NCLAT Rules, Liability Of Corporate Debtor Not Discharged By Release Of Guarantors' Liability If Bank Preserves Right To Proceed Under IBC
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, has held that the liability of a Corporate Debtor under the Insolvency and Bankruptcy Code, 2016 (IBC), cannot be said to be discharged merely because the guarantors have been released by the creditor Bank under a One-Time Settlement (OTS). So long as the Bank has explicitly preserved its right to proceed under the IBC, the release of mortgaged properties or guarantors does not exonerate the principal borrower.
The three-member Bench comprising Justice Rakesh Kumar Jain (Judicial Member), Mr. Naresh Salecha (Technical Member), and Mr. Indevar Pandey (Technical Member) delivered this ruling while dismissing an appeal challenging the order of the National Company Law Tribunal (NCLT), Chandigarh Bench, which had admitted a Section 7 application and initiated the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, M/s. AJS Builders Private Limited.
Appellant’s Submissions
The Appellant contended that the financial creditor, Jammu and Kashmir Bank Ltd., failed to disclose a crucial fact—that the entire financial liability was fully and finally settled before the initiation of CIRP. According to the Appellant, the outstanding loan comprising a cash credit facility of ₹9 crores and a secured overdraft of ₹4 crores had been resolved through a settlement between the Bank and the guarantors, Amit Jain and Sudhir Jain. The guarantors had paid ₹10 crores and, in return, received a release letter dated 03.06.2021, along with the release of the mortgaged property situated at Gandhi Nagar, Jammu.
It was argued that the mortgage arrangement was tripartite—among the Bank, the Borrower (Corporate Debtor), and the Guarantors—and therefore the Bank could not have released the property unless the loan account stood fully satisfied. The Appellant further claimed that the Bank had already received more than the OTS amount and was thus acting arbitrarily in invoking IBC.
Bank’s Response
The Respondent Bank submitted that the payment received from the guarantors was not a discharge of total debt but only a partial recovery. The decision to release the property was a commercial decision taken under the mutually agreed OTS. Importantly, the release deed issued by the Bank explicitly preserved its right to proceed against the Corporate Debtor under IBC or any other law.
The Bank stated that there was no No Dues Certificate issued in favour of the Corporate Debtor. The liability continued to subsist, and therefore the invocation of Section 7 of IBC was legally tenable. It also pointed out that after receipt of the partial payment, it had filed a recovery suit for the remaining dues and proceeded under the SARFAESI Act, demonstrating that the debt was not considered fully satisfied.
Tribunal’s Analysis
The Tribunal closely examined the Deed of Release dated 03.06.2021 and noted that the Bank had clearly inserted a clause stating: “That the Bank is at liberty to initiate proceedings against the borrower including under the IBC and this deed shall not act as a bar to such proceedings.”
This express reservation of rights, the Bench held, demonstrated that the Bank never intended to extinguish the corporate debtor’s liability. It was merely releasing the guarantors from their contractual obligations pursuant to the OTS. Refuting the Appellant's argument, the Tribunal observed: “The debt against the Corporate Debtor was not extinguished as no waiver or No Dues Certificate was issued.”
Further, the Tribunal held that any internal agreement between the Corporate Debtor and the guarantors concerning distribution of liability did not bind the Bank, as it was not a party to such arrangement. The liability of the principal borrower remained intact, and the guarantors’ payment under the OTS did not, by itself, amount to full settlement under law.
The Appellant also attempted to invoke the principles laid down in Vidarbha Industries Power Ltd. v. Axis Bank Ltd [Civil Appeal No. 4633 of 2021], claiming that government contracts worth ₹38 crores were ongoing and that insolvency proceedings would disrupt public interest. However, the Tribunal rejected this argument, noting: “The Appellant has not produced any documentary evidence to prove that any such amount has been acknowledged or is due and payable. Merely referring to ongoing work orders without substantiating claims does not satisfy the Vidarbha test.”
In conclusion, the NCLAT affirmed the NCLT's admission of the Section 7 application. It held that the Corporate Debtor’s liability was not discharged by the release of the guarantors under the OTS, especially when the Bank had explicitly preserved its right to initiate insolvency proceedings. The appeal was found to be devoid of merit and was accordingly dismissed.
Appearance
For Appellant: Mr. Amar Vivek & Mr. Aditya Jain, Advocates.
For Respondent: Mr. Syed Arsalan, Mr. Prateek Khaitan, Mr. Chatanya Sharma and Mr. Shitij Chakravarty, Advocates.
Cause Title: Puneet Resutra V. Jammu & Kashmir Bank Ltd.
Case No: Company Appeal (AT) (Ins.) No. 752 of 2023
Coram: Justice Rakesh Kumar Jain [Judicial Member], Mr. Naresh Salecha [Technical Member] Mr. Indevar Pandey [Technical Member]
