Court’s Decision
The Division Bench of the Delhi High Court comprising Justice Anil Kshetrapal and Justice Harish Vaidyanathan Shankar dismissed a company appeal filed by the personal guarantors of a wound-up company, affirming that once a final winding up order is passed and the Official Liquidator (OL) assumes charge, the Company Court has no jurisdiction to intervene to protect guarantors from recovery proceedings initiated by creditors.
The Court upheld the Single Judge’s order dated 21 December 2023, which had dismissed the guarantors’ plea seeking to restrain IDBI Bank from recovering ₹252.53 crores under a notice issued pursuant to their personal guarantees.
The Bench emphasized that the role of the Company Court is “confined to realization and distribution of the company’s assets”, and it cannot extend its jurisdiction to insulate guarantors from independent contractual or statutory obligations. The judgment reaffirms the principle laid down by the Supreme Court in Lalit Kumar Jain v. Union of India (2021) 9 SCC 321, holding that discharge of the corporate debtor in liquidation does not extinguish the personal liability of guarantors.
Facts
The dispute stemmed from the winding up of a tool manufacturing company that was ordered to be liquidated by the Delhi High Court on 18 March 2003 in a petition filed by creditors. Following the order, a Provisional Liquidator and later an Official Liquidator were appointed to manage the company’s assets, which included six industrial units.
Between 2005 and 2022, all six properties were sold under the supervision of the OL. Five properties were sold by 2005 for about ₹3.85 crores, while the final unit was sold in 2022 for ₹43 crores against a reserve price of ₹23.56 crores. The proceeds were distributed among secured creditors and workmen under court supervision, following directions issued on 25 May 2011 and 13 August 2023, with the cut-off date for adjudicating claims fixed as 18 March 2003.
In 2023, the appellants (personal guarantors of the company) alleged that they had cooperated with the banks in negotiating a One Time Settlement (OTS) and that their liability should not be enforced until the OTS proceeds were realized. They also argued that delays in disbursement by the OL frustrated the OTS, which, they claimed, was not due to their fault.
Despite these contentions, IDBI Bank issued a recovery notice dated 2 December 2023, demanding ₹252.53 crores. The guarantors approached the Company Court seeking a restraint order against the Bank, which was rejected by the Single Judge. They then filed the present appeal before the Division Bench under Section 483 of the Companies Act, 1956.
Issues
- Whether the Company Court has jurisdiction to protect personal guarantors from recovery proceedings after a company has been finally wound up.
- Whether the liability of personal guarantors ceases upon liquidation or completion of winding up.
- Whether the purported OTS or delays by the Official Liquidator could suspend the guarantors’ liability.
Petitioner’s Arguments
The appellants contended that they had acted in good faith by assisting the banks and the OL in selling the assets of the company and that the sale proceeds were sufficient to discharge the entire debt. They argued that the delay in distribution of sale proceeds by the OL had caused the OTS to fail, which should not prejudice their position as guarantors.
Their counsel submitted that the OTS was entered into in 2023 with the creditor banks, including IDBI, and that they had undertaken to cooperate in recovery. However, since the OL delayed disbursement and the sale proceeds were not promptly applied to clear dues, the appellants claimed that the Bank’s notice was premature and oppressive.
They further asserted that as the winding up proceedings had concluded under the supervision of the Court, the Company Court should exercise its equitable jurisdiction to protect the guarantors from independent recovery actions, at least until final settlement of accounts between the OL and creditors.
Respondent’s Arguments
The counsel for IDBI Bank opposed the appeal, arguing that no valid or binding OTS existed between the Bank and the guarantors. The Bank contended that the appellants were never members of the original lending consortium, which was led by Dena Bank (now merged with Bank of Baroda), and that IDBI was not a party to any OTS proposal.
It was further submitted that the Company’s winding up had attained finality, with the OL having already realized and distributed the company’s assets according to law. The liability of guarantors, the Bank argued, was independent of the liquidation process, and the guarantors could not use winding up proceedings as a shield against personal recovery.
The Bank placed strong reliance on the Supreme Court’s ruling in Lalit Kumar Jain v. Union of India (2021) 9 SCC 321, which upheld that personal guarantors remain liable for the corporate debtor’s dues even after its discharge in insolvency or liquidation. It contended that the Company Court’s jurisdiction was limited to winding up, realization of assets, and distribution of proceeds—it could not be invoked for reliefs between guarantors and creditors.
Analysis of the Law
The Court reiterated that the jurisdiction of the Company Court under the Companies Act, 1956 is confined to four core functions:
- Supervising the winding up process;
- Realising and selling the company’s assets;
- Settling claims of creditors and contributories; and
- Overseeing distribution of sale proceeds.
Beyond these functions, the Company Court cannot entertain or adjudicate disputes between guarantors and financial institutions, as such matters fall within the purview of civil courts, Debts Recovery Tribunals (DRTs), or the National Company Law Tribunal (NCLT) under the relevant statutes.
The Court emphasized that personal guarantees are independent contracts of indemnity, and the guarantor’s liability does not depend on the continuation of the principal debtor’s corporate existence. The principle is codified in Sections 128 and 134 of the Indian Contract Act, 1872, which state that a surety’s liability is co-extensive with that of the principal debtor unless the contract provides otherwise.
Therefore, even if the principal debtor (the company) ceases to exist upon liquidation, the guarantor’s contractual liability survives.
Precedent Analysis
- Lalit Kumar Jain v. Union of India (2021) 9 SCC 321 – The Supreme Court held that discharge of a corporate debtor in insolvency or liquidation does not absolve its personal guarantors from liability. The contract of guarantee remains enforceable independently.
Relevance: Applied directly to reaffirm that guarantors cannot invoke winding up proceedings to escape recovery. - ICDS Ltd. v. Smithaben H. Patel (1999) 3 SCC 80 – The Court held that guarantors’ obligations are independent and not extinguished by discharge of the borrower unless expressly agreed.
Relevance: Reinforced the co-extensive nature of guarantors’ liability. - State Bank of India v. Indexport Registered (1992) 3 SCC 159 – Clarified that creditors may proceed simultaneously against both the borrower and guarantor.
Relevance: Supported IDBI’s right to pursue recovery from guarantors even after winding up.
Court’s Reasoning
The Division Bench found that the Company had been wound up more than two decades ago, and all its properties had been sold and proceeds distributed under judicial oversight. The appellants’ reliance on the alleged OTS was deemed unsupported by evidence, as the record showed no formal approval or payment under the scheme.
The Court agreed with the Single Judge’s reasoning that disputes between guarantors and banks fall outside the scope of company jurisdiction, and the appellants could seek relief before other appropriate forums, such as the DRT or civil courts.
Rejecting the plea that the delay by the OL frustrated the OTS, the Court held that administrative delays in liquidation cannot absolve guarantors of contractual liability. It also clarified that IDBI Bank was not a party to earlier applications (C.A. No. 677/2023) and that no directions had ever been issued restraining it.
Ultimately, the Court held that the liability of guarantors is autonomous and unaffected by the liquidation process, and the Company Court cannot act as a protective shield for them once winding up has concluded.
Conclusion
The Division Bench dismissed the appeal, upholding the Single Judge’s order. It held that:
- The Company Court’s jurisdiction ends once liquidation and distribution are complete;
- The liability of personal guarantors continues independently; and
- The appellants are free to seek remedies before competent tribunals or courts but cannot seek shelter under company jurisdiction.
The Court also observed that the alleged OTS and valuation grievances were irrelevant to the scope of company proceedings and could not be grounds for restraining IDBI from recovery.
Accordingly, the appeal was dismissed as devoid of merit, and all pending applications were closed.
Implications
This ruling serves as a clear reaffirmation that personal guarantors cannot evade liability through corporate liquidation proceedings. It limits the jurisdiction of the Company Court strictly to liquidation functions and prevents misuse of its equitable powers by guarantors seeking to delay or obstruct recovery.
The judgment also underscores the continuing enforceability of personal guarantees post-liquidation, aligning with the Insolvency and Bankruptcy Code (IBC) framework and the Supreme Court’s consistent jurisprudence on guarantor liability.
FAQs
1. Can a guarantor be protected from recovery after company liquidation?
No. The guarantor’s liability is independent and continues even after the company is wound up or discharged.
2. Can the Company Court restrain banks from recovering dues from guarantors?
No. The Company Court’s powers are confined to winding up and distribution; disputes between guarantors and creditors must be pursued before DRTs or civil courts.
3. What if the guarantor had an OTS with the bank?
Unless the OTS is formally executed and honoured, it does not suspend the guarantor’s liability.