A Supreme Court bench in an order said the personal guarantors cannot be absolved of their responsibilities to pay back the lenders, as they are bound by separate contracts, for corporates undergoing resolution under the IBC.
Supreme Court ruling on Friday to held personal guarantor also accountable in corporate debt cases undergoing resolution under the Insolvency and Bankruptcy Code (IBC) will lead to more number of cases getting resolved, and the recovery amount will also go up, experts opined. A Supreme Court bench in an order said the personal guarantors cannot be absolved of their responsibilities to pay back the lenders, as they are bound by separate contracts, for corporates undergoing resolution under the IBC.
The apex court upheld the validity of the central government’s notification, allowing the lenders to proceed against such persons (personal guarantors/promoters) for recovery of their loans, given to a corporation, undergoing resolution under the IBC.
“This judgment is probably one of the final key missing pieces in the IBC framework. This significantly enhances the position of the lenders as it allows them the leeway to invoke the personal guarantee given by the promoters – thereby potentially paving the way for more settlements and that too in a shorter time frame,” said Samir Paranjpe, Partner and Forensics Leader, Grant Thornton Bharat LLP.
Welcoming the verdict, he said it will make the promoters accountable and they will be extremely careful in giving personal guarantees. However, it needs to be seen how this judgement will impact the insolvency process. Requests sent to a few banks for comments on the latest development have not yet elicited their replies.
The verdict came on as many as 75 petitions, including some transfer petitions, filed by various firms and by those who had given their personal guarantees to the banks and FIs for loans advanced to companies. The plea filed by one Lalit Kumar Jain, against the November 15, 2019 notification issued under the IBC related to personal guarantors to corporate debtors, was taken up as the lead matter. Upholding the validity of the notification, the top court ruled that initiation of an insolvency resolution plan for a company does not absolve corporate guarantees given by individuals from paying up the dues to financial institutions.
L Viswanathan, Partner at Cyril Amarchand Mangaldas, termed it a “historic judgement” and said, “We have seen that the resolution process of corporate borrowers has not resulted in recovery of full amount of debt for the lenders. With this judgment lenders can now pursue remedies against the personal guarantors resulting in further recovery for them.”
The issue with regard to simultaneous proceedings under IBC against corporate debtors and corporate guarantor is pending before the Supreme Court, he said. “The personal guarantors judgment in essence has also decided the issue with respect to corporate guarantors as well. Once that is decided it will complete the full circle of recovery under IBC both for personal and corporate guarantors,” Viswanathan further said. Corporate lawyer Sumit Batra said the judgment paves way for the lenders to initiate and pursue action against the corporate debtor and the personal guarantors simultaneously.
Earlier, no remedy being in sight for the lenders to go after the personal guarantors, provided an easy escape route to the promoters and at times used to act as a roadblock in the Corporate Insolvency Resolution Process, Batra said. “With this judgment, one can expect more debt realisation for the lenders as personal guarantors would now want to settle with the lenders to escape any unwarranted consequences,” he added. Sudhir Chandi, Director, Resurgent India Limited, said the verdict would ensure maximisation of recovery under IBC and ensure stringent credit discipline in the future.
Subsequently, the banks pursued personal insolvency against the guarantors who had given personal guarantors to the corporate debtors. However, the new provision by the government was challenged, claiming that it is always a board management that runs the company, and the promoters shall not be held accountable.
The National Company Law Appellate Tribunal (NCLAT) also held a similar view. The issue was challenged in the Supreme Court, upholding the provisions under IBC about personal insolvency of the corporate guarantors.
A Supreme Court 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 the banks or financial institutions (FIs) as they are bound by separate contracts.