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SC upholds IBC provisions of corporate debt recovery from personal guarantors
The court ruling will clear the decks for creditors to recover the remaining debt from personal guarantors after the conclusion of the Corporate Insolvency Resolution Process
The Supreme Court on Friday affirmed the Central government’s November 15, 2019 notification which enabled financial institutions to proceed against the promoters in their capacity as personal guarantors of the defaulting corporate debtor.
The court ruling will clear the decks for creditors to recover the remaining debt from personal guarantors after the conclusion of the Corporate Insolvency Resolution Process (CIRP).
Industrialists such as Anil Ambani, Kapil Wadhawan, Sanjay Singhal, and Venugopal Dhoot had challenged the 2019 notification, which had extended the personal insolvency provisions of the Insolvency and Bankruptcy Code (IBC) to the promoters as well.
The bench of justices L Nageswara Rao and S Ravindra Bhat, reading out the operative part of the judgment, said that the notification has been held to be “legal” and “valid”.
It added that approval of the resolution plan relating to the corporate debtor will not operate as an estoppel so as to discharge the liabilities of the personal guarantor.
A batch of 75 petitions had raised questions over the validity of the 2019 notification, which brought into force provisions of the Part III of the IBC, extending insolvency and bankruptcy for individuals and partnership firms to the promoters too.
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In view of the ambiguity over the provisions, the top court had, in October 2020, asked the high courts across the country not to pass any order in such cases. It had also passed an interim order, staying the insolvency proceedings against personal guarantors.
In June 2020, the State Bank of India had moved the National Company Law Tribunal, 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. Soon after, several promoters challenged the 2019 notification, prompting the Supreme Court to transfer all matters to itself last year.
The promoters contended that the Centre did not have the power to bring in IBC provisions selectively to personal guarantors of corporate debtors while also claiming that singling out of guarantors was violative of the fundamental right to equality.
