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A Resolution Plan Can Include a Clause Extinguishing FC's Security Interest via Personal Guarantees

The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan, Chairperson and Barun Mitra, technical Member was hearing an appeal and held that a Resolution Plan can include a clause extinguishing a Financial Creditor's security interest via personal guarantees, as long as the terms of the guarantee permit it.

The National Company Law Appellate Tribunal (NCLAT) heard an appeal challenging the Adjudicating Authority's (National Company Law Tribunal, Indore Bench, Court No. 1) order dated January 6, 2023. The Adjudicating Authority had rejected the Resolution Professional's application (IA/190 (MP) 2021) seeking approval of a Resolution Plan. The appellant, a Successful Resolution Applicant, contested this decision.

The case revolved around the Corporate Insolvency Resolution Process (CIRP) initiated against 'M/s. Ujaas Energy Limited' on September 17, 2020. The Appellant submitted a Resolution Plan in response to Form-G. After extensive discussions, the Committee of Creditors (CoC) approved the Resolution Plan with a 78.04% vote share on August 30, 2021. A Letter of Intent was issued on August 31, 2021, and the Resolution Professional requested approval on September 16, 2021.

A dissenting Financial Creditor, Bank of Baroda, holding a 5.83% voting share, opposed the plan, arguing it extinguished rights under personal guarantees. The Adjudicating Authority rejected the plan on January 6, 2023, citing contravention of Section 30(2)(e) of the Code, as it allegedly impaired the secured creditor's right to proceed against the personal guarantor. The bank had also initiated separate proceedings against the personal guarantor.

The Appellant contended that the CoC's commercial wisdom should be respected and emphasized that security interests could be dealt with in a Resolution Plan. Both the CoC and the Appellant argued that there was no legal prohibition on releasing personal guarantees.

During the proceedings, the Appellant referred to the Supreme Court's judgments in "State Bank of India v. V. Ramakrishnan and Another, REED 2018 SC 08560" and "Lalit Kumar Jain v. Union of India and Others, REED 2021 SC 05510" The former recognized the interests of former directors as guarantors in a Resolution Plan, and the latter affirmed that a Resolution Plan's approval didn't automatically discharge a guarantor's liability.

The central issue was whether a Resolution Plan could include a clause extinguishing a Financial Creditor's security interest through personal guarantees given by the directors of the Corporate Debtor. The NCLAT examined relevant sections of the Insolvency and Bankruptcy Code and the Regulations, focusing on the definition of "security interest" and Regulation 37. The NCLAT’s analysis highlighted that while approval of a Resolution Plan doesn't discharge a guarantor's liability, it depends on the specific terms of the guarantee.

In conclusion, the NCLAT considered the legal framework and past judgments to determine whether a Resolution Plan could contain a clause extinguishing a Financial Creditor's security interest via personal guarantees. The central issue revolved around the liability of personal guarantors following the approval of the Resolution Plan. The National Company Law Appellate Tribunal (NCLAT) issued a judgment concerning the validity of a Resolution Plan involving personal guarantors and their liabilities. The judgment addressed various legal aspects and rulings.


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