Guarantors Should Exercise Caution! The Liability Of Guarantors Under The Contract Act Is Retained But His Corresponding Right Is Restricted

By way of Gazette notification dated 15.11.2019 Government Of India had brought into effect Part III of the IBC. The same was under challenge before the Hon’ble S.C. It has been finally put to rest by the Hon’ble Supreme Court by way of its judgment in Lalit Kumar Jain v. Union of India . Pursuant to Lalit Kumar Jain judgment, it has pave the way for creditors in better recovery of loans as on the other hand it would leave a personal guarantor remediless if the resolution plan (wherein creditor has say ) decides extinguishment of personal guarantor’s right of subrogation, which means creditors may be able to benefit from double-dipping. Creditor who otherwise  was taking haircut are entitled to proceed against personal guarantee. In the Essar Steel case it moved away from the settled principles under the Contract Act and clarified that guarantors are not entitled to right of subrogation, if the resolution plan states. The resultant situation is that while the liability of a personal guarantor under the Contract Act is retained, his corresponding right is restricted, which goes against  general principles of law and equity.

With the present legal position, it will have far reaching repercussions on the business expansion and shall create big challenge for startup business. Going forward it  would difficult find a guarantor which may limit opportunity of finance and business.