Personal Guarantors: IBBI, govt to defend legal validity of IBC provisions

Insolvency regulator IBBI and the government are expected to go all out to defend the legal validity of the IBC provisions on personal insolvency against personal guarantors to corporate debtors, when the current matters on legal challenges come next before the Delhi High Court on October 6.

Some personal guarantors who are in the dock are now claiming that enforcing certain IBC provisions in relation to personal guarantors to corporate debtors amounted to an unconstitutional usurpation of legislative power by the executive and they are challenging the provisions as “wholly impermissible in law”, sources said.

The stance to stick to the legal validity is also supported by the fact that the Department of Financial Services in the Finance Ministry had, recently, in separate directions, asked public sector banks (PSBs) to put in place a mechanism for monitoring cases, which may require initiation of insolvency proceedings against personal guarantors of corporate debtors.

Asked to comment on the recent legal challenges to the IBC provisions on personal guarantors , MS Sahoo, Chairman, Insolvency and Bankruptcy Board of India (IBBI), told BusinessLine that he would not like to comment as the matter is sub-judice. However, on the rationale, Sahoo clarified that insolvency resolution of a corporate debtor and resolution of its guarantors – corporate and personal – are intertwined. “Resolution of personal guarantors to corporate debtors, therefore, complements the corporate insolvency resolution process. It also places both corporate guarantors and personal guarantors of the corporate debtor on the same level playing field,” he said.

Corporate observers pointed out that even for corporate insolvency, there were so many rounds of challenges, taking the legal validity matter all the way up to the Supreme Court. It is no surprise that the people who are affected are fighting to their best against the personal insolvency proceedings of the guarantors and have challenged it, they said.

Experts’ take

Aditya Nayyar, Partner, Ortis Law Offices, said that it is the arguments of the petitioners (challenging the provisions) that the enforcement of insolvency provisions in relation to personal guarantees given to corporate debtors is wholly unconstitutional and without jurisdiction.

“On the other hand, it may be argued by the IBBI or the government that once personal guarantees are invoked by banks on a default by the corporate debtor, the guarantors automatically become a direct creditor and, hence, proceeding under the insolvency provisions against such creditors would be wholly constitutional, more so when the manner in which the debt came into light would fall within the definition of the term ‘financial debt’,” he said.

Padmaja Kaul, Partner, IndusLaw, said the latest series of challenges to the very vires of the provisions relating to personal guarantors, before the Delhi High Court, by Anil Ambani and now Sanjay Singhal, was an anticipated legal tussle, specifically in view of the already existing lacuna and lack of clarity in the law; the maintainability of parallel proceedings against the Corporate Debtor and the personal guarantor etc.

Sonam Chandwani, Managing Partner, KS Legal & Associates, said that with the validity of provisions pertaining to personal guarantors under the IBC being challenged, the stance of the Centre and judiciary on such cases is likely to have far-reaching implications hereafter.