Sanction of a resolution plan and finality imparted to it by Section 31 of the Insolvency and Bankruptcy Code does not per se operate as a discharge of the guarantor’s liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. When considering the liability of guarator in case where the liability of the principal debtor is absolved under Insolvency law or Company law, the same shall be considered as an involuntary act of the principal debtor leading to loss of security , and in such cases such liability of the guarantor continues and the creditor can realise the same from the guarantor in view of the language of Section 128 of the Contract Act, 1872 as there is no discharge under Section 134 of that Act.
The Supreme Court had dealt with a situation where a resolution plan for the principal borrower was approved in CIRP, and the principal borrower was discharged from the debt by operation of law through an involuntary process. It was held that the contract between the creditor and the surety is independent; therefore, the approval of the resolution plan of the principal borrower will not amount to the discharge of the surety. The same principles will apply when the resolution plan is approved in CIRP of the surety. In such a case, the surety gets a discharge from his liability under the guarantee by operation of law or by involuntary process. It will not amount to the discharge of the principal borrower.
Liability of a surety to a contract.
A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.” A surety is also known as a guarantor. The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract.
Discharge of the liability of the surety
Sections 133 to 139 of the Contract Act deal with the circumstances that will lead to the discharge of surety from its obligations towards the Creditor. Following are the circumstances in which the surety shall be discharged from the obligations.
If any changes are made to the contract terms between the main debtor and the creditor without the surety's approval, the surety is released from any obligations related to transactions occurring after the changes.
If the principal debtor is released through a contract between the creditor and the principal debtor, or if the creditor's actions or inactions result in the discharge of the principal debtor, then the surety is relieved of their obligations.
If the creditor enters into an agreement with the main debtor to settle the debt, extend the payment period, or refrain from legal action, the surety is released from liability unless they agree to the terms of the agreement.
If a creditor makes an agreement with a third party to extend the time for payment to the main debtor, rather than with the main debtor directly, the guarantor is not released from their obligation.
Simply refraining from suing the main debtor or pursuing any other legal action against them does not release the guarantor from their obligations, unless specified otherwise in the guarantee.
If there are co-sureties, releasing one of them from the obligation by the creditor does not absolve the remaining co-sureties of their responsibility, nor does it release the released surety from their obligations towards the other co-sureties.
Should the creditor take any action that goes against the surety's rights, or fail to take any action that is required by duty towards the surety, resulting in the surety's eventual remedy against the principal debtor being compromised, the surety will be released from liability.
The Corporate guarantor's CIRP does not absolve the Principal borrower.
The resolution plan approved by the adjudicating authority for a corporate debtor is binding on the corporate debtor, its employees, members, creditors, guarantor, and other stakeholders. Therefore, if a company provides a corporate guarantee to secure debt for another company, and the Corporate Insolvency Resolution Process (CIRP) of the corporate guarantor concludes with a resolution plan, it will also bind the creditor of the corporate guarantor. In such a scenario, the liability of the corporate guarantor may cease by operation of law. Nonetheless, the resolution plan for the corporate guarantor will not release the principal borrower from the obligation to repay the loan amount to the creditor, except after adjusting for any amount recovered from the corporate guarantor or paid by the resolution applicant on behalf of the corporate guarantor as per the resolution plan.
From the above it is clear that, CIRP being an involuntary act will not absolve the surety from its obligations towards the Creditor and the CIRP agansit the guarantor shall not relieve the Principal borrower from it obligations also.
Bijoy P Pulipra Advocate
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