Hindustan Times ST (Mumbai) - HT Navi Mumbai Live
GUARANTORS...
“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. 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 go.
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 discharge personal guarantors of their liabilities under the contract of guarantee.
Representing the Centre, attorney general KK Venugopal and solicitor general Tushar Mehta 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, the law officers claimed, 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 ₹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.