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

Arbitral Award Cannot Convert Personal Guarantor into Co-Borrower: NCLAT Rules

The National Company Law Appellate Tribunal (NCLAT) dismissed an appeal by a personal guarantor, affirming that an arbitral award enforcing joint liability under a guarantee does not alter the legal nature of the liability or transform the guarantor into a co-borrower. The tribunal held that the existence of a joint liability clause in the award or underlying contract does not amount to novation of the debt or recharacterization of the guarantee obligation.

The NCLAT observed that the liability of a guarantor remains accessory and secondary to that of the principal borrower. Even if an arbitral tribunal directs both the borrower and guarantor to pay, this does not extinguish the original debtor-creditor relationship. Relying on the Supreme Court’s decision in National Agricultural Cooperative Marketing Federation of India Ltd v. Alchemist Asset Reconstruction Co. Ltd., the tribunal reiterated that personal guarantors are not corporate debtors unless independently liable as such.

This decision clarifies a critical distinction in insolvency proceedings: enforcement of personal guarantees does not equate to creating independent borrower status. Practitioners should ensure that proceedings against personal guarantors are initiated under Section 95 of the IBC only after establishing eligibility, and not assume co-borrower status from contractual or arbitral language alone.