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NCLAT Delhi Holds Arbitral Award's Does Not Extinguish
The , delivered a significant ruling on , clarifying that an arbitral award imposing does not, by itself, alter the legal status of a personal guarantor or extinguish the underlying contract of guarantee. The decision came in appeals filed by personal guarantors of , challenging the admission of insolvency proceedings under . The bench, comprising Judicial Member Justice Sharad Kumar Sharma and Technical Members Arun Baroka and Indevar Pandey, dismissed the appeals, reinforcing the distinct legal position of a guarantor even in the face of a restructuring debt.
Background: The Debt and the Guarantee
had availed credit facilities from a consortium of cooperative banks in , including (the respondent). Some consortium banks later assigned their debts to (CFM ARC), while Jankalyan Sahakari Bank retained its share. The appellants—personal guarantors of , including Ravindra Gopalkrishan Agarwal—had executed personal guarantees to secure the loans. In , the account was declared a , triggering proceedings under the . Disputes were referred to arbitration under the , resulting in a on that rescheduled repayment obligations. Subsequently, Jankalyan Sahakari Bank filed petitions under Section 95 of the IBC against the personal guarantors. The , admitted those petitions, prompting the present appeals before the NCLAT.
The Core Arguments: Guarantors vs. Bank
The personal guarantors advanced several contentions to challenge the admission of insolvency proceedings. First, they argued that the effectively converted them from guarantors into co-borrowers, thereby extinguishing the original guarantees. They contended that the award's use of the phrase "" created a new relationship that displaced the . Second, they claimed that since part of the debt had been assigned to CFM ARC, which subsequently sold secured property, Jankalyan Sahakari Bank lost its to initiate proceedings. Third, they relied on a and subsequent payments by a to argue that their liability stood discharged. They also invoked , asserting that restructuring the debt without their consent amounted to a that discharged them as sureties. Finally, they contended that the petitions were time-barred.
Jankalyan Sahakari Bank countered each argument. It submitted that the arbitral award merely rescheduled repayment and did not alter the guarantors' status. The bank emphasised that it had not assigned its own debt to CFM ARC, and assignments by other consortium members did not affect its independent rights. It argued that Section 133 was inapplicable because no variation had been made by the bank itself. Further, the contained a clause extending liability to interest, damages, and costs, and the bank maintained that the petitions were within the .
NCLAT’s Reasoning: No
The NCLAT firmly rejected the guarantors' arguments. The tribunal observed: “The use of the expression '' in the arbitral award does not, by itself, establish that the original contract of guarantee was extinguished. It also does not establish that the Appellant acquired the legal status of a . Because the will not alter the status of Appellant acquired under uncontroverted and subsisting contract of guarantee which was still binding the contracting parties, unless rescinded by law.”
The bench noted that the expressly stated that it would remain valid and binding until all loans and monies due were fully repaid to the bank. There was no material to show that the bank had expressly released the appellants from the guarantees or entered into a . The tribunal underscored: “There cannot be an of contract i.e. , only by way of inference assigned to it by the consenting award. The Award contemplated continued liability in the event of default. It therefore cannot be read as creating a new relationship which completely displaced the original contract of guarantee.”
On the issue of assignment, the NCLAT noted that Jankalyan Sahakari Bank had not assigned its debt, as no assignment deeds executed by the bank were produced. The assignment by other consortium lenders and the subsequent sale of property by CFM ARC did not discharge the guarantors' liability towards the bank. Regarding the MoU and payments by a , the tribunal held that assumption of liability by a third party does not release the guarantors in the absence of an by the creditor. The guarantee itself provided that the guarantors' liability would not be affected by variations, and no variation by the bank was established to attract Section 133 of the Indian Contract Act. Finally, the petitions were held to be within limitation.
Legal Implications: Clarity on Guarantor Status
This ruling reinforces a fundamental principle of the law of guarantees: a is a separate contract distinct from the principal debt. An arbitral award that restructures repayment obligations or imposes does not, without more, convert a guarantor into a . The distinction is crucial in insolvency proceedings under the IBC, where personal guarantors are often pursued alongside corporate debtors. The NCLAT’s decision provides clarity that the mere existence of a cannot be used to escape the obligations of a guarantee. It also underscores that creditors retain the right to enforce guarantees independently, even when other creditors have assigned their debts or sold secured assets.
Impact on Insolvency Practice
For legal practitioners, this judgment serves as a reminder that the wording of an arbitral award must be carefully scrutinised. Awards that use terms like "" do not automatically alter the legal relationship between the creditor and the guarantor. The decision also highlights the importance of or substitution of contract—an inference will not suffice. Additionally, the ruling affirms that the for filing a Section 95 petition runs from the date of default under the guarantee, not necessarily from the date of the award. This could affect strategies in enforcement. The NCLAT’s reasoning also reinforces the principle that a creditor’s rights against a guarantor are independent of actions taken by other creditors, provided the guarantee itself remains valid.
Conclusion
The NCLAT Delhi’s judgment provides a definitive answer to the question of whether an arbitral award with extinguishes a . It does not. The contract of guarantee remains binding unless expressly rescinded by law or by the creditor. By dismissing the appeals, the tribunal has upheld the sanctity of guarantee agreements and the intent of the IBC to hold personal guarantors accountable for their obligations. This decision will guide future disputes where personal guarantors seek to evade liability based on restructuring or awards, and it reaffirms that the shield of a cannot pierce the separate legal fabric of a .
