Home > Legal Updates > Decks cleared for creditors to recover remaining debt from personal guarantors despite the conclusion of the Corporate Insolvency Resolution Process (CIRP)

Decks cleared for creditors to recover remaining debt from personal guarantors despite the conclusion of the Corporate Insolvency Resolution Process (CIRP)

In a landmark judgement passed by the Hon’ble Supreme Court on 21.05.2021 in a transfer case bearing no. 245 of 2020 titled Lalit Kumar Jain vs Union of India & Ors., the Hon’ble Supreme Court upheld the notification dated 15.11.2019 issued by Central Government vide which few provisions of the Insolvency & Bankruptcy Code, 2016 with respect to the personal guarantors of the Corporate Debtors had come into force.

The effect of upholding the said notification is that Banks / Financial Institutions can recover their outstanding dues independently from the personal guarantors even after the conclusion of the Corporate Insolvency Resolution Process.

The Hon’ble Supreme Court held that “approval of resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. The release or discharge of a principal borrower from the debt owed by it to its creditors by any involuntary process i.e. by operation of law, or due to liquidation or insolvency proceedings, does not absolve the surety / guarantor of his or her liability, which arises out of an independent contract.”

The Hon’ble Supreme Court referred to its earlier decision in Maharashtra State Electricity Board vs Official Liquidator, High Court Ernakulam & Anr. 1982 (3) SCC 358 wherein the Hon’ble Supreme Court had held that in case of unequivocal guarantee, such liability of the guarantor continues, and the creditor can realize the same from the guarantor in view of section 128 of the Indian Contract Act, 1872.