Guarantor's Liability Can't Be Restricted To Cap Prescribed Under Deed Of Guarantee On Principal Borrower's Liability: NCLAT
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan and Mr. Barun Mitra (Technical Member) has held that the liability of the guarantor cannot be restricted to only the capped amount prescribed in respect of the principal borrower's liability, since the guarantor's liability to discharge repayment obligations upon invocation of the guarantee and...
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan and Mr. Barun Mitra (Technical Member) has held that the liability of the guarantor cannot be restricted to only the capped amount prescribed in respect of the principal borrower's liability, since the guarantor's liability to discharge repayment obligations upon invocation of the guarantee and the principal borrower's liability operate in separate spheres.
The present appeal has been filed under section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC) against an order passed by National Company Law Tribunal by which it held Respondent No. 1 liable for Rs. 25 crore under the Guarantee Deed.
The Appellant submitted that the Adjudicating Authority had failed to appreciate that the Corporate Guarantee also contained a specific clause viz. Clause 3 which provided for liability on the part of the UEL to pay default interest. Thus, while Clause 33 operates in respect of liability of UEL for amounts owed by UIL, Clause 3 deals with the liability on the part of the UEL to pay interest arising out of their own default in discharging their liability towards the guarantee undertaken by them.
Per contra, the Respondent submitted that Clause 33 of the Agreement contained a “notwithstanding” proviso which proviso had been deliberately and intentionally inserted by the parties in the Guarantee Agreement setting a cap on the overall liability of the Guarantor. In such circumstances, any liability beyond Rs 25 Cr. could not have been permitted by the Adjudicating Authority as it would have otherwise rendered nugatory the non-obstante provision.
The Tribunal observed that the Appellant in form C crystallised the guarantee liability at Rs. 25 crore upon invocation of the guarantee under clause 3 of the Guarantee Deed. This amount was within the security amount and cap prescribed under clause 33. Furthermore, this amount was not disputed by Respondent No. 1 of the RP. No error was found as to the quantum of liability as the liability did not exceed Rs. 25 crores under the terms of the Guarantee.
It further observed that clause 3 of the Guarantee specifies a rate of interest which is identical to that applicable to the principal borrower but independently applicable to the liability of the guarantor. This shows a clear intent of the parties that the Guarantor's repayment obligation carried its own interest liability which is distinct from default interest on the debt of principal borrower. Thus, while clause 3 addresses the guarantor's default, clause 33 imposes a cap on the principal borrower's liability under clause 3(a). Both the clauses operate in separate spheres.
It held that “We are also inclined to agree with the principles enunciated in the Topalsson judgment that when a clause is present in the Guarantee Contract for levy of interest on late payment, this substantial remedy cannot be circumvented by falling back on the liability cap with respect to principal amount as this would amount to denial of the benefit of the remedy for late payment which is integral part of the present Deed of Guarantee.”
It further held that the liability of the Respondent to pay default interest is distinct from the principal borrower's liability. Since the UEL failed to discharge its liability of Rs. 25 crore within cure period, the Appellant Bank became entitled to levy default interest as per clause 3 of the Guarantee Deed. Therefore, the RP was right in adding this interest in the Appellant's claim and the Adjudicating Authority erred in treating as a breach of cap prescribed under clause 33 of the Deed.
It held that it is clear that clause 33 caps the liability of the Respondent to Rs 25 crore. However, clause 3 cannot be ignored which was included consciously by the parties and provided default interest on delayed discharge of the guarantor's liability. Since clause 3 operates independently of the liability of the principal borrower, it does not conflict with clause 33 of the Deed. The cap under clause 33 of the Deed cannot restrict the guarantor's liability to pay default interest which falls beyond its scope.
Accordingly, the present appeal was allowed and the impugned judgment was set aside.
Case Title:ICICI Bank Ltd. Versus Seeta Neeraj Shah and Anr.
Case Number: Company Appeal (AT) (Insolvency) No. 731 of 2025
Judgment Date: 03/09/2025