Guarantors liable if firms fail to repay: SC

NEW DELHI : 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 Anil Ambani, Venugopal Dhoot, and Kapil Wadhawan who had personally guaranteed corporate debt, and who 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.

Friday’s ruling means that in keeping with the government notification that activated the IBC provision against the guarantors of companies going through insolvency proceedings, if the debt owed by such a company is not repaid under the resolution plan, the personal guarantor 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 coffee. 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.”