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NCLAT Holds Bound by DRT's Final Liability Under Insolvency Code
In a significant ruling that reinforces the of debt recovery proceedings, the has held that of an insolvent company cannot the extent of their liability under a once the has adjudicated the issue and its order has attained . The decision, delivered by a three-member bench comprising Officiating Chairperson Justice Yogesh Khanna and Technical Members Ajai Das Mehrotra and Barun Mitra, also affirmed the rejection of a that failed to secure the required of creditors.
The appeals were filed by of , challenging an order of the (NCLT). The NCLT had earlier held that the guarantors' liability was not limited under the dated , and had rejected their proposed under .
Background: The Guarantee and the Dispute
, a corporate debtor, had availed credit facilities secured by personal guarantees from its directors and other individuals. The
contained multiple clauses defining the scope of the guarantors' obligations. While clauses 1, 6, and 9 made the guarantors
for the entire principal debt, along with interest, costs, and charges, Clause 24 stated that the guarantee was
"restricted to the market value of the properties mortgaged or to be mortgaged to secure Archon Engicon's credit facilities."
The guarantors relied heavily on Clause 24, as well as sanction letters, an inter-creditor agreement, and a transaction audit report, to argue that their liability was capped at the value of the collateral properties. However, the DRT, in its order dated , in O.A. No. 83/2017, had already adjudicated the validity of the and held the guarantors for the entire debt of Rs 1,49,26,12,243. That order was never challenged by the guarantors.
NCLAT’s Reasoning: of DRT Adjudication
The NCLAT observed that the guarantors had participated in the DRT proceedings, filed written statements, and did not dispute the execution of the guarantee deed. Having allowed the DRT order to attain , they could not now seek to the same issue in under the IBC.
“In any case the liability of the Appellants had already been adjudicated by the Ld. DRT vide order dated 03.08.2021 in O.A. No. 83/2017 for Rs 1,49,26,12,243/-, wherein the validity of the was upheld and the guarantors were held for the entire dues. The said order had attained and was never challenged by the Appellants, therefore, now the Appellants cannot seek to the extent of their liability in under Section 114 of the Code,” the bench ruled.
The tribunal also addressed the interplay between the various clauses of the . It noted that the NCLT had correctly interpreted Clause 24 as dealing with the security arrangement rather than limiting the primary contractual liability under clauses 1, 6, and 9. In simple terms, the clause referring to the value of the mortgaged properties could not override the clauses that made the guarantors liable for the entire debt.
Rejection: No Substitute for
The appeals also challenged the NCLT’s rejection of the submitted by the guarantors. The plan was considered at several meetings of the , where the guarantors were given opportunities to improve their proposal. Despite this, the final plan failed to secure the required 66% voting share. The voting results showed only 21.35% in favour, 20.14% against, 42.16% abstentions, and 15.91% absent.
The NCLAT clarified that under Section 114 of the IBC, the is required to consider the based on the creditors’ meeting report. It does not empower the NCLT to substitute its own commercial view when the required has not been achieved. Since the plan did not receive the requisite 66% approval, its rejection was inevitable.
“Section 114 requires the to consider the based on the creditors' meeting report. It does not give the NCLT power to substitute its own commercial view when the required has not been achieved,” the bench observed.
Legal Implications for
This ruling has significant implications for under the IBC. It underscores that once a DRT or other competent forum has conclusively determined the liability of a guarantor, that determination cannot be relitigated in insolvency proceedings. The decision also reinforces the principle that the terms of a guarantee deed must be read as a whole, and a clause restricting liability to the value of security will not be allowed to override clear contractual obligations unless the deed explicitly states such a limitation.
Legal practitioners note that the judgment provides much-needed clarity on the binding nature of prior adjudications. It prevents guarantors from using the IBC as a second forum to dispute liability that has already been . Additionally, the ruling on repayment plans reaffirms the primacy of creditor voting in the insolvency resolution process, discouraging attempts to force plans through judicial intervention when they lack commercial viability.
Impact on Insolvency Practice
The decision is likely to streamline personal insolvency resolution proceedings under . By preventing re-litigation of liability, it reduces delays and costs for all stakeholders. Creditors can now rely on DRT orders with greater confidence, knowing that guarantors cannot the same issues before the NCLT or NCLAT.
The ruling also sends a strong message about the importance of clause drafting in guarantee deeds. Guarantors seeking to cap their liability must ensure that the limitation is unequivocally expressed and cannot be interpreted as merely a security arrangement. Ambiguous clauses will be construed against the guarantor, especially when other clauses impose joint and several liability for the entire debt.
Conclusion
The NCLAT’s judgment in the appeals arising from ’s insolvency is a clear affirmation of the of DRT adjudications and the of creditors. By dismissing the ’ challenge, the tribunal has reinforced the integrity of the debt recovery process and the statutory framework under the IBC. The decision serves as a reminder that guarantors cannot have a once their liability has been determined by a competent forum.
