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Supreme Court upholds provisions of Insolvency and Bankruptcy Code on the insolvency of personal guarantors

By Nancy Goyal      24 May, 2021 01:29 PM      0 Comments
Supreme Court upholds provisions of Insolvency and Bankruptcy Code on the insolvency of personal guarantors

On May 21, 2021, Supreme Court upheld the provisions of the Insolvency and Bankruptcy Code allowing lenders to continue Insolvency proceedings against promoter guarantors of companies facing the corporate insolvency resolution process.

The Bench of Justices L Nageswara Rao and Ravindra Bhat passed the judgment. The decision would permit banks to file bankruptcies against guarantors in any event when the insolvency firm is yet to be settled.

During a hearing Justice Ravindra Bhat said that the approval of the resolution plan related to the corporate debtor doesn't work to release the liabilities of the personal guarantors.

The bench stated that in 2019 Centre formed new provisions in Insolvency and Bankruptcy Code 2016, that permits banks to move an application for commencement of bankruptcy against personal guarantors to corporate debtors. The goal was to hold the promoters of the defaulter companies who had provided personal guarantees for the loan taken by their companies, liable. following the provisions, the moneylenders filed bankruptcy cases against India's top business big shots including Anil Ambani, Sanjay Singal, and Kapil Wadhawan.

The new provisions were challenged by numerous promoters before various high courts, stating that the promoters alone ought not to be expected to take responsibility for the default on debt repayment. In October 2020, the apex court moved to itself a group of writ petitions pending before various high courts challenging the provisions of IBC concerning personal bankruptcy.

Therefore,” the Supreme Court upholding the provisions of the Insolvency and Bankruptcy Code, the creditors are no longer forced to use traditional routes to authorize their cases, thereby strengthening the rights of the creditors to initiate concurrent insolvency procedures against the corporate debtors and personal guarantors. The personal guarantors who are invariably promoters will be at risk for their defective choices," 

The Supreme Court has also eliminated the legal position that once a resolution plan approved by the Committee of Creditors, produces results, it is restricting on the guarantors and thus a guarantor can't get away from its payment commitments according to the resolution plan,".

The Supreme Court also stated that sections 95, 96,99,100, and 101 of IBC are valid will apply to personal guarantors to corporate debtors.

Vide the 2019 notice, the Union Ministry of Corporate Affairs introduced the following provisions of the IBC to the extent that they are related to the personal guarantor to corporate account holders:

  • Clause (e) of Section 2;
  • Section 78 (except with regard to fresh start process) and Sections 79;
  • Sections 94 to 187 (both inclusive);
  • Clause (g) to Clause (i) of sub-section (2) of Section 239
  • Clause (m) to Clause (zc) of sub-section (2) of Section 239;
  • Clause (zn) to Clause (zs) of sub-section (2) of Section 240
  •  Section 249.

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