Explicit Clause Required: NCLT's Decision on Guarantee Agreements and Past Liabilities

Explicit Clause Required: NCLT's Decision on Guarantee Agreements and Past Liabilities

Introduction

The National Company Law Tribunal (NCLT) Kochi bench has held that liabilities incurred before the execution of a Guarantee Agreement cannot be included in it unless an explicit clause covering such past dues is incorporated. The present petitions were filed under section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC) to initiate the Personal Insolvency Resolution Process (PIRP) against the personal guarantors of the Corporate Debtor.

Factual Background

The Petitioner argued that the outstanding invoices related to supplies made before 04.01.2022 but were partially unpaid, and that payments were made after the execution of the Credit and Guarantee Agreements, showing an ongoing business relationship. The Respondent submitted that all the invoices relied upon by the Petitioner were dated before the execution of the agreements, and hence, no liability could arise under the said agreements for transactions that took place earlier.

Contentions of the Parties

Petitioner's Contentions:

• The Guarantee Agreement was intended to cover outstanding liabilities, including those incurred before its execution.
• The continuing business relationship and payments made after signing the Agreement showed that past liabilities were meant to be covered.

Respondent's Contentions:

• The Guarantee Agreement did not mention any past dues or old invoices.
• The Petitioner could not invoke the Guarantee for liabilities predating the execution of the Agreement.

Issues

The primary issue was whether the Guarantee Agreement explicitly covered past liabilities incurred before its execution.

Reasoning & Analysis

The bench of Madhu Sinha (Member Technical) and Vinay Goel (Member Judicial) observed that the Guarantee Agreement did not contain any clause referring to past dues or invoices issued before it was signed. The Tribunal held that while the law allows parties to cover past liabilities under a Guarantee, a clear clause must be included — otherwise, it cannot be presumed. It further reaffirmed that a guarantee is a secondary obligation and must be strictly interpreted according to its wording.

Implications

This decision clarifies that Guarantee Agreements must clearly specify if they are meant to secure past liabilities, highlighting the need for careful drafting to avoid disputes.

Outcome

The Tribunal dismissed the present petitions, holding that the Agreement of Guarantee did not cover liabilities incurred before its execution.

In this case the petitioner was represented by Mr. Vinod PV, Advocate, while the respondent was represented by Mr. Job Abraham, Advocate.