Supreme Court IBC Ruling Good For Companies, Bad For Guarantors

The Supreme Court’s verdict creating distinction between insolvency proceedings against a company and its guarantors is likely to pave the way for better resolution under bankruptcy law, according to experts.

The top court upheld the notification allowing lenders to initiate proceedings under the Insolvency and Bankruptcy Code against personal guarantors of a corporate debtor. And it ruled that liabilities of guarantors will continue even if the liabilities of the company have ended.

The end of IBC proceedings against a company won’t absolve the guarantor of his liability, Kumar Saurabh Singh, partner at Khaitan and Co., said. “Accordingly, the guarantors would have to separately enter into compromise with lenders, failing which they can be taken to insolvency themselves.”

Personal insolvency provisions constitute part III of the IBC. While it applies to partnerships and individuals, the government had operationalised the provisions in November 2019 only for personal guarantors. This made way for creditors to go after individual promoters and others who stood as guarantors for loans granted to the companies undergoing insolvency.

The top court was hearing a batch of over 40 petitions challenging the operationalisation of these provisions, including those by industrialists Kapil Wadhawan, Anil Ambani, Venugopal Dhoot and others.

The petitioners had challenged the notification on the ground that the central government had acted in excess of its authority by operationalising part III of the code for only personal guarantors even though it covered other classes such as partnership firms.

The top court didn’t agree with the reasoning and said it didn’t amount to impermissible and selective implementation of the code. “There’s 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 judgment said.

Legal experts said the ruling will expedite insolvency process against corporate debtors and also encourage more applicants to bid for companies undergoing IBC proceedings.

“'We have seen resolution process of corporate borrowers has not resulted in recovery of full amount of debt for the lenders,” said Bishwajit Dubey, partner at Cyril Amarchand Mangaldas, who represented the State Bank of India in the case. “With this judgment, lenders can now pursue remedies against the personal guarantors resulting in further recovery for them.”

This amendment in the long run will prove to be highly beneficial for all stakeholders and shall also increase the chances of settlement, according to Ruby Singh Ahuja, partner at Karanjawala & Co.

‘Liabilities Of Company, Promoter Different’

The top court said liability of the guarantors don’t get extinguished if insolvency proceedings against the company has ended.

When it comes to a principal borrower, the discharge of its liability through the approval of a resolution plan by insolvency proceedings/liquidation cannot absolve the guarantors. This because the personal guarantors have a separate contract of guarantee which governs their liability, the top court said.

After clarity on personal guarantors, the focus now shifts to corporate guarantors and their liabilities in the IBC process. This issue is pending before the top court in a separate case, Dubey said.