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NCLT Indore Holds Resignation as Director Does Not Extinguish for Mahesh Rajpal
The has delivered a significant ruling on the interplay between corporate directorship and personal guarantees, holding that a director’s resignation does not automatically revoke a executed in favour of a creditor. The decision, delivered on , underscores the independent contractual nature of guarantee obligations under the , and clarifies that the liability of a personal guarantor continues unless validly terminated in accordance with law.
The case arose from an application filed by the against Mahesh Rajpal, a personal guarantor for The bank had sanctioned a drop-line overdraft facility of ₹20 crore to the corporate debtor, backed by a Deed of Guarantee executed by Rajpal on . After the account was classified as a , SBI invoked the guarantee but recovered nothing. The bank claimed ₹23.70 crore as of , comprising ₹18.40 crore principal and ₹5.29 crore interest.
Background: The Guarantee and the Resignation
Rajpal’s primary defence was that he had resigned as a director of the corporate debtor on – before the was signed – and that the loan documents had been pre-signed. He submitted Form DIR-12 as evidence of his resignation and argued that the guarantee documents lost legal effect after he ceased to be a director. Additionally, he relied on a letter dated by which the corporate debtor communicated withdrawal of his guarantee to SBI, which the bank acknowledged on .
Rajpal further contended that a revival letter dated amounted to of the contract, to which he was not a party, and that pending proceedings before the and the sufficiency of mortgaged assets (valued at ₹40 crore) should bar the bank from pursuing him personally. He also raised a defence, citing and precedents.
The Tribunal’s Findings: Independence of the Guarantee
The bench, comprising Judicial Member Brajendra Mani Tripathi and Technical Member Man Mohan Gupta, rejected all of Rajpal’s arguments. It observed:
“A is an . Resignation from the office of director does not, by itself, revoke or extinguish a guarantee already furnished in favour of the creditor.”
The Tribunal emphasised that the guarantee agreement expressly provided that the guarantor’s liability would remain unaffected by changes in the status of the borrower or guarantor. It noted that the corporate debtor’s board resolution had specifically named Rajpal as guarantor, and the guarantee was a independent of his position as director.
The Withdrawal Letter Did Not Constitute
A critical issue was whether SBI’s mere acknowledgment of the corporate debtor’s withdrawal letter amounted to acceptance of the guarantee’s . The Tribunal held that acknowledgment of receipt did not establish acceptance. Without clear evidence that the bank agreed to release the guarantor, the guarantee continued. The bench also rejected the argument that Rajpal’s absence from revival letters or balance confirmations defeated his liability, noting that under , the surety’s liability is co-extensive with that of the principal debtor.
and Other Objections
On the point, the Tribunal found that the default occurred on , and the application was filed on – well within the three-year period under read with . It also held that pendency of DRT proceedings or the availability of sufficient secured assets did not bar initiation of insolvency proceedings against a personal guarantor, though any recoveries must be accounted for to prevent double recovery.
Impact of the Corporate Resolution Plan
Another notable aspect was the subsequent approval of the corporate debtor’s resolution plan, under which SBI received ₹19.11 crore. Rajpal argued that this recovery should discharge his liability. The Tribunal disagreed, stating that the receipt did not extinguish the guarantee, especially since the resolution plan did not provide for his release. The obligation of a personal guarantor remains until the entire debt is satisfied.
Legal Implications and Practice Points
This ruling reinforces a consistent line of NCLT and decisions that personal guarantees are independent contracts, not ancillary to directorship. For legal practitioners, the case highlights several key takeaways:
- Resignation alone is insufficient. Guarantors seeking to exit must obtain a formal release from the creditor, preferably in writing.
- Acknowledgment of withdrawal letters is not acceptance. Creditors should be cautious in acknowledging such communications without clearly stating their position.
- under Section 128 means the guarantor is liable for the entire debt, regardless of the debtor’s status or other security.
- runs from the date of default , not from the date of resignation or attempt.
- Subsequent recoveries from the corporate debtor do not automatically reduce the guarantor’s liability unless the creditor agrees to a discharge.
The decision also serves as a warning to directors who may assume that leaving the board severs their financial obligations. As the Tribunal noted, “a is an ,” and parties must adhere to the terms of the deed.
Conclusion
The NCLT Indore’s order admitting SBI’s application and initiating personal insolvency proceedings against Mahesh Rajpal is a clear statement that the ’s provisions for personal guarantors will be enforced robustly. The judgment underscores the importance of documenting any or discharge of a guarantee explicitly, and it reinforces the principle that corporate and personal liabilities remain distinct even after a change in directorship.
