Supreme Court Upholds Provisions of Insolvency And Bankruptcy Code on Insolvency of Personal Guarantors

The Supreme Court in Lalit Kumar Jain vs UOI & Ors (Judgement) has upheld the validity of the notification dated November 15, 2019 (Notification).

The Notification had brought into force certain provisions along with the rules under the Insolvency and Bankruptcy Code, 2016 (Code) in relation to insolvency of personal guarantors to corporate debtors and rules made thereunder.

The Judgement also upheld that the method adopted by the Central Government to bring into force different provisions of the Code so as to fulfil the objectives underlying the Code.

Various petitions were filed by promoters in various courts challenging the validity of the Notification. The Supreme Court had transferred all such petitions from various High Courts to itself on a Government’s request to authoritatively settle the law.

The Judgement will allow lenders to initiate and pursue action against the corporate debtor and the personal guarantors to initiate insolvency proceedings, simultaneously against personal guarantors, who are usually promoters of big conglomerates business houses, for whom they have given guarantees.

The lenders may pursue IBC petitions against such defaulting personal guarantors in the event that they are unable to recover their full amount of dues from the corporate insolvency resolution process (“CIRP”) of the corporate debtor, since the guarantors’ liabilities are co-extensive with that of the corporate debtor.

Post the Judgement, the promoters, who are participants in the CIRP of the corporate debtor, may try to persuade prospective resolution applicants to infuse greater amounts, or provide for maximum payments to creditors of the corporate debtor as this move would reduce the extent of their personal liability.

A closer reading of the Judgment will also imply the sanction of a resolution plan under the Code shall not per se operate as a discharge of the guarantor’s liability. The Judgement would make the promoters accountable and they will be extremely careful in giving personal guarantees and ensure maximisation of recovery under Code by lenders.

-Devesh Juvekar, partner, Rajani Associates and
Dikshat Mehra, principal associate, Rajani Associates
Devesh Juvekar and Dikshat Mehra

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