Resigning as a director does not end your personal guarantee
Three insolvency rulings reported in one week make the same point from different sides: a personal guarantee follows the person who signed it, long after the board seat, the shareholding and even the company’s own insolvency are behind them.
At a glance
| Ruling | Forum | What it decided |
|---|---|---|
| State Bank of India v. Mahesh Rajpal | NCLT Indore | A guarantee is an independent contract. Resignation as director, and a “withdrawal letter” the bank merely acknowledged, did not end it. |
| IDBI Bank v. Raj Kumari Garg | NCLT New Delhi | Restructuring of the facilities without the guarantor’s signature did not discharge her, because the guarantee itself allowed variations. |
| Manju Sirohi v. Assets Care & Reconstruction Enterprise | NCLAT New Delhi | Once a guarantor is declared bankrupt, the bank balance vests in the trustee. Money withdrawn afterwards must be repaid. |
In the first two cases the tribunal admitted the lender’s application and started personal insolvency proceedings against the guarantor. In the third, the appeal against a repayment order was dismissed.
Why this keeps happening
Lenders to private and closely held companies almost always take a personal guarantee from the promoters and, often, from other directors. The document is signed with the rest of the loan papers and rarely thought about again. Years later the signatory has left the board, sold the shares or handed the business to the next generation, and assumes the guarantee went with the role.
It did not. A guarantee is a contract between the guarantor and the lender. Nothing in it depends on the guarantor continuing to hold office, and the company cannot release it. Since 2019 lenders have been able to proceed against personal guarantors of corporate debtors under Part III of the Insolvency and Bankruptcy Code, and the Supreme Court has upheld both that regime and the principle that approval of a resolution plan for the company does not release its guarantors. The three rulings below show how those rules work out in practice.
Resignation and the “withdrawal letter”
In State Bank of India v. Mahesh Rajpal, the bank had extended a ₹20 crore overdraft to Rajpal Abhikaran Pvt. Ltd., backed by a deed of guarantee dated 24 March 2016. The guarantor’s resignation as director was recorded with effect from 17 March 2016. A letter withdrawing the guarantee was sent on 3 May 2016, and the bank acknowledged receiving it two days later. The account went into default in August 2019. The company was admitted to insolvency in March 2021 and the bank recovered ₹19.11 crore under the resolution plan. It then claimed ₹23.70 crore from the guarantor.
The guarantor argued that the papers had been signed in advance and lost their force when he resigned; that the withdrawal letter revoked the guarantee; that a revival letter of 2019, to which he was not a party, created a new contract; that the bank held security said to be worth ₹40 crore and was already before the Debts Recovery Tribunal; and that the claim was out of time.
As reported, the tribunal rejected each point.
- Resignation. The guarantee is an independent contract and is not extinguished by resignation. The deed itself said liability would not be affected by any change in the status of the borrower or the guarantor.
- Revocation. Acknowledging receipt of a withdrawal letter is not acceptance of a revocation.
- Revival letters. A surety’s liability is co-extensive with the principal debtor’s under section 128 of the Contract Act. The guarantor’s absence from later revival letters and balance confirmations did not defeat it.
- Other remedies. Pending recovery proceedings and the existence of security do not bar insolvency proceedings against a guarantor, though recoveries must be accounted for so there is no double recovery.
- The resolution plan. What the bank recovered under the company’s plan did not discharge the guarantor for the balance.
- Limitation. Default in August 2019 and filing in August 2021 was within three years.
Restructuring without the guarantor’s signature
A guarantor’s best statutory defence is usually section 133 of the Contract Act: a variation in the terms of the contract between the lender and the borrower, made without the surety’s consent, discharges the surety for transactions after the variation. In IDBI Bank v. Raj Kumari Garg the guarantor relied on it, and on novation under section 62.
She had given her guarantee in June 2013 when working capital limits for SMS Paryavaran Ltd. were enhanced to ₹33 crore. The facilities were then renewed, brought under a consortium agreement, restructured to ₹35.25 crore in 2015 and placed under a master restructuring agreement in 2016. She signed none of the later documents and gave no fresh guarantee.
The tribunal held that she was not discharged. The guarantee was continuing and irrevocable and expressly contemplated variations in the facilities without releasing the guarantor. There was no agreement showing that it had been released or revoked. On those terms, her not signing the later documents made no difference. The release of a mortgaged property against payment of ₹2.70 crore did not discharge her either, though the amount had to be credited, and the 2023 resolution plan for the company did not extinguish the guarantee.
The lesson is in the drafting. Section 133 protects a surety who has not consented to a variation. A standard bank guarantee gives that consent in advance, in wide terms, on the day it is signed.
After bankruptcy: the account is no longer yours
The third ruling shows where the process ends if it is not resolved. In Manju Sirohi, the personal guarantor of Saha Infratech Pvt. Ltd. was declared bankrupt by the NCLT on 21 May 2025 and a bankruptcy trustee was appointed. Her savings account then held about ₹19.07 lakh. Over the following two months she withdrew almost all of it. The trustee obtained an order directing her to repay ₹19,17,500, and she appealed.
She said the money came from the sale of her personal jewellery and a transfer from a family member, that jewellery is an excluded asset, and that she was a senior citizen without income who did not know of the restrictions. The NCLAT dismissed the appeals. As reported, it held that:
- on a bankruptcy order the estate vests in the trustee by operation of law, without any transfer, so the later withdrawals were dealings with property that was no longer hers;
- the list of excluded assets in section 79(14) is closed, protects unencumbered ornaments only up to ₹1 lakh, and applies to the described assets and not to money realised from them; and
- ignorance was not available on the facts, as the trustee’s intimation had reached her before the first withdrawal and she had attended the creditors’ meeting.
What does and does not end a guarantee
| Event | Effect on the guarantee |
|---|---|
| Resigning as director | None |
| Selling your shares or exiting the business | None, unless the lender releases you in writing |
| A letter to the bank withdrawing the guarantee | None, unless the bank agrees. Most bank guarantees are expressed to be irrevocable |
| Restructuring or enhancement of the loan without your signature | Usually none, where the guarantee permits variations, as most do |
| The company’s insolvency and an approved resolution plan | None for the unpaid balance |
| The lender holding other security or suing elsewhere | None; recoveries are set off |
| A written release or discharge signed by the lender | Ends it |
| Substitution of a new guarantor, accepted by the lender in writing | Ends it |
| Full repayment and closure of the facility | Ends it; obtain a no-dues letter and the original deed |
The table states the usual position under a standard bank guarantee. The answer in any case depends on the words of the deed.
The only reliable exit is a release signed by the lender
None of these three outcomes is surprising as law. What they show is how little the common assumptions are worth. A resignation filed with the Registrar, a letter the bank stamped as received, a restructuring you were never asked to sign: each was argued, and each failed against the terms of the guarantee.
The time to deal with a guarantee is when you still have something the other side wants. For a retiring director, that is before the resignation. For a seller, it is before closing, as a condition of the sale. Afterwards the lender has no reason to release anyone, and the buyer no obligation to help.
What to do now
Directors and promoters planning to step down
- List every guarantee you have signed, for which lender and which facility. Include guarantees for group companies.
- Read the deed for the clauses on continuing liability, variation, revocation and change of status.
- Ask the lender for a written release or for substitution of an incoming guarantor before you resign. An acknowledgement of your letter is not a release.
- If the lender will not release you, obtain a written indemnity from the company and the continuing promoters, and understand that it protects you only as far as they can pay.
Sellers in a share sale or business transfer
- Make release of the sellers’ personal guarantees, or their replacement by the buyer’s, a condition precedent to closing.
- If release can only follow closing, provide for a deadline, a buyer indemnity backed by security or escrow, and a bar on enhancing or restructuring the facilities until release.
Buyers
- Identify in diligence which facilities carry promoter guarantees and what the lender will require to release them. Lender consent often drives the closing timetable.
Guarantors already facing a demand
- Check the default date, limitation and the amounts the lender has already recovered, which must be credited.
- Once an insolvency application is admitted, and especially after a bankruptcy order, do not deal with your assets or bank accounts without advice. Withdrawals can be reversed.
References
- State Bank of India v. Mahesh Rajpal, C.P.(IB)/40(MP)/2021, NCLT Indore, order of 11 September 2026, 2026 LLBiz NCLT(IND) 979 (LiveLawBiz report)
- IDBI Bank Limited v. Smt. Raj Kumari Garg, IA-833/2025 in CP (IB)-785(PB)/2024, NCLT New Delhi, 2026 LLBiz NCLT (DEL) 985 (LiveLawBiz report)
- Manju Sirohi v. Assets Care & Reconstruction Enterprise Ltd. & Anr., Company Appeal (AT) (Insolvency) 1172/2026 and 1173/2026, NCLAT New Delhi, order of 7 October 2026, 2026 LLBiz NCLAT 393 (LiveLawBiz report)
- Indian Contract Act, 1872: sections 62, 128 and 133
- Insolvency and Bankruptcy Code, 2016: sections 79(14), 95, 126, 128 and 154
- Lalit Kumar Jain v. Union of India (Supreme Court, 2021); Dilip B. Jiwrajka v. Union of India (Supreme Court, 2023)