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Personal guarantors accountable in IBC: SC

Written by eveningindia

The apex court on Friday upheld the central government’s November 2019 notification issued under the Insolvency and Bankruptcy Code (IBC) as “legal and valid”.

“It is held that the impugned notification was issued within the power granted by Parliament and in valid exercise of it. The exercise of power in issuing the impugned notification is, therefore, not ultra vires; the notification is valid,” said a bench of justices L. Nageswara Rao and S. Ravindra Bhat.

The bench dismissed a clutch of 75 petitions challenging the 2019 notification.

The petitioners included industrialists Anil Ambani, Venugopal Dhoot, Kapil Wadhawan, Sanjay Singal and Atul Punj, each of whom had stood as personal guarantor to corporate debts.

The 2019 notification sought to make them personally liable for that part of the debt that had remained outstanding in the resolution proposal of the companies under insolvency.

Friday’s ruling means if the debt owed by a company is not repaid under the resolution plan, the personal guarantor would not only not stand discharged but could find himself taken into bankruptcy proceedings by the creditors.

Reacting to the verdict, Faisal Sherwani, partner, L&L Partners law firm, said: “From a jurisprudential perspective, it is now clear that mere approval of a resolution plan relating to a corporate debtor would not mean that the personal guarantor is also off the hook. After all, the object sought to be achieved by the amendment was permissible and aimed at maintaining the financial health of the banking sector.”

However, advocate Soumya Dharwa, who represented one of the petitioners, said he feared the ruling may lead to a further concentration of powers with the lenders, who now have one more avenue for recovery of their loans in addition to the SARFAESI Act, debt recovery proceedings, and other civil remedies. This, the lawyer said, could open the floodgates to litigation between lenders and corporate borrowers and their personal guarantors.

While the petitioners had alleged that the Centre did not have the power to bring in the IBC provisions selectively to personal guarantors of corporate debtors, the top court ruled that “there is no compulsion in the Code that it should, at the same time, be made applicable to all individuals, (including personal guarantors) or not at all.”

“The intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as the possibility of two separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals, for whom the adjudicating authority was common with the corporate debtor to whom they had stood guarantee,” added the bench.

Citing various provisions of the IBC, the bench noted that there was “sufficient legislative guidance” for the Central government to distinguish and classify personal guarantors separately from other individuals and provide the National Company Law Tribunal (NCLT) as a common forum for the financial institutions and other lenders to seek recovery of their debts.

“The NCLT would be able to consider the whole picture, as it were, about the nature of the assets available, either during the corporate debtor’s insolvency process or even later; this would facilitate the Committee of Creditors (CoC) in framing realistic plans, keeping in mind the prospect of realizing some part of the creditors’ dues from personal guarantors,” said the court, finding justification in the merger of proceedings against personal guarantors with that of corporate debtors.

It also shot down another contention by the petitioners that since an approved resolution plan for a corporate debtor amounted to the elimination of all outstanding claims against that debtor, the liability of the personal guarantor must also be considered settled.

Referring to a few judicial precedents as well as provisions of the Contract Act, the bench held that approval of a resolution plan did not ipso facto discharge a personal guarantor of liabilities under the contract of guarantee.

“As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract,” it said.

Representing the Centre, attorney general K.K. Venugopal and solicitor general Tushar Mehta defended the notification that came into force from 1 December 2019 on the grounds that the objective was to have a unified adjudication through the same forum—NCLT—for corporate resolution, bankruptcy and insolvency processes in relation to personal guarantors.

The notification said the government’s law officers would ensure a more optimal resolution process, and the total debt servicing of the corporate debtor might be lowered if the personal guarantor’s assets were also taken into account to mitigate the corporate debtor’s liabilities.

In June 2020, State Bank of India moved the NCLT, Mumbai, to recover more than 1,200 crore from Anil Ambani as he had given a personal guarantee for loans extended to Reliance Communications Ltd and Reliance Infratel Ltd. Subsequently, several promoters and directors challenged the 2019 notification, prompting the Supreme Court to transfer all matters to itself last year.

The apex court on Friday upheld the central government’s November 2019 notification issued under the Insolvency and Bankruptcy Code

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The apex court on Friday upheld the central government’s November 2019 notification issued under the Insolvency and Bankruptcy Code

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