Does A Settlement Discharge A Personal Guarantor? NCLAT's Ruling In Jagtar Singh vs Gagan Gulati And Broader Legal Principles.

Indian insolvency law has consistently maintained a clear and principled distinction between arrangements that merely reorganize or govern the performance of existing contractual obligations and those that result in a genuine novation as defined by the Indian Contract Act, 1872. Settlement agreements, restructuring plans, or updated repayment schedules do not, by their mere execution, eliminate pre-existing contractual liabilities. This doctrinal clarity holds particular importance in insolvency proceedings, where issues often emerge regarding the persistence of underlying debt obligations and the ongoing liability of personal guarantors, even in the face of consensual settlements between creditors and corporate debtors.

In this legal context, the ruling of the National Company Law Appellate Tribunal ("NCLAT"), Principal Bench, New Delhi, in Jagtar Singh vs Gagan Gulati¹ gains additional relevance. The Tribunal was tasked with determining whether a settlement agreement made between a corporate debtor and its creditor could function as a novation, thereby releasing the personal guarantor from liability. In reaffirming established principles of novation under the Contract Act and the independent and co-extensive nature of guarantor liability within commercial debt arrangements, the NCLAT's decision provides authoritative guidance on the boundaries of settlement-driven discharge in insolvency scenarios and emphasizes the stringent threshold required to establish a legally effective novation.

I. Background of the Case

The dispute originated from two loan facilities provided to a corporate debtor, one in 2013 and the other in 2016. The appellant had signed a personal guarantee for the loan facility from 2013, whereas the second facility did not have such a guarantee.

When repayment issues arose, the creditor issued a recall notice, initiated arbitration, obtained an award, and subsequently began Corporate Insolvency Resolution Proceedings ("CIRP") in 2019. During the appellate phase, the parties, under the guidance of court-supervised mediation, finalized a structured settlement on 2 December 2019, which was integrated into the enforceable NCLAT orders.

The settlement outlined revised repayment conditions and personal commitments from the promoters but also included a provision for the reinstatement of the entire liability in case of default. After the corporate debtor failed to comply, the CIRP was reinstated, and the creditor activated the personal guarantee, commencing proceedings under Section 95 of the IBC against the appellant.

Issue: Did the 2019 settlement nullify the original guarantee obligation through novation?

II. Appellant's Submissions

The Appellant presented the following arguments before the Tribunal:

1. It was asserted that the personal guarantee signed by the Appellant was distinctly confined to the loan facility provided in 2013 and did not encompass any later or separate credit agreements.
2. The Appellant argued that the settlement agreement executed in 2019 represented a new and independent contractual arrangement between the creditor and the corporate debtor. The Appellant contended that this arrangement constituted a novation as defined in Sections 62 and 133 of the Indian Contract Act, 1872.

Based on this reasoning, it was maintained that the original contractual obligations were extinguished and replaced by the settlement framework, resulting in the legal outcome that the Appellant's duties as a personal guarantor were discharged, given that the underlying guaranteed debt had been significantly restructured.

III. Respondent's Submissions

The Respondent contested the Appellant's arguments and put forth the following points:

1. It was claimed that the personal guarantee provided by the Appellant was a continuing guarantee, covering all amounts due under the original loan agreement and remaining effective until the complete and final settlement of the underlying debt.
2. The Respondent argued that the settlement agreement signed in 2019 did not replace, annul, or extinguish the original contract. Instead, it merely outlined the repayment method by allowing the outstanding dues to be settled in instalments, accompanied by a clear revival clause that reinstated the creditor's rights of enforcement upon default.
3. It was asserted that the settlement agreement did not contain any express or implied release of the Appellant from his responsibilities as a personal guarantor. The arrangement did not change the essential nature of the guaranteed obligation, nor did it inflict any legal disadvantage on the guarantor that would warrant discharge under the Indian Contract Act, 1872.

IV. Tribunal's Legal Analysis

The Tribunal initiated its examination by referencing Section 62 of the Indian Contract Act, 1872, which states that when the parties involved in a contract agree to replace an existing contract with a new one, or to cancel or modify it, the original contract does not need to be fulfilled. Legal precedent has consistently maintained that a claim of novation can only prevail when the following crucial elements are demonstrated:

1. The presence of mutual agreement among all parties to the original contract, including those whose obligations are intended to be discharged;
2. A definitive and unambiguous intention to completely eliminate the original contractual obligations;
3. The successful replacement of the original contract with a new, valid, and enforceable agreement outlining the rights and responsibilities of the parties involved.

By applying these established principles, the Tribunal concluded that the settlement agreement in question failed to meet the legal or theoretical criteria for novation. Rather than nullifying the original contractual framework, the settlement explicitly maintained the foundational rights and obligations by merely adjusting the method and timing of repayment.

Specifically, the Tribunal highlighted that the settlement:

1. Altered the repayment timeline without discharging or superseding the underlying debt obligation;
2. Included a revival clause, under which any default would lead to the immediate reinstatement and enforceability of the original liability.

In the Tribunal's opinion, these characteristics were decisive in indicating the parties' intention not to replace the original contract, but merely to temporarily reorganize their performance obligations. The existence of a revival mechanism was deemed fundamentally incompatible with the notion of novation, which necessitates the definitive and comprehensive displacement of the previous contract.

The Tribunal also noted that this interpretation aligns with previous NCLAT jurisprudence, which has consistently ruled that settlements or restructuring agreements do not constitute novation unless there is an explicit and complete substitution of the original contractual obligations. High judicial authority has similarly supported that novation cannot be inferred from simple modification, rescheduling, or extension of contractual terms, and must rely on a clear and unmistakable intention to achieve a total replacement of the original contract.

V. Guarantee Obligations and Discharge

According to the Indian Contract Act of 1872, a continuing guarantee remains valid until it is deliberately discharged or until events occur that legally free the surety from responsibility. Statutorily, Section 133 stipulates that any modification in the terms of the agreement between the principal debtor and the creditor, made without the surety's consent, discharges the surety only to the extent of that modification, provided the change adversely affects the surety's position.

In applying these principles, the Tribunal determined that the settlement agreement did not harm or disadvantage the personal guarantor. Instead, the arrangement provided relief to the corporate debtor by alleviating immediate repayment responsibilities and allowing for the liquidation of debts through installment payments. Such concessions, which are either beneficial or neutral in nature, were deemed not to represent a significant alteration of the underlying obligation that would warrant the discharge of the guarantor under Section 133.

The Tribunal also observed that the settlement agreement lacked any explicit clause releasing or discharging the Appellant from his duties as a personal guarantor. In the absence of any clear release or any contractual change that significantly compromised the guarantor's rights or increased his liability, the continuing guarantee was deemed to remain in effect.

This reasoning aligns with well-established contractual law, which consistently acknowledges that continuing guarantees persist despite restructuring or concessionary arrangements between creditor and debtor, unless there is a definitive discharge of the guarantee or a harmful alteration of contractual terms without the guarantor's consent.

VI. Decision

After a thorough evaluation of the contractual structure and the applicable legal principles, the National Company Law Appellate Tribunal reached the following conclusions:

1. The settlement agreement entered into in 2019 did not constitute a novation of the initial loan contract as defined by Section 62 of the Indian Contract Act, 1872, since it neither eliminated the original obligations nor replaced them with a new and independent contractual framework.
2. In the absence of any explicit discharge or legally effective change detrimental to the surety, the personal guarantee provided by the Appellant remained in effect and was not annulled by the settlement agreement.
3. Upon the corporate debtor's default, the explicit revival clause within the settlement agreement became applicable, leading to the reinstatement and enforceability of the original underlying obligation.

As a result, the Tribunal determined that the Appellant continued to be liable in his role as a personal guarantor, and the creditor had the legal right to commence proceedings against him under Section 95 of the Insolvency and Bankruptcy Code, 2016.

VII. Legal Implications

1. For Guarantors

1.1. Settlement or restructuring agreements reached between a creditor and a corporate debtor do not automatically lead to the termination of a personal guarantee.

1.2. A guarantor's responsibility will persist unless there is a clear and explicit novation that replaces the original contract or a definitive release of the guarantee.

1.3. Guarantors are advised to meticulously examine settlement documents to determine if any changes in terms significantly disadvantage their position, as only such detrimental modifications made without their consent may warrant discharge under the Contract Act.

1.4. When discharge is sought, guarantors should demand an unambiguous waiver or release clause that clearly articulates the creditor's intention to terminate guarantee obligations.

2. For Creditors

2.1. Settlement agreements must be crafted with accuracy to distinctly maintain the original debt and associated guarantees, regardless of any rescheduling or concessional repayment arrangements.

2.2. Incorporating explicit revival clauses, rights preservation clauses, and non-waiver provisions is essential to prevent disputes over implied novation or discharge.

2.3. Any adjustment to repayment terms should be framed as a regulatory or facilitative measure, rather than a replacement of the original contract, to safeguard enforceability against guarantors.

2.4. If guarantees are to remain in effect, the settlement should clearly state that the guarantor's liability is unchanged and is parallel to that of the principal debtor.

Conclusion

The ruling of the NCLT in Jagtar Singh vs Gagan Gulati reaffirms the enduring and autonomous nature of personal guarantee obligations while highlighting the rigorous legal standard necessary to prove novation under Indian contract law. The Tribunal has clearly stated that a settlement or restructuring agreement, without a complete and intentional replacement of the original contract, does not serve to extinguish ancillary or secondary obligations like personal guarantees. By aligning with established contractual and insolvency jurisprudence, the decision enhances legal certainty and predictability in commercial dealings and insolvency resolutions, ensuring that voluntary settlements do not inadvertently weaken creditor rights or compromise the enforceability of guarantees.

Footnote

1 Comp. App. (AT) (Ins) No. 2240 of 2024 & I.A. No. 8420 of 2024

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