Sangeetha Prathap

The National Company Law Appellate Tribunal (NCLAT), New Delhi, has held that a personal guarantor continues to remain liable under a continuing guarantee even when the principal debtor enters into a mediated settlement with the financial creditor, unless the creditor has expressly discharged the guarantor. The Tribunal further held that part-payments made by the principal debtor extend the limitation period for proceedings against the guarantor. The ruling came while dismissing the appeal filed by Upkar Kaur, personal guarantor to Jagtar Singh & Sons Hydraulics Pvt. Ltd., challenging the initiation of the personal insolvency resolution process (PIRP) against her.

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The bench of Justice N. Seshasayee (Judicial Member) and Technical Members Arun Baroka and Indevar Pandey observed that “the guarantee executed by the Appellant was never extinguished, substituted, or discharged. The settlement of 2019 did not cancel the old contract, nor did it release the guarantor. Instead, the breach of the settlement caused the full liability to revive.” It also underscored that “an acknowledgment or part-payment by the principal debtor extends limitation against the guarantor also, unless the guarantee has been expressly revoked or the creditor has agreed to treat the guarantor differently”

The dispute arose from two loan facilities granted by Intec Capital Limited to the corporate debtor. The first loan of ₹3.18 crore was sanctioned in March 2013, for which Kaur executed a deed of guarantee, while the second loan of ₹41.32 lakh was sanctioned in May 2016. After a recall notice in July 2017 and an arbitration award in August 2018, CIRP was initiated in 2019. During the pendency of the appeal, the promoters and the creditor entered into a mediated settlement on December 2, 2019 before former Supreme Court judge Justice (Retd.) A.K. Sikri, which the NCLAT recorded as binding. The settlement restructured the dues and post-dated cheques were issued. Although several instalments were honoured in 2020 and 2021, payments stopped after April 29, 2021, triggering revival of CIRP pursuant to the settlement terms.

Following the revival of CIRP, a demand notice was issued to Kaur in January 2022 and a Section 95 IBC application was filed in May 2022. Kaur contended that the application was time-barred as limitation should run from the 2017 recall notice. She also argued that she was guarantor only to the 2013 loan and not to the 2016 loan; that the 2019 settlement constituted a substituted contract under Section 62 of the Contract Act, thereby extinguishing her original guarantee; that misaddressed notices invalidated the proceedings; and that personal undertakings given by the promoters replaced her guarantee.

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The Tribunal rejected these contentions in detail. On limitation, it held that the debt could not be treated as confined to the 2017 recall notice since the corporate debtor continued to deal with the creditor thereafter — including entering into settlement before NCLAT and making part-payments on 11 September 2020 and 29 April 2021 — both of which constituted acknowledgements extending limitation. It also held that the revival of CIRP on breach of settlement clearly showed that the underlying debt continued to subsist, contradicting the plea of time-bar.

On the validity of the guarantee, the Tribunal held that Kaur’s guarantee was unconditional, irrevocable and continuing. The clauses of the deed expressly provided that variations in loan terms, restructuring, concessions, or enhancement of limits would not discharge the guarantor. It noted that the guarantee would remain in force until all dues were cleared and could be discharged only by the financial creditor issuing a formal release. No such release had ever been granted. The Tribunal also held that although the promoters gave personal undertakings in the settlement, this did not supersede or extinguish Kaur’s guarantee, stating that “when two individuals give a personal undertaking, it does not mean the earlier guarantor has been released”.

Finding that the settlement merely offered a revised payment mechanism rather than substituting the original loan contract, the Tribunal concluded that breach of settlement resulted in revival of the full unpaid liability. Since the principal debtor continued to remain liable after revival of CIRP, the guarantor remained liable as well, given that the guarantor’s liability is co-extensive with that of the debtor.

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Ultimately, the NCLAT upheld the NCLT’s order initiating the personal insolvency resolution process against Kaur and dismissed the appeal, holding that no grounds for interference were made out.

Appearance

For Appellant: Advocates Rakesh Bajaj and Hitesh Chopra

For Respondent: Advocates Jasmeet Singh and Nitin Kumar for Resolution Professional; Advocate Manish Kumar for Financial Creditor.

Cause Title: Upkar Kaur v. Gagan Gulati & Anr.

Case No: Company Appeal (AT) (Ins.) No. 2238 of 2024

Coram: Justice N. Seshasayee (Judicial Member), Technical Members Arun Baroka