SC ruling on individual guarantors brings top industrialists under IBC ambit

In a significant verdict, the Supreme Court on Friday held that individual guarantors to corporate loans will also undergo insolvency proceedings along with firms under the Insolvency and Bankruptcy Code (IBC) and they are not absolved of liabilities even after resolution plans to revive the sick companies are approved.

The verdict, upholding Centre's November 15, 2019, notification bringing personal guarantors of corporate debtors under the net of the IBC, assumes significance in view of the fact that various high-profile industrialists may now face insolvency proceedings along with their debt-ridden firms under the IBC. 

Lenders had last year filed bankruptcy cases against promoters of alleged delinquent companies including Reliance group's Anil Ambani, Dewan Housing Finance Corp Ltd.'s Kapil Wadhawan and Bhushan Power and Steel Ltd.'s Sanjay Singhal. The cases were however stayed on appeals filed in higher courts.

A bench comprising justices L Nageswara Rao and S Ravindra Bhat held that approval of the resolution plan for revival of sick companies under the IBC does not discharge personal guarantors of their liability to pay back banks or financial institutions (FIs) as they are bound by separate contracts.

“It is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his 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,” Justice Bhat, writing the judgment for the bench, said.

The top court also permitted simultaneous insolvency proceedings against corporate guarantors before National Company Law Tribunals (NCLTs).

“It is held that the impugned notification is legal and valid. It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors). The writ petitions, transferred cases and transfer petitions are accordingly dismissed in the above terms, without order on costs,” the 82-page judgment said.

Now if a corporate debtor faces insolvency proceedings then the same proceedings can be “triggered” against individual guarantors too, it said.

“Likewise, a personal guarantor to a corporate debtor, facing insolvency, can be subjected to insolvency proceedings. All this is to be resolved and decided by NCLT. In other words, the amendment by Section 60(2) too achieved a unified adjudication through the same forum for resolution of issues and disputes concerning corporate resolution processes, as well as bankruptcy and insolvency processes in relation to personal guarantors to corporate debtors,” the verdict said.

The judgment came on as many as 75 petitions, including some transfer petitions of firms, individuals and by those who had given personal guarantees for loans advanced to their firms.

The plea filed by one Lalit Kumar Jain, against the notification was taken up as the lead matter.

The common question in all the pleas assailed the “the vires and validity of the notification” of the central government by alleging that the power conferred under the IBC could not have been resorted to in the manner as to extend the provisions of the Code to personal guarantors of corporate debtors.

The verdict rejected the plea that Centre exceeded its power conferred upon it by Parliament under IBC by roping in personal guarantors.

”Parliamentary intent was to treat personal guarantors differently from other categories of individuals. 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,” it held.

The top court held the notification was not ”an instance of legislative exercise, or amounting to impermissible and selective application of provisions of the Code”.

It held the notification was issued within the power granted by Parliament, and in valid exercise of it, the verdict said, adding ”the exercise of power in issuing the impugned notification under Section 1(3) is therefore, not ultra vires; the notification is valid.”

It rejected the plea that by applying IBC to personal guarantors, it took away protection of law that once a resolution plan is accepted, the corporate debtor is discharged of liability and as a consequence, the guarantor whose liability is co-extensive with the firm too is discharged of liabilities.