IBC: Lenders Can Go After Personal Guarantors, Supreme Court Says

The Supreme Court of India has made way for lenders to initiate insolvency proceedings against personal guarantors, usually promoters, of stressed companies.

The court has upheld the constitutionality of the government notification that had operationalised the Insolvency and Bankruptcy Code provision against personal guarantors of companies facing insolvency.

The notification is legal and valid, the apex court said.

“It is also held that the approval of the resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of the personal guarantors of the corporate debtor. The writ petition and transferred petitions are dismissed in above terms without costs,” the apex court has held.

Personal insolvency provisions constitute Part III of the IBC. While it applies to partnerships and individuals, the government had operationalised the provisions in November 2019 only for personal guarantors. This made way for creditors to go after individual promoters and others who stood as guarantors for loans granted to the companies undergoing insolvency proceeding.

The top court was hearing a batch of over 40 petitions challenging the operationalisation of these provisions which included industrialists Kapil Wadhawan, Anil Ambani, Venugopal Dhoot and others. The top court heard the arguments and had reserved its judgment in March, 2021.

The petitioners had argued that Part III of the IBC includes partnerships and individuals but the government had made the provisions applicable only for the latter.

Such selective operationalisation of the code was not intended by the Section 1(3), which gives the central government the power to notify different provisions of the IBC on different dates.

The government was within its rights to bring in force sections, chapters or parts of the IBC. But, it cannot operationalise portions of a part of the code or make them applicable only to a select class, the petitioners argued.

Further, the petitioners also argued on how the move would affect the rights of the creditors and said:

• The debt of a personal guarantor co-exists with the corporate debtor and once the insolvency process is complete for either of the two, the creditor’s claim will cease to extinguish.
• Granting the opportunity to creditors to pursue two remedies for the same debt may give rise to a possibility of unjust enrichment.

The government called the petitioners’ arguments on powers to operationalise parts of the IBC as 'hyper-technical'

Solicitor General Tushar Mehta argued that the text of the code allowed the government to operationalise different provisions of the IBC which gives the government a wide ambit when it decides on bringing into effect parts of the code.

The government, Mehta said, was well within its right to enforce it for certain categories and the same cannot be held unconstitutional as long as it does not alter the character of the law.

In this case that has not happened, Mehta told the top court bench.

He also called the petitioners’ apprehensions of unjust enrichment by the creditors through two different proceedings as unfounded. The principle of ‘‘double dip’’ which allows a creditor to recover debt from two different proceedings is well recognised internationally, the Solicitor General told the court.

The safeguards provided under the IBC, the Solicitor General said, ensure that in the second claim the amount received is proportionately reduced to the value which the creditor has already received in the first.

The arguments in this case were heard by a two-judge bench of Justice L Nageswara Rao and Justice S Ravindra Bhat.