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).
Simply put, a personal guarantor has no right to step into the shoes of a creditor against the ‘corporate debtor’ (company going through IBC) in case of a resolution plan under the IBC.
This ruling came in an appeal filed by ‘Lalit Mishra & Ors’, the promoters of Sharon Bio Medicine Ltd (corporate debtor), against the February 28 order of NCLAT, Mumbai.
Subrogation refers to the substitution of one person or group by another in respect of debt or insurance claim, accompanied by the transfer of any associated rights and duties.
Expert take
Saurav Kumar, partner, IndusLaw, a law firm, said that the judgment confirms the NCLAT’s stance on no subrogation rights of a surety in case of a personal guarantee, i.e the right of a personal guarantor to step into the shoes of a creditor against the corporate debtor in case of an IBC resolution.
However, the court has not clarified two aspects (a) whether such a situation would only be for a promoter-based personal guarantee, or if it could extend to a third-party personal guarantee; and (b) whether such right of subrogation is automatically taken away once a resolution plan is passed or whether it is a matter that needs to be decided in terms of the resolution plan and the committee of creditors.
“To me it seems that the latter is more likely the intent of the judgment. With this judgment most positions is now clarified on personal guarantees and, accordingly, it may be understood that the liability of a personal guarantor survives a resolution process under IBC. However, any right of a personal guarantor (at least in case of a promoter personal guarantee) can be withdrawn as part of the resolution process,” he said.
The judgment further empowers the committee of creditors on making decisions on a resolution plan rights and liabilities of personal guarantors, said Kumar.