Guarantor Liability Not Limited by Mortgage Clause | IBC Sec 114 Overrides Later Security Clause in Deed of Guarantee : NCLAT

The National Company Law Appellate Tribunal (NCLAT) dismissed appeals by personal guarantors who sought to limit their liability under a deed of guarantee to the market value of mortgaged properties, affirming that the DRT’s adjudicated joint and several liability cannot be revisited in collateral proceedings under Section 114 of the Insolvency and Bankruptcy Code, 2016.

Background & Facts

The Dispute

The appellants, who were personal guarantors for the corporate debtor Archon Engicon Ltd, challenged an order of the National Company Law Tribunal (NCLT), Ahmedabad Bench dated 05.02.2026, which rejected their plea that liability under the Deed of Guarantee dated 12.06.2014 was restricted to the market value of mortgaged properties. The guarantors contended that Clause 24 of the deed limited their liability, while the respondent banks and the Resolution Professional asserted that Clauses 1, 6 and 9 imposed joint and several liability for the entire debt.

Key Facts

• The Deed of Guarantee was executed on 12.06.2014 by the appellants in favour of a consortium of banks led by the State Bank of India.
• Clause 24 of the deed states: "The guarantee of the guarantors is restricted to the extent of the market value of the properties (as described below) mortgaged/to be mortgaged by the Guarantors to secure the credit facility granted/to be granted to Archon Engicon Limited."
• Clauses 1, 6 and 9 of the same deed impose joint and several liability for the principal sum (not exceeding Rs. 427 crores) together with interest, costs and charges.
• Sanction letters: Bank of India dated 05.03.2014; State Bank of India dated 31.03.2014.
• Arrangement Letter dated 31.05.2014 and Inter Creditor Agreement dated 12.06.2014 were relied upon by the guarantors.
• The Transaction Audit Report (date not specified) recorded the guarantors’ share in the mortgaged property.
• The Debts Recovery Tribunal (DRT) passed an order on 03.08.2021 in O.A. No. 83 of 2017, adjudicating the guarantors jointly and severally liable for Rs. 1,49,26,12,243/- and upholding the validity of the deed.
• The DRT order attained finality and was never challenged by the appellants.
• The NCLT, in an admission stage order dated 05.08.2024, rejected the plea of limited liability.
• The impugned order under appeal is dated 05.02.2026, passed in I.A. Nos. 612, 613 and 614/2025 arising from C.P.(IB) Nos. 178, 179 and 177/2024.
• The National Company Law Appellate Tribunal (NCLAT) made an observation on 05.12.2024 directing the NCLT to examine Clause 24 alongside Clauses 1, 6 and 9.
• The Committee of Creditors (CoC) held meetings: 3rd CoC meeting on 13.12.2024, 4th meeting on 21.12.2024, and 5th CoC meeting on 02.01.2025.
• A final modified repayment plan dated 04.01.2025 proposed Rs. 1.60 crore each from certain guarantors and Rs. 2.75 crore from others, totalling Rs. 3.20 crore, against admitted claims of Rs. 1,221,55,30,202.
• At the 5th CoC meeting on 02.01.2025, voting share in favour was 21.35% (IDBI), against 20.14% (BoB 14.03% & UBI 6.11%), abstained 42.16% (SBI), absent 15.91% (BOI), failing to secure the requisite 66% affirmative vote.

Procedural History

• 03.08.2021: DRT order (O.A. No. 83/2017) crystallising joint and several liability of guarantors for Rs. 1,49,26,12,243/-.
• 05.08.2024: NCLT admission stage order rejecting the limited liability plea.
• 05.12.2024: NCLAT observation directing examination of Clause 24 with Clauses 1, 6 and 9.
• 05.02.2026: Impugned order of NCLT Ahmedabad Bench rejecting the guarantors’ limited liability contention.
• 21.09.2026: Date of the present NCLAT judgment dismissing the three appeals (Company Appeal (AT)(Ins) Nos. 702, 703 and 704/2026).

The Parties' Positions

Appellants (Personal Guarantors): Argued that Clause 24, read with sanction letters, arrangement letter, inter-creditor agreement and transaction audit report, restricted liability to the mortgaged property’s market value; invoked doctrines of contra proferentem, non est factum and specific vs. general clauses; contended that the NCLT erred in holding earlier clauses prevail over later ones.

Respondents (Resolution Professional and Banks): Contended that the extent of guarantee must be decided at the time of finalising the payment plan under Section 95 IBC; asserted that the DRT had already crystallised the dues and the guarantors had participated in DRT proceedings without disputing execution of the deed; argued that Section 114 IBC does not allow re-agitation of settled liability in collateral proceedings.

Relief Sought

The appellants sought to set aside the impugned order dated 05.02.2026, a declaration that their liability under the Deed of Guarantee is limited to the market value of mortgaged properties, and consequential relief including discharge from personal liability beyond that value.

The Legal Issue

The central question was whether, under a deed of guarantee containing both clauses imposing joint and several liability for the entire debt and a later clause limiting liability to the mortgaged property’s value, the latter clause overrides the former, thereby restricting the guarantors’ liability, and whether such a plea can be raised in proceedings under Section 114 of the IBC after the DRT has already adjudicated the liability.

Arguments Presented

For the Appellant

The appellants relied on the principles of contra proferentem (Haris Marine Products v. Export Credit Guarantee Corporation, (2022) 20 SCC 776), non est factum (Ramathal v. K. Rajamani, 2023 SCC OnLine SC 1022) and the doctrine that specific clauses prevail over general ones. They argued that Clause 24 is a specific provision dealing with security realisation and should restrict liability to the mortgaged property’s market value. They cited the sanction letters, arrangement letter, inter-creditor agreement and transaction audit report as evidence of the parties’ intent to limit liability. They further contended that the NCLT’s reliance on Bharat Sher Singh Kalsia v. State of Bihar (2024) 4 SCC 318 (para 32) was misplaced because the deed does not contain a conflict requiring application of the "earlier clause prevails" rule; instead, the clauses are capable of harmonious construction where Clause 24 operates as a security-realisation clause without affecting the primary liability.

For the Respondent

The respondents emphasized that the DRT order dated 03.08.2021 had attained finality and the guarantors had not challenged it, thus they are barred from re-agitating the extent of liability under Section 114 IBC. They argued that Clauses 1, 6 and 9 expressly impose joint and several liability for the principal sum, interest and charges, and that Clause 24 merely deals with security enforcement and does not limit the primary contractual obligation. They invoked the principle of harmonious construction and the ruling in Bharat Sher Singh Kalsia v. State of Bihar that, in case of conflict, earlier clauses prevail over later ones. They also pointed out that the guarantors had participated in DRT proceedings, filed written statements and had not disputed execution of the deed, thereby negating any claim of non est factum.

The Court's Analysis

The Tribunal began by noting that the DRT’s order of 03.08.2021 had attained finality and the guarantors had never challenged it, therefore any attempt to re-open the question of liability in collateral proceedings under Section 114 is impermissible. It observed that the NCLT had correctly framed the issue of limited liability for determination in para 12(iii) of the impugned order. The Tribunal then examined the deed of guarantee.

It held that Clauses 1, 6 and 9 impose joint and several liability for the principal sum (up to Rs. 427 crores) together with interest, costs and charges. Clause 24, by its own terms, relates to security realisation and the extent to which the guarantors’ liability is restricted to the market value of mortgaged properties. Applying the principle of harmonious construction, the Tribunal found that Clause 24 does not override the express liability undertaken under Clauses 1, 6 and 9; rather, it operates as a provision dealing with the enforcement of security and does not affect the primary contractual obligation.

The Tribunal further relied on Bharat Sher Singh Kalsia v. State of Bihar (2024) 4 SCC 318 (para 32), which states: "... if there is a conflict between the earlier clauses (in a Deed) and the later clauses and it is not possible to give effect to all of them, then it is the earlier clause that must override the later clause and not the vice-versa." It found that, even if a conflict were perceived, the earlier clauses (1, 6 and 9) must prevail over the later Clause 24. The doctrine of contra proferentem was deemed inapplicable because the deed had been judicially examined by the DRT and liability had been crystallised, leaving no ambiguity to be resolved against the drafter. The plea of non est factum failed as the guarantors had participated in DRT proceedings, filed written statements and had not disputed execution of the deed, thus satisfying the requirements laid down in Ramathal v. K. Rajamani.

Finally, the Tribunal held that Section 114 IBC does not confer jurisdiction on the adjudicating authority to substitute its commercial view where the statutory majority under Section 111 has not been achieved; the decision of the CoC in rejecting the repayment plan is binding in law, and the guarantors cannot invalidate the entire process on the basis of an objection that does not demonstrate any prejudice or any finding that the statutory process was vitiated.

"The contractual clauses must be read harmoniously. Clauses 1, 6 and 9 impose liability upon default for the principal sum with interest and charges. Clause 24 refers to security arrangements. The DRT has already adjudicated liability. The plea of limited guarantee cannot override the crystallised debt."

The Verdict

The appeals are dismissed and the impugned order dated 05.02.2026 is upheld. The Tribunal affirmed that the personal guarantors remain jointly and severally liable for the entire debt as adjudicated by the DRT, with no restriction to the market value of mortgaged properties. No monetary relief, interest or costs were awarded, as the relief sought was denied. The decision is final and the guarantors are liable for the dues as per the DRT order of 03.08.2021.

What This Means For Similar Cases

Guarantor Liability Cannot Be Limited by Later Security Clauses

In deeds of guarantee containing both primary liability clauses and later security-limitation clauses, the earlier clauses imposing joint and several liability prevail over later security-clause provisions when harmoniously construed.

Collateral Proceedings Under Section 114 IBC Cannot Re-Agitate Settled Liability

Once a DRT or NCLT has adjudicated the liability of guarantors and the order has attained finality, guarantors are barred from challenging the extent of their liability in subsequent proceedings under Section 114 IBC.

Voting Failure in CoC Does Not Permit Judicial Substitution of Commercial View

If a repayment plan fails to secure the requisite 66% affirmative vote under Section 111 IBC, the adjudicating authority cannot independently approve the plan; the CoC’s decision is binding and the plan’s rejection cannot be collaterally challenged.