Guarantor's insolvency plan approved. Does the borrower walk free?

A guarantor paid ₹38.87 crore of a ₹241 crore debt. The creditor then went after the borrower for ₹1,428 crore. The guarantor cried foul.

The money had been paid. The resolution plan — a thick document stamped with the NCLT's seal — was approved. BRS Ventures, the company that bought the guarantor out of bankruptcy, believed the debt was dead. Then SREI Infrastructure Finance, the creditor, filed a fresh case against Gujarat Hydrocarbon — the original borrower — for the remaining ₹1,428 crore. BRS Ventures rushed to the Supreme Court, arguing the creditor had been paid and could not chase anyone else for the same debt.

The question was simple: when a guarantor's insolvency plan is approved and the creditor takes a partial payment, does the principal borrower walk free?

When a ₹100 crore loan turned into a ₹1,428 crore fight

Gujarat Hydrocarbon needed money for a Special Economic Zone (SEZ) project. It approached SREI Infrastructure Finance, which agreed to lend ₹100 crore. The loan came with a guarantee from ACIL, the holding company that controlled Gujarat Hydrocarbon. If the borrower defaulted, the guarantor would pay.

The borrower defaulted. SREI invoked the guarantee and, when ACIL could not pay, filed an insolvency petition against the guarantor under Section 7 of the Insolvency and Bankruptcy Code (IBC — the law that allows a creditor to start bankruptcy proceedings against a company that owes money). The NCLT admitted the case in October 2017, and ACIL went into Corporate Insolvency Resolution Process (CIRP — the process where a company tries to find a buyer or a rescue plan to avoid liquidation).

BRS Ventures stepped in as the successful resolution applicant — the company that submitted a plan to take over ACIL and pay its debts. The plan was approved by the NCLT in September 2018. Under that plan, BRS Ventures paid SREI ₹38.87 crore as a full and final settlement of ACIL's guarantee liability, which stood at ₹241.27 crore. The cheque for ₹38.87 crore was handed over; the resolution plan was signed. BRS Ventures thought the matter was closed.

Then SREI filed a fresh Section 7 application against Gujarat Hydrocarbon — the original borrower — for ₹1,428 crore. That included the principal loan amount plus accumulated interest and penalties. The application landed at the NCLT, and the resolution plan document, stamped with the NCLT's seal, sat on the table as BRS Ventures' counsel prepared to argue that the debt was settled.

The argument that almost worked

BRS Ventures challenged the fresh application on two grounds. First, it argued that under Section 140 of the Indian Contract Act (the right of subrogation — when a guarantor pays the debt, it steps into the creditor's shoes and can recover the amount from the borrower), BRS Ventures had inherited SREI's rights against Gujarat Hydrocarbon. If SREI had already been paid, it could not turn around and claim the same debt again.

Second, BRS Ventures argued that SREI was estopped — legally prevented — from pursuing the borrower. Under Sections 63 and 41 of the Contract Act, if a creditor accepts a partial payment and agrees to discharge the guarantor, the entire debt is extinguished. The creditor cannot later change its mind and go after the principal borrower.

The NCLT and the National Company Law Appellate Tribunal (NCLAT — the appeal court for insolvency cases) both rejected these arguments. At the NCLAT hearing, the bench listened without interruption as BRS Ventures' counsel argued that the debt had been settled. The appeal was dismissed. BRS Ventures appealed to the Supreme Court.

Why the Supreme Court said no

A bench of Justice Abhay S. Oka delivered the judgment on February 22, 2024. The court rejected every argument BRS Ventures raised. The judgment copy, fresh from the registrar's office, carried a crisp finding: the principal borrower remained liable.

First, the court held that "the approval of a resolution plan of the guarantor by operation of law does not discharge the principal borrower." The approval of the plan binds the guarantor and its creditors, but it does not extinguish the principal borrower's liability. The creditor can still pursue the borrower for the remaining amount after deducting whatever was recovered from the guarantor.

Second, the court clarified that Section 140 of the Contract Act — the right of subrogation — only kicks in when the guarantor has paid the entire guaranteed debt. BRS Ventures had paid only ₹38.87 crore against a guarantee of ₹241.27 crore. That was a partial payment, not a full discharge. The right of subrogation never arose.

Third, the court held that a holding company and its subsidiary are separate legal entities. Under Sections 18 and 36(4)(d) of the IBC, the assets of a subsidiary cannot be included in the insolvency or liquidation estate of the holding company. BRS Ventures, as the resolution applicant of the holding company ACIL, had no claim over Gujarat Hydrocarbon's assets or liabilities.

The court also relied on its earlier judgment in Lalit Kumar Jain v. Union of India (2021), where it had held that approval of a guarantor's resolution plan does not discharge the principal borrower. The creditor retains the right to proceed against the borrower for the balance.

The bench reads the ratio: why the borrower stays on the hook

The court engaged with several provisions of the IBC and the Contract Act to reach its conclusion. Under Section 128 of the Contract Act, the surety's liability is co-extensive with that of the principal debtor — meaning the creditor can recover from either. But the court noted that this co-extensiveness does not mean that partial recovery from the surety extinguishes the principal debtor's liability. Sections 133 to 139 of the Contract Act, which deal with discharge of the surety, were interpreted to mean that only specific acts — such as variance of contract, release of the principal debtor, or loss of security — can discharge the surety. Approval of a resolution plan under the IBC is not one of those acts.

Section 60(2) of the IBC permits separate or simultaneous insolvency proceedings against the corporate debtor and the corporate guarantor. The court held that this provision is consistent with the co-extensive liability principle under Section 128 of the Contract Act. If the creditor can pursue both simultaneously, it follows that recovery from one does not bar recovery from the other.

The court also examined Sections 18 and 36(4)(d) of the IBC. Section 18 lists the duties of the interim resolution professional, including taking control of the corporate debtor's assets. Section 36(4)(d) excludes assets of a subsidiary from the liquidation estate of the holding company. The court held that these provisions reinforce the separate legal entity principle — a holding company and its subsidiary are distinct, and the assets of one cannot be used to pay the debts of the other.

The court cited several precedents to support its reasoning. In Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors. (2019), the court had held that a resolution plan binds all stakeholders but does not extinguish the liability of parties not covered by the plan. In Vodafone International Holdings BV v. Union of India (2012), the court had reaffirmed the separate legal entity doctrine. In Punjab National Bank Ltd. v. Shri Vikram Cotton Mills (1970), the court had held that a creditor can proceed against the guarantor without first exhausting remedies against the principal debtor. These precedents, taken together, supported the conclusion that the principal borrower remained liable despite the guarantor's resolution plan.

The court also considered the principle that if the creditor recovers only part of the guaranteed amount from the surety and agrees not to proceed further against the surety, this does not extinguish the remaining debt payable by the principal borrower. The creditor's right to pursue the borrower for the balance remains intact, subject only to the deduction of amounts already recovered from the guarantor.

What this means for lenders, borrowers, and guarantors

The judgment makes one thing clear: a guarantor's insolvency is not a get-out-of-jail-free card for the principal borrower. Lenders can recover from both the guarantor and the borrower, and recovering partially from one does not wipe out the other's liability.

For resolution applicants like BRS Ventures, the lesson is harsh. Paying a fraction of the guaranteed amount and assuming the debt is dead can be a costly mistake. The creditor can still chase the borrower for the rest — and the resolution applicant, as the new owner of the guarantor, may find itself dragged into litigation it thought it had left behind. The resolution plan document, once seen as a clean exit, now reads as a partial closure — a door left open for the creditor to walk through again.

THE PLAY: A resolution applicant paying a guarantor's debt must get a full and final settlement from the creditor that explicitly releases the principal borrower — or risk facing the same debt again.

The borrower did not walk free. The creditor kept its chase alive. The file on the bench, heavy with arguments and counter-arguments, closed with a single conclusion: the debt survived the guarantor's discharge.