SC allows recovery of dues from guarantors

Promoters, managing directors and chairmen, who stand as personal guarantors to corporate loans, can also be proceeded against before the company law tribunal if their firms are unable to repay debts, ruled the Supreme Court on Friday as it declared “legal and valid” a November 15, 2019 notification issued by the Union government under the Insolvency and Bankruptcy Code (IBC).

“It is held that the impugned 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,” a bench of justices L Nageswara Rao and S Ravindra Bhat held.

Affirming the government’s mandate, the bench dismissed a clutch of 75 petitions, including the ones filed by industrialists and business tycoons Anil

Ambani, Venugopal Dhoot, Kapil Wadhawan, Sanjay Singal and Atul Punj -- each one of whom stood as personal guarantors to corporate debts, and challenged the validity of the 2019 notification that sought to make them personally liable for remaining debts not settled in the resolution plan of the companies under insolvency.

After the court ruling on Friday, if that debt owed by a company is not repaid under the resolution plan, the personal guarantor would not stand discharged, but could be forced into bankruptcy proceedings by the creditors.

Reacting to the verdict, Faisal Sherwani, Partner, L&L Partners law firm, said: “It is time for promoters who furnish personal guarantees lightly to wake up and smell the roses. From a jurisprudential perspective, it is now clear that mere approval of a resolution plan relating to a corporate debtor would not mean that the personal guarantor is also off the hook. After all, the object sought to be achieved by the amendment was permissible and aimed at maintaining the financial health of the banking sector.”

However, advocate Soumya Dharwa, who represented one of the petitioners in the matter, apprehended that the judgment may result in further concentration of powers with the lender banks by opening another avenue for recovery of their loans apart from SARFAESI Act, debt recovery proceedings, and other civil remedies already available with them. This, the lawyer said, will also open the floodgates for multiple litigations between the lenders and corporate borrowers and their personal guarantors.

While the petitions alleged that the Centre did not have the power to bring in IBC provisions selectively to personal guarantors of corporate debtors, the top court underscored that “there is no compulsion in the Code that it should, at the same time, be made applicable to all individuals (including personal guarantors), or not at all”.

“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,” said the bench.

Citing various pertinent provisions of IBC, the bench noted that there was “sufficient legislative guidance” for the central government to distinguish and classify personal guarantors separately from other individuals and provide the National Company Law Tribunal (NCLT) as a common forum for the financial institutions and other lenders to seek recovery of their debts.

“The NCLT would be able to 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 (CoC) in framing realistic plans, keeping in mind the prospect of realizing some part of the creditors’ dues from personal guarantors,” highlighted the bench, finding justification in merger of proceedings against personal guarantors with that of corporate debtors.

It shot down another contention by the petitioners that since an approved resolution plan in respect of a corporate debtor amounted to extinction of all outstanding claims against that debtor, the liability of the personal guarantor must also extinguish.

Referring to a few judicial precedents as well as provisions of the Contract Act, the bench held that the approval of a resolution plan did not ipso facto discharge a personal guarantor 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,” it said.

Representing the Centre, attorney general KK Venugopal and solicitor general Tushar Mehta had defended the November 15, 2019 notification that came into force from December 1 that year on the grounds that the objective was to have a unified adjudication through the same forum (NCLT) for resolution of issues concerning corporate resolution processes, as well as bankruptcy and insolvency processes in relation to personal guarantors.

The notification, said the law officers, would ensure a more optimal resolution process and the total debt servicing of the corporate debtor might be lowered if the personal guarantor’s assets were also taken into account to mitigate the corporate debtor’s liabilities.

In June 2020, State Bank of India moved NCLT, Mumbai to recover more than Rs 1,200 crore from Anil Ambani as he had given a personal guarantee for loans extended to Reliance Communications Ltd and Reliance Infratel Ltd. Soon thereafter, several promoters and directors challenged the 2019 notification, prompting the Supreme Court to transfer all matters to itself last year.

In view of the nationwide challenges to the notification, the top court, in October 2020 asked the high courts across the country not to pass any order in such cases. It had also passed an interim order, staying the insolvency and bankruptcy proceedings against the personal guarantors, which will revive after the verdict on Friday.