Is the Gujarat High Court judgment in Prashant Sashi Ruia v. State Bank of India flawed?

Justice V Ramasubramaniam, known for his sarcasm and wit, while authoring the judgment in Embassy Properties, had noted that four days prior to the famous judgement of the House of Lords in Anisminic Ltd v. Foreign Compensation Commission, the Supreme Court in Official Trustee, West Bengal v. Sachindra Nath Chatterjee had taken an identical view as in Anisminic.

He then went on to observe in paragraph 19 that though the judgment of the Supreme Court preceded Anisminic and could be proudly considered as an Indian pre-cursor to an English landmark judgement, subsequent judgments of the Supreme Court had considered Anisminic alone as having provided a break-through.

This sums up the fad to follow English or foreign precedents, even if it is well-settled by decisions rendered by our courts. The recent judgment of the Gujarat High Court in the batch of writ petitions in Prashant Sashi Ruia v. State Bank of India exposes this flawed approach.

The liability of the personal/corporate guarantor not getting discharged even after the corporate debtor’s liability is extinguished on the sanction of a resolution plan is clear from the ratios laid down in State Bank of India v. V. Ramakrishnan, Committee of Creditors v. Satish Kumar Gupta, and Lalit Kumar Jain v. UOI. After analyzing the provisions of the Insolvency and Bankruptcy Code (IBC) and earlier decisions, including Lalit Kumar Jain, by which the notifications issued for proceedings against personal guarantor were upheld, the two-judge Bench of the Supreme Court had categorically held that the liability of the guarantor does not get discharged after the approval of the resolution plan.

In Prashant Ruia, writ petitions were filed before the Gujarat High Court by the personal guarantors of Essar Steel praying for issue of a writ of prohibition against the Debts Recovery Tribunal (DRT) before which applications were filed by the State Bank of India for recovery of amounts due as per guarantees. The writ petitions were filed on the ground that the entire debt of M/s Essar Steel India Limited stood assigned to M/s ArcelorMittal India Private Limited as per the resolution plan sanctioned by the National Company Law Tribunal (NCLT), and that there were no dues in the books of the financial creditors to make claims against the guarantors.

The Division Bench of the Gujarat High Court, while dismissing the writ petitions, had highlighted the decision of the Australian Supreme Court in Hutchens v. Deauville Investments Pty Ltd and directed the DRT to consider the said decision closely while deciding the matter. Pursuant to the directions of the High Court, the DRT in Ahmedabad dismissed the application filed by the bank by relying on the Hutchens case.

The Gujarat High Court as well as the DRT fell in serious error by not only failing to appreciate the correct factual matrix in the Hutchens case, but also the ratio laid down based on the factual matrix. In Hutchens, the dramatis personae were: (a) Kenbrite Corporation, the principal debtor; (b) Hutchens, a director of Kenbrite and a personal guarantor, who, in addition to the guarantee, also had mortgaged the property in favour of the creditor General Credits; (c) General Credits, the creditor and first charge holder and in whose favour the guarantee was originally executed; (d) Helvetic, subsequent creditor of Kenbrite which held the second charge on the assets of Kenbrite; (e) M/s Deauville Investments, assignee of the debts by M/s Helvetic.

After the principal debtor became insolvent, General Credits proceeded to appoint a receiver and so did Helvetic for the second charge. General Credits assigned all its rights as a creditor to Helvetic. Helvetic, thereafter, had assigned its rights in favour of Deauville and also transferred the mortgage of the immovable property. However, the facts noticed for consideration by the Supreme Court were that there was no transfer of first mortgage debt nor an express transfer of Hutchens indebtedness by Helvetic to Deauville.

The issue raised in this regard is summed up by the Supreme Court of Australia as follows:

“If that be so, the questions arise about whether the transfer of real property mortgage by Helvetic to Deauville, could, of itself, suffice to effect a transfer of Hutchens indebtedness as a guarantor, which was, as has been seen, the only actual liability it secured and whether, if it could not, Deauville is entitled as mortgagee to enforce the security of the real property mortgage given to secure the payment of a debt to a company other than itself.”

It was in this context that the Supreme Court noticed the difficulty that arises when the benefit of the guarantee and real property offered to secure it alone was transferred to Deauville while Kenbrite remained liable as a principal debtor.

Against this factual background, the Supreme Court of Australia held that as a matter of basic principle, it would be impossible to assign the benefit of guarantee or the security for it while retaining the benefit of a guaranteed debt, thereby converting the one debt owed to the creditor by the principal debtor and the guarantor into two debts – one owed by principal debtor to the creditor and other owed by the guarantor to the assignee. This ratio has no application in the Indian context as there is no independent assignment of guarantor’s liability by the financial creditors, making it into two debts. The guarantees are invoked to make up for the short fall or the “haircut” which the financial creditors are constrained to accept under the resolution plan.

It is unfortunate that the Gujarat High Court, instead of following the dicta of our Supreme Court on guarantors’ liability not getting extinguished even after the corporate debtor is discharged from the liability on the sanction of a resolution plan, had directed the DRT to closely follow the Australian Supreme Court judgment in Hutchens case. 

R Venkatavaradan is an advocate practicing at the Madras High Court.