NCLAT Strikes Down NCLT’s Restrictive Observations on Release of Personal Guarantees After Plan Approval

NCLAT Strikes Down NCLT’s Restrictive Observations on Release of Personal Guarantees After Plan Approval

Introduction

The Principal Bench of the National Company Law Appellate Tribunal examined whether a successful resolution applicant (SRA) could challenge certain restrictive observations made by the NCLT despite its application being allowed. The controversy centred on whether dissenting financial creditors could continue recovery proceedings against personal guarantors and third-party assets after approval of a resolution plan extinguishing such rights.

Factual Background

The Corporate Debtor, Shivaji Cane Processors Ltd., was admitted into CIRP on 18.02.2021 on a Section 7 application. The company had availed consortium loans from multiple lenders, including Respondent Nos. 1 and 2, secured by mortgage deeds and personal/third-party guarantees.

During CIRP, the Appellant submitted a resolution plan which was approved by the CoC with 78.03% voting share, though Respondent Nos. 1 and 2 dissented. The NCLT initially rejected the plan on 01.05.2023, holding that it improperly extinguished rights of dissenting financial creditors against personal guarantors.

On appeal, the NCLAT (24.11.2023) allowed the appeals and upheld the validity of clauses extinguishing third-party securities and personal guarantees. The Supreme Court dismissed the challenge filed by Respondent No. 1 on 11.03.2024, thereby affirming the plan.

Despite receiving payments under the plan, Respondent Nos. 1 and 2 continued recovery proceedings and retained attachments over assets of guarantors under Section 101 of the Maharashtra Cooperative Societies Act, 1960.

The SRA filed I.A. No. 4484/2024 seeking directions for implementation of the plan and restraint against further recovery actions. While the NCLT allowed the application, it made certain observations (paras 55–57) limiting the scope of release to only those assets specifically mortgaged, thereby excluding certain personal properties under attachment. The present appeal challenged only those observations.

Procedural Background

The NCLT, Mumbai Bench, by order dated 25.04.2025, allowed the SRA’s application and held that the resolution plan validly extinguished rights of dissenting financial creditors against personal guarantors. However, in paragraphs 55–57, it clarified that personal properties not expressly mortgaged or secured would not stand released.

Aggrieved by these restrictive observations, the SRA preferred the present appeal before the NCLAT.

Issues

1. Whether, after approval of a resolution plan (affirmed up to the Supreme Court), dissenting financial creditors can continue recovery against personal guarantors or third-party assets?

2. Whether the NCLT was justified in restricting the scope of extinguishment to only specifically mortgaged properties despite broad release clauses in the plan?

Contentions of the Parties

The Appellant contended that the approved resolution plan expressly extinguished all encumbrances, security interests, liens, and attachments over assets of promoters, directors, and guarantors. These clauses had already been upheld by the NCLAT and affirmed by the Supreme Court. Therefore, Respondent Nos. 1 and 2 were bound under Section 31 of the IBC and could not re-agitate the same objections.

It was further submitted that once the entire debt stood resolved under the plan, attachments under Section 101 of the Maharashtra Cooperative Societies Act could not survive.

Respondent Nos. 1 and 2 argued that certain third-party assets were not part of their Form-C claim and that attachments under the Maharashtra Cooperative Societies Act were independent recovery measures. They contended that liabilities of personal guarantors are independent and not automatically extinguished unless specifically identified.

Reasoning and Analysis

The NCLAT examined the resolution plan clauses, particularly Clause C-13(7), which provided that all encumbrances, security interests, liens and attachments (including under applicable law) over assets of promoters, directors and guarantors “charged or not charged” shall be irrevocably released.

The Tribunal emphasized that these clauses had already been judicially examined and upheld in its earlier judgment dated 24.11.2023. The Supreme Court’s dismissal of the appeal rendered the issue final.

The NCLAT held that once the resolution plan was approved and binding under Section 31 of the IBC, dissenting financial creditors could not retain third-party securities or continue recovery actions. Attachments under Section 101 of the Maharashtra Cooperative Societies Act were recovery mechanisms for the same debt, and once the debt stood resolved, such attachments could not survive.

The bench of Mr. Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member). found that the NCLT erred in observing that liabilities of personal guarantors are independent and not extinguished unless specifically stated. The broad language of the approved plan clearly extinguished such rights, and it was not open to the Adjudicating Authority to dilute the scope of finalised plan provisions.

The NCLAT also rejected the argument that the consideration of ₹2 crore for assignment of residual debts was meagre. Once approved by the CoC with requisite majority, commercial wisdom could not be revisited by dissenting creditors.

Decision

The appeal was allowed. Paragraphs 55–57 of the impugned NCLT order were set aside and deleted. The rest of the order remained unaffected.

The Tribunal further directed that if the respondents failed to release all assets of promoters, personal guarantors and third parties, the Adjudicating Authority shall forward the matter to the IBBI within 30 days for consideration of prosecution under Section 74(3) of the IBC. Parties were directed to bear their own costs.

In this case the appellant was represented by Mr. Krishnendu Datta, Sr. Advocate with Mr. Ramchandra Madan, Mr. Tushar Nigam, Mr. Himanshu Yadav, Ms. Alina Merin Mathew and Mr. Harshit Chaudhary, Advocates. Meanwhile the respondent was represented by Mr. Abhijeet Sinha, Sr. Advocate with Mr. Ayush Pratap Singh and Mr. Udayraj Patwardhan, Advocates, Mr. Udayraj Patwardhan and Ms. Shreya, Advocates.