With the Supreme Court pinning down the obligations of personal guarantors under the Insolvency and Bankruptcy Code (IBC), creditors now have a better chance of recovering the dues of Rs 1.64 trillion relating to personal guarantees. Last week, the apex court upheld the constitutionality of the provisions of the IBC relating to the Personal Guarantors Insolvency Resolution, which became effective through amendments in 2019. The provisions had been challenged by a group of promoters, including Anil Ambani, on the ground that they were not given a chance to present their case, among other things. The apex court however found their arguments untenable. The moratorium, the three-judge bench headed by Chief Justice DY Chandrachud noted, was automatically imposed on the guarantors at the time of the insolvency petition being filed.
While rejecting the petition, the SC held that the approval of a resolution plan did not ipso facto free them from their obligations and liabilities as personal guarantors under the contract of guarantee. The release by either liquidation or insolvency proceedings, of the principal borrower, from the debt owed by him or her did not absolve the guarantor of his or her liability. This is because the obligation of the personal guarantor arose out of an independent contract. Personal guarantors must understand their rights are embedded in the terms of the guarantee and they should not expect more. Importantly, as the SC ruled, this contract is mutually exclusive or independent of the insolvency proceedings. It is also not tenable that promoters should argue on the grounds of privacy when the matter relates to a loan default, especially a wilful default since often the borrowings are taxpayer money.
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Last week’s judgment was in tune with an earlier SC observation that the government was right in “carving out personal guarantors as a separate species of individuals”, given the “intimate connection between such individuals and corporate entities to whom they stood guarantee”. The latest ruling will strengthen the IBC Code which has evolved since it came into being in May 2016. This was needed as the experience of invoking insolvency proceedings against personal guarantors has been disappointing so far. Data put out by the insolvency regulator showed that as of September 2023, for personal guarantors, only 21 cases involving personal guarantees have led to repayment plans being approved, and creditors realised only 5.2% of their admitted claim. In that context, the SC ruling certainly signals a shift in favour of Indian lenders improving their ability to enforce guarantees without long legal battles. It should also serve as a wake-up call to many promoters who are adept at gaming the system by stalling the efforts of many banks to enforce personal guarantees against their loans on which there have been defaults.
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But it would be a mistake to underestimate the ingenuity of India’s promoters. As the case was stuck in the apex court for over four years, many have reportedly used the window to transfer their assets to a trust or dispose of them, making it difficult for lenders to exercise their rights over them. Yet another problem is that the regulation prescribes forensics of personal guarantors’ assets, which could delay the process for recovery of dues. These are issues that need to be tackled, but the importance of the SC judgment lies in the judicial sanction to plug loopholes in the IBC and ensure sanctity of contracts is maintained.
With the Supreme Court pinning down the obligations of personal guarantors under the Insolvency and Bankruptcy Code (IBC), creditors now have a better chance of recovering the dues of Rs 1.64 trillion relating to personal guarantees. Last week, the apex court upheld the constitutionality of the provisions of the IBC relating to the Personal Guarantors Insolvency Resolution, which became effective through amendments in 2019. The provisions had been challenged by a group of promoters, including Anil Ambani, on the ground that they were not given a chance to present their case, among other things. The apex court however found their arguments untenable. The moratorium, the three-judge bench headed by Chief Justice DY Chandrachud noted, was automatically imposed on the guarantors at the time of the insolvency petition being filed.
While rejecting the petition, the SC held that the approval of a resolution plan did not ipso facto free them from their obligations and liabilities as personal guarantors under the contract of guarantee. The release by either liquidation or insolvency proceedings, of the principal borrower, from the debt owed by him or her did not absolve the guarantor of his or her liability. This is because the obligation of the personal guarantor arose out of an independent contract. Personal guarantors must understand their rights are embedded in the terms of the guarantee and they should not expect more. Importantly, as the SC ruled, this contract is mutually exclusive or independent of the insolvency proceedings. It is also not tenable that promoters should argue on the grounds of privacy when the matter relates to a loan default, especially a wilful default since often the borrowings are taxpayer money.
Last week’s judgment was in tune with an earlier SC observation that the government was right in “carving out personal guarantors as a separate species of individuals”, given the “intimate connection between such individuals and corporate entities to whom they stood guarantee”. The latest ruling will strengthen the IBC Code which has evolved since it came into being in May 2016. This was needed as the experience of invoking insolvency proceedings against personal guarantors has been disappointing so far. Data put out by the insolvency regulator showed that as of September 2023, for personal guarantors, only 21 cases involving personal guarantees have led to repayment plans being approved, and creditors realised only 5.2% of their admitted claim. In that context, the SC ruling certainly signals a shift in favour of Indian lenders improving their ability to enforce guarantees without long legal battles. It should also serve as a wake-up call to many promoters who are adept at gaming the system by stalling the efforts of many banks to enforce personal guarantees against their loans on which there have been defaults.
But it would be a mistake to underestimate the ingenuity of India’s promoters. As the case was stuck in the apex court for over four years, many have reportedly used the window to transfer their assets to a trust or dispose of them, making it difficult for lenders to exercise their rights over them. Yet another problem is that the regulation prescribes forensics of personal guarantors’ assets, which could delay the process for recovery of dues. These are issues that need to be tackled, but the importance of the SC judgment lies in the judicial sanction to plug loopholes in the IBC and ensure sanctity of contracts is maintained.
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Wake-up call for promoters: Importance of SC judgment lies in sanction to plug loopholes in IBC
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14.11.2023
With the Supreme Court pinning down the obligations of personal guarantors under the Insolvency and Bankruptcy Code (IBC), creditors now have a better chance of recovering the dues of Rs 1.64 trillion relating to personal guarantees. Last week, the apex court upheld the constitutionality of the provisions of the IBC relating to the Personal Guarantors Insolvency Resolution, which became effective through amendments in 2019. The provisions had been challenged by a group of promoters, including Anil Ambani, on the ground that they were not given a chance to present their case, among other things. The apex court however found their arguments untenable. The moratorium, the three-judge bench headed by Chief Justice DY Chandrachud noted, was automatically imposed on the guarantors at the time of the insolvency petition being filed.
While rejecting the petition, the SC held that the approval of a resolution plan did not ipso facto free them from their obligations and liabilities as personal guarantors under the contract of guarantee. The release by either liquidation or insolvency proceedings, of the principal borrower, from the debt owed by him or her did not absolve the guarantor of his or her liability. This is because the obligation of the personal guarantor arose out of an independent contract. Personal guarantors must understand their rights are embedded in the terms of the guarantee and they should not expect more. Importantly, as the SC ruled, this contract is mutually exclusive or independent of the insolvency proceedings. It is also not tenable that promoters should argue on the grounds of privacy when the matter relates to a loan default, especially a wilful default since often the borrowings are taxpayer money.
Also ReadSC upholds validity of key provisions of Insolvency and Bankruptcy Code
Last week’s judgment was in tune with an earlier SC observation that the government was right in........
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