The National Company Law Tribunal (Chandigarh), in the case of Jammu Kashmir Bank Limited vs Ace Engineering (India) Pvt Ltd., has held that “Even if, either the principal borrower or guarantor has been discharged then the other party would not stand discharged automatically till the liability is met out or discharged. The contract with the principal borrower and the contract with the surety/guarantor stand on a completely different footing under the provisions of the Indian Contract Act, 1872.”

In 2012 Ace Engineering Pvt. Ltd (Corporate Debtor) availed the credit loan facilities with a cash credit limit of Rs. 9 crores and a bank guarantee facility of Rs. 5 crores from the Jammu and Kashmir Bank Limited (Financial Creditor). In 2015, the Corporate Debtor was granted a one-time Secured Overdraft Facility (“SOD”) of Rs. 4 crores for the completion of an order worth 16.14 crores for 6 months or till the completion of the supply order at an effective rate of 13% p.a. with monthly rests or such other rate of interest prescribed by the Financial Creditor from time to time. The bank did not receive any payment.

It was contended by the Corporate Debtor that there was no financial debt due as the Financial Creditor had already received the payment instead of the full and final settlement of accounts and had issued release letters in favour of the guarantors. 

The NCLT while relying on the judgment of the Supreme Court in the case of Lalit Kumar Jain vs UOI & Ors, observed that “The liability of the principal borrower and guarantor is joint and several in a contract of guarantee. Hence even if either of them has been discharged, the other party doesn’t stand automatically discharged till the liability is met out or discharged.”