Arbitral Award Doesn’t Convert Guarantor to Co-Borrower: NCLAT

NCLAT Rejects Guarantor’s Bid to Escape Liability Post-Arbitral Award

The National Company Law Appellate Tribunal (NCLAT) dismissed an appeal by a personal guarantor, clarifying that an arbitral award imposing joint liability under a contract does not amount to novation or convert a guarantor into a co-borrower. The appeal arose from proceedings under the Insolvency and Bankruptcy Code (IBC), where the creditor sought recovery against both the corporate debtor and the personal guarantor.

The guarantor argued that a joint liability clause in the arbitral award merged his obligation with that of the borrower, thus extinguishing the guarantee. NCLAT rejected this, affirming that unless there is an explicit agreement or statutory mechanism effecting novation, the nature of a personal guarantee remains unchanged. The tribunal emphasized that joint liability in an award does not equate to co-borrowership, particularly in the absence of independent credit facilities or loan disbursement to the guarantor.

This decision reinforces the sanctity of personal guarantees under IBC jurisprudence. Practitioners should note that enforcement proceedings against personal guarantors can proceed independently, and arbitral awards imposing liability do not automatically alter the contractual structure. Creditors may rely on such awards to trigger personal insolvency resolution processes under Sections 94 and 95 of the IBC.