Stepping Down, Not Walking Away: NCLAT Upholds Liability of Resigned Director as Personal Guarantor

Stepping Down, Not Walking Away: NCLAT Upholds Liability of Resigned Director as Personal Guarantor

Introduction

The National Company Law Appellate Tribunal (NCLAT), New Delhi, held that resignation from the post of director does not discharge a personal guarantor from liability under a continuing guarantee, unless the guarantee is expressly revoked. The Tribunal, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), observed that the continuing nature of the 2009 guarantee deed rendered the appellant liable despite his resignation in 2012.

Factual Background

The appeal arose from an order passed by the National Company Law Tribunal (NCLT), New Delhi, admitting a petition under Section 95 of the Insolvency and Bankruptcy Code, 2016, filed by the State Bank of India (SBI) against Subhash Aggarwal, who had executed a personal guarantee in favour of M/s J.V. Strips Ltd. The guarantee, executed in 2009 for ₹3.84 crore, was part of the total sanctioned limit of ₹41.25 crore. It was subsequently revised and enhanced several times until 2018, when the borrower’s account was classified as a Non-Performing Asset (NPA). The appellant contended that he had resigned from the company in 2012 and that subsequent deeds of guarantee were forged and fabricated.

Procedural Background

The NCLT admitted SBI’s petition under Section 95 of the IBC, holding that the debt and default were established. The appellant challenged this order before the NCLAT, arguing that his liability as a personal guarantor ceased upon resignation and that later guarantees were invalid.

Issues

1. Whether the resignation of a director results in the discharge of liability under a continuing personal guarantee.

2. Whether subsequent variations in the loan terms without the guarantor’s participation absolve him from liability.

3. Whether the petition under Section 95 was barred by limitation.

4. Whether multiple reports filed by the Resolution Professional (RP) violated procedural norms under Section 99 of the IBC.

Contentions of the Parties

Appellant’s Submissions: The 2009 guarantee was not continuing and ceased to be effective after resignation in 2012. Any renewals or variations in 2014 and beyond were fabricated or executed without his consent. Liability under Sections 62 and 133 of the Indian Contract Act stood discharged due to variation in contract terms. The petition was time-barred as it was filed in 2022, four years after the account was declared NPA in 2018. The RP’s filing of multiple reports was contrary to the ten-day limitation prescribed under Section 99 of the IBC.

Respondent’s Submissions (SBI): The 2009 deed was a continuing and irrevocable guarantee under Section 129 of the Indian Contract Act. Resignation of a director does not terminate a personal guarantee unless it is expressly revoked under Section 130. Clause 14 of the guarantee deed permitted variation of credit limits without affecting the guarantor’s liability.

The application was filed within limitation, calculated from the loan recall notice, not from the NPA classification date. Filing of additional reports by the RP did not prejudice the appellant.

Reasoning and Analysis

The NCLAT observed that the 2009 guarantee was both continuing and irrevocable, as evident from Clauses 8, 11, and 14 of the deed. The Tribunal noted that these clauses explicitly allowed subsequent variations in credit facilities without affecting the guarantor’s liability. Rejecting the appellant’s selective interpretation, the Tribunal held that resignation from directorship does not automatically revoke a continuing guarantee. It relied on Sitaram Gupta v. Punjab National Bank, where it was held that once a guarantee is executed, it cannot be revoked merely by resignation unless express notice of revocation is given.

The Tribunal further clarified that subsequent guarantees executed after 2009 were supplemental and did not extinguish the original liability. The absence of any communication revoking the guarantee before resignation further affirmed the continuing obligation of the guarantor. On the issue of limitation, the Tribunal ruled that the date of default, not the NPA classification date, determines limitation. The filing of additional reports by the RP was also upheld as valid, with the Tribunal noting that sufficient opportunity was provided to the appellant to respond. Consequently, the NCLAT upheld the NCLT’s decision, affirming the existence of debt and default. However, in the interest of justice, the Tribunal restricted the appellant’s liability to ₹3.84 crore — the amount originally guaranteed in 2009.

Implications

This judgment reinforces that resignation from directorship does not nullify obligations under a continuing personal guarantee unless expressly revoked. It underscores that such guarantees survive corporate and managerial changes, ensuring continuity of creditor protection. The ruling also clarifies the limited scope of Section 130 of the Contract Act in relation to continuing guarantees, aligning with established precedents.

In this case the appellant was represented by Mr. Abhijeet Sinha, Sr. Advocate with Mr. Arindam Ghose, Mr. Upinder Singh and Ms. Shavanya Bhatnagar, Advocates.