In Lalit Mishra and Others v. Sharon Bio Medicine Limited and Others (decided on December 19, 2018), the National Company Law Appellate Tribunal ("NCLAT") determined that a resolution plan that released the corporate debtor from paying off its personal guarantors, who were also the promoters, was not discriminatory in nature.
In the instant case titled Lalit Mishra and Others v. Sharon Bio Medicine Limited and Others the issue raised for clarification before the NCLAT was:
If the personal guarantors weren't paid off, did the NCLT in Mumbai have the right to approve the settlement plan?
With regard to this issue, The NCLAT noted that one of the main goals of the Code is to maximise the value of the Corporate Debtor's assets while also balancing the interests of all of its creditors. Additionally, the Code forbids promoters from directly or indirectly controlling the corporate debtor or from profiting from the resolution of corporate insolvency or its conclusion. By forbidding promoters from rewarding themselves at the expense of creditors and undermining the bankruptcy procedures, the Code aims to defend the interests of the Corporate Debtor's creditors. The fact that the promoters' and shareholders' rights to representation, participation and voting at the meeting of the committee of creditors are suspended once the resolution process begins and that their powers as members of the corporate debtor's board of directors are suspended makes this clear. The NCLAT further noted that the promoters, who had filed the appeal in this case and were the personal guarantors, were responsible for the Corporate Debtor's insolvency. As a result, a resolution plan that does not call for paying obligations to the appellants in their capacity as promoters or personal guarantors or that releases the corporate debtor's burden in addition to that of the successful resolution applicant would not be discriminatory in nature.
The NCLAT also ruled that guarantors share in the borrower's liability. Additionally, the Code did not intend to favour personal guarantee holders by preventing creditors from using legal remedies available to them to recover their debts by enforcing the personal guarantees, which are separate contracts. The NCLAT dismissed the appeal brought by the Appellants after concluding that the resolution plan does not discriminate against the promoters, shareholders, or personal guarantors.
The NCLAT categorically stated that,
“In the aforesaid background, if no amount is given to the promoters/ shareholders and the other equity shareholders who are not the promoters have been separately treated by providing a certain amount in their favour, the Appellant cannot claim to have been discriminated.”