A Supreme Court bench held that approval of the resolution plan for revival of sick companies under the Insolvency and Bankruptcy Code 2016 does not discharge personal guarantors of their liability to pay back the banks or financial institutions (FIs) as they are bound by separate contracts.

This land mark decision by the Apex Court paves the way for recovery of remaining dues of the lenders (Banks and Financial Institutions) having their loans guaranteed by the Promoters and/or Directors of the respective companies. The Supreme court in its judgment said that Creditors can initiate insolvency proceedings against such persons (promoters and/or Directors guaranteeing the loans from the financial institutions) in the National Company Law Tribunal Board.

Sections 94 to 187 of the Code, read with sec. 60 (1) and (2), w.r.t. insolvency and bankruptcy of personal insolvency of corporate guarantors were notified vide notification dated 15.11.2019, along with rules and regulations for insolvency and bankruptcy process of Personal Guarantors and made effective from 1^st December, 2019.

The State Bank of India Vs Mr. Anil Ambani was the first high-profile case which was admitted against Personal Guarantors. The Application was admitted by the Hon’ble National Company Law Tribunal, Mumbai Bench. However, the “constitutional validity” of the provisions of the Insolvency & Bankruptcy Code, 2016 that deals with Insolvency Proceedings against Personal Guarantors along with the Order passed by the Hon’ble Tribunal was challenged before the Hon’ble High Court of Delhi. It is further known that the Hon’ble High Court of Delhi on 27.08.2020, ordered a stay on the proceedings initiated by the Hon’ble NCLT against the admission of the Personal Guarantor Insolvency and also restrained alienation of assets vide the same order.

This instant order of stay on proceedings initiated against the Personal Guarantors under the Insolvency & Bankruptcy Code became the yardstick for similar other cases where proceedings were initiated against the guarantors. The Personal Guarantors took shelter under the issue of constitution validity and sought interim reliefs or protection until that is decided.

Petitions were filed by various promoters and directors of such companies in the High Court of Delhi and other High Courts challenging the Notification dated 15.11.2019 and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019. The Writ Petitioners also sought a declaration that Section 95, 96, 99, 100, 101 of the Insolvency and Bankruptcy Code, 2016 are unconstitutional in so far as they apply to personal guarantors of corporate debtors.

The Insolvency and Bankruptcy Board of India (IBBI) filed a Transfer Petition under Article 139(A) read with Article 142 of the Constitution of India in the Supreme Court of India contending that several Writ Petitions have been filed in the other High Courts and requested for the transfer of the Writ Petitions from all the High Courts to the Supreme Court to avoid the confusion caused by possible divergence of opinions expressed by the High Courts. The Supreme Court vide its order dt. 29.10.2020 in the case of IBBI vs Lalit Kumar Jian and Ors observed that “We are of the considered opinion that the Writ Petitions that are pending in the High Courts pertaining to the challenge to the Notification dated 15.11.2019 and related issues have to be transferred to this Court. Transfer of the Writ Petitions to this Court would avoid conflicting decisions by the High Courts which are in seisin of the Writ Petitions. The Insolvency and Bankruptcy Code is at a nascent stage and it is better that the interpretation of the provisions of the Code is taken up by this Court to avoid any confusion, and to authoritatively settle the law.” In its decision the supreme court further said “Considering the importance of the issues raised in the Writ Petitions which need finality of judicial determination at the earliest, it is just and proper that the Writ Petitions are transferred from the High Courts to this Court.”

The Supreme Court passed the final verdict on 21.05.2021 on all the transferred petitions. The Apex court upheld the validity of the Centre’s notification allowing banks to proceed against personal guarantors for recovery of loans given to a company under the Insolvency and Bankruptcy Code 2016.

The Supreme Court bench comprising justices L Nageswara Rao and S Ravindra Bhat held that approval of resolution plan under the IBC does not discharge personal guarantors of their liability towards the banks.

The apex court said there was an “intrinsic connection” between personal guarantors and their corporate debtors. The verdict, said it was this “intimate” connection that made the government recognise personal guarantors as a “separate species” under the IBC.It was again this intimacy that made the government decide that corporate debtors and their personal guarantors should be dealt by a common forum – National Company Law Tribunal through the same adjudicatory process.

In fact, side by side bankruptcy proceedings before the same forum for both the corporate debtors and their personal guarantors would help the NCLT “consider the whole picture, as it were, about the nature of the assets available, either during the corporate debtor’s insolvency process, or even later”.

“This would facilitate the Committee of Creditors to frame realistic plans, keeping in mind the prospect of realising some part of the creditors’ dues from personal guarantors,” the judgment said.

The Court in its judgement has upheld the validity of the notification dt. 15.11.2019 in the conclusion of the judgement which decided as many as 75 petitions pertaining to the validity of the notification.

The verdict is a boost for lenders as it allows them to seek recovery of dues from guarantors of loans even while bankruptcy processes against the companies are pending. This could help speed up efforts by Banks and Financial Creditors to clear the piles of bad loans.