Jul 03,2021 | 5 min read

Explainary Guide of Insolvency and Bankruptcy Code, 2016

Personal Insolvency of Corporate Guarantors

Insolvency and Bankruptcy Code of 2016 was enacted to bring uniformity to India’s bankruptcy laws. The parliament implemented law sights to de-clutter the necessitated pile of debts that were non-performing for ages, with the mechanism that is time-bounded, followed by strict deadlines. The consolidated code covenanted to fix errors of the crippled financial situation with speedy mechanisms to curb the long-listed pending cases. 

IBC is still considered by many to be in its nascent stage. It is in its evolving regime No escapism, personal guarantors are accountable as well. It looks like a big step as far as bankers and creditors are concerned. 

The Supreme Court in a recent hearing on insolvency matters has upheld a government notification from 2019 that allows lenders to invoke bankruptcy proceedings against promoter guarantors of companies. Facing insolvency with the Apex Court earlier got petitions against the notification that were filed in various High Court transfers to itself. The apex court upheld the central government’s November 2019 notification issued under the Insolvency and Bankruptcy Code (IBC) as “legal and valid".

The two bench judges; Justice L. Nageswara Rao and Justice S. Ravindra Bhat, held that: “ the November 2019 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”

Therefore with the passed order lenders can also proceed against the promoters of a defaulting company even when the corporate insolvency resolution process of the firm itself has not been completed. 

Order Brief:

In a big victory for banks, the Supreme Court has allowed personal bankruptcy cases to proceed against dozens of industrialists deciding the fate of personal guarantees. The Court ruled that initiation of insolvency resolution planned for a company does not absolve corporate guarantees given by individuals to secure loans for their companies.  The court has upheld the IBC rules which allow banks to begin insolvency proceedings against personal guarantors. The Court made it clear that approval to a resolution plan of a corporate debtor does not discharge the liability of the personal guarantor.

While upholding the 15 November 2019 notification, which was issued under the Insolvency and Bankruptcy Code of 2016; was meant for personal guarantors. The Court has rejected petitions filed by personal guarantors against rules of IBC  in which petitions filed by Sanjay Singhal, Atul Punj and various others were included. The Apex Court’s verdict essentially means that now the banks can resume personal bankruptcy cases against dozens of industrialists. They can begin proceedings to recover from personal guarantees and personal bankruptcy cases can be filed against guarantors.

The way forward:

The Hon’ble SC judgement will undoubtedly give more strength to the entire insolvency process. The resolution will not only benefit the stakeholders but will also help the creditors and banks. The proposed investors cannot be looked out as they are highly benefited by this. The economy needed the much-awaited decision of the Supreme Court. Well pleased that it has come at the right time since the country has been suffering from outstanding debts.

The Supreme Court passed order shall decrease the time spent as the procedures are to happen simultaneously at one forum. Hence the unification of the entire process is a welcome step. It also maintains and professes a stricter rule towards the promoters and guarantors as they get to aware that they too can be bright under the umbrella of insolvency act before the NCLT, which also is a faster-acclaimed forum. This will also lead to growth in settlement chances with the banks and financial institutions. Hence this also sweeps away any argument that states, the order will lead to a delayed mechanism.

The Glitch:

The loophole that was subjected as the key issue by the petitioners was that this could lead to perhaps unjust enrichment of the bankers or the creditors or lenders. Essentially there would be 

Two channels of recovery as the petitioners argue. One being the Company itself and the second from the promoter, guarantors.

To justify the above notion, it can be highlighted that one principle which we have been following in our resolution processes and the Hon’ble Supreme Court has upheld is the extinguishment of debt. This allows the corporate debtor to start from a clean slate. 

Now what the promoters and guarantors are arguing is: if it is a clean slate and the debt becomes zero then how can you have a case against “me”? That is where the problem will arise. The issue of unjust enrichment begins from this very question as it is left unclarified. But one can be hopeful that these lacunas will be ironed out sooner than later.

The Apex Court's order is undeniably a big step forward that we've seen time and time again. It’s a step forward giving more clarity to the IBC regime and shall bring more clarity that will decrease the timeline of the resolution process and perhaps paint a smoother path ahead for the insolvency establishment.

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Lawyered Team

Lawyered Team