In a resolution plan under IBC, personal guarantors cannot step into creditor’s shoes- NCLAT

By EDITORIAL TEAM INSOL INDIA Posted On : January 15, 2019

In Lalit Mishra & Others vs Sharon Bio Medicine Limited & Others, the National Company Law Appellate Tribunal (“NCLAT”) has ruled that a personal guarantor’s right to subrogation against a corporate debtor can be taken away in a resolution plan under the Insolvency and Bankruptcy Code (“IBC”).

In the present case, the appellants, the promoters of Sharon Bio Medicine Limited (“Corporate Debtor”) had challenged the approval of a resolution plan on the following grounds:

The appellants, promoters were the shareholders and for them no amount has been provided under the ‘Resolution Plan; and

Some promoters, also ‘personal guarantors’ have been discriminated as the personal guarantees of the appellants have been reduced to ‘nil.

The appellants alleged that such a resolution plan was in contravention with the provisions of the Section 133 and Section 140 of the Indian Contract Act, 1872 (“Contract Act”) since it deprived the personal guarantors of their subrogation rights against the corporate debtor.

The NCLAT held that resolution under the IBC is not a recovery suit. It is aimed at maximization of the value of the assets of the Corporate Debtor and then to balance all the creditors. The IBC prohibits the promoters from benefiting from the ‘Corporate Insolvency Resolution Process’ or its outcome. Admittedly, the shareholders and promoters are not the creditors and thereby the Resolution Plan cannot balance the maximization of the value of the assets of the Corporate Debtor at par with the ‘Financial Creditors’ or ‘Operational Creditors’ or ‘Secured Creditors’ or ‘Unsecured Creditors’. Therefore, the appellant cannot claim to have been discriminated. Further, the court observed that on approval of the resolution plan claim of all the stakeholders are cleared and that the resolution applicant can provide in the plan that there will be no liability on the company or the resolution applicant in case the personal guarantees are invoked.