In a significant ruling, the Supreme Court on Thursday upheld the constitutionality of IBC provisions on Personal Guarantors’ Insolvency Resolution, dismissing over 200 petitions that challenged their legal validity.
A Bench of Chief Justice of India (CJI) D Y Chandrachud with Justices J B Pardiwala and Manoj Misra held that the provisions (Sections 95 to 100) held that IBC provisions on personal guarantors’ insolvency process did not suffer from arbitrariness as contended by petitioners. The latest apex court move is expected to give a fillip to the lenders (mostly banks) efforts to recover dues of corporate debtors from personal guarantors., who are mostly promoters of companies.
“The statute (IBC) does not suffer from any manifest arbitrariness to violate Art 14 of the Constitution,” declared the bench.
This apex court move would come as a major relief for lenders whose petitions for insolvency proceedings against personal guarantors were getting stuck in various judicial forums due to the legal challenge of various provisions.
This decision has effectively removed the procedural obstacles that were hindering the progress of insolvency motions against personal guarantors pending before the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT).
As of end September this year, as many as 2289 insolvency applications involving corporate debt amount of ₹1,63,916 crore has been filed since the year 2019 against personal guarantors under the IBC. In 2020, some of the high-profile individuals who were facing bankruptcy proceedings as personal guarantors of ailing corporate debtors include Anil Ambani, Sanjay and Arti Singhal, Atul Punj, Lalit Jain, Ajay Mehra, Yogesh Mehra, and Mahendra Kumar Rajpal.
The judgment notably affirms that the principles of natural justice cannot be applied in a straight-jacket manner and that their application could vary depending on the situation.
The apex court held that sufficient safeguards are present as regards the manner in which a resolution professional functions in the course of an insolvency process.
The SC Bench has also ruled that resolution professional is not intended to perform an adjudicatory function. Petitioners are wrong in contending that RP has been conferred with adjudicatory powers, it added.
The provisions relating to personal guarantors were introduced under the Insolvency and Bankruptcy Code (IBC) in 2019, but were subsequently challenged before various Courts and the matter travelled to the Supreme Court. The Finance Ministry had in 2020 asked public sector banks to up their game in initiating insolvency process against personal guarantors.
Point of contention
The main point of contention was that these IBC provisions (Sec 95-100) did not afford personal guarantors the opportunity to dispute the initiation of insolvency resolution processes against them before the petition is admitted.
It was argued that these provisions did not adhere to the due process of law when applying the IBC to personal guarantors in comparison to corporate debtors.
Rohan Batra, Partner, Anagram Partners, said this SC decision clarifies the legal landscape regarding personal guarantors within the context of the IBC and reinforces the need for careful consideration before assuming such responsibilities.
Anoop Rawat Partner, Shardul Amarchand Mangaldas &Co, said that there is now no bar on continuance of personal guarantor insolvencies.
“The judgment brings great relief to the lenders as it allows them to recover the portion of debt which had not been recovered in the CIRP of the principal debtor through the insolvency resolution of the personal guarantor”, he said.
Sushmita Gandhi, Partner, INDUSLAW, said the NCLT can now move ahead without having to hear the personal guarantors at the stage or before the stage of filing of report by the RP, which would be a relief to so many creditors whose petitions were otherwise on status quo.
Hari Hara Mishra, CEO, ARC Association, said this judgment removes uncertainty around the applications filed against 2,289 debtors for initiation of Personal Insolvency Resolution Process as of September 2023.