Money & Banking

Personal Guarantors’ insolvency: IBBI seeks to transfer pending petitions to Supreme Court

KR Srivats New Delhi | Updated on October 20, 2020

Insolvency regulator IBBI has moved the Supreme Court, seeking transfer of batch of pending petitions before various High Courts on the challenge of IBC provisions related to insolvency of ‘personal guarantors’. The apex court bench of Justices L Nageswara Rao, Hemant Gupta and Ajay Rastogi will hear the IBBI plea on October 28, official sources said.

It may be recalled that various writ petitions werefiled in more than one High Court, which raise substantial questions of law of general importance. All these pending writ petitions challenge the constitutional validity of Part III ( deals with insolvency resolution for individuals and partnership firms) of the Insolvency and Bankruptcy Code.

In some of the pending writs, the petitioners had secured interim orders from the High Courts, leading to the stalling of proceedings. The IBC rules and regulations framed under are expected to be examined by the apex court as regards insolvency of personal guarantors. The petitions of some high-profile industrialists, including Anil Ambani, is now sought to be transferred to the Supreme Court by IBBI.

Given the proliferation of litigation on the matter of insolvency of personal guarantors, IBBI now wants Supreme Court to hear the challenge to the vires of the provisions.

One of the main reasons is that the IBBI does not want to fight the matter by separately appearing in so many courts and wasting resources. It is estimated that there are about 15-20 cases in many High Courts, where the IBC provisions around insolvency of ‘personal guarantors’ is under challenge. Even if the IBBI appears in these courts, different High Courts can give conflicting judgments and further complicate the matter, sources said. Also, even if High Courts give their judgment, it may still go to the Supreme Court on appeal by an aggrieved party.

The story so far

Insolvency of personal guarantors had come under spotlight after the Centre had, in November 2019, given effect to the provisions under the IBC. The apex court had, in July this year, enquired why banks are not invoking the new remedy in law, given that a whopping ₹1.8-lakh crore worth of guarantees are at stake.

Following the SC reprimand, the Finance Ministry directed banks to set up a monitoring mechanism to pursue personal insolvency proceedings against all those promoters who had furnished personal guarantees for borrowing by the companies that subsequently turned bad. This had put several industrialists in a spot, with banks invoking insolvency proceedings against them (as personal guarantors).

There are still several issues of clarity in law or lacuna in the provisions related to the insolvency of personal guarantors.

Experts’ take

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said that the initiative of seeking consolidation of pending matters at the Apex Court is a pragmatic move, which would rule out the possibility of inconsistent verdicts being pronounced by various High Courts and, at the same time, may see a time-bound disposal. This is an important legal issue, which would have a far reaching impact on recovery and resolution process, he said.

Abir Lal Dey, Partner, L&L Partners, said that the IBBI’s move to the Apex Court to transfer all petitionspending before various High Courts related to insolvency of personal guarantors, is with the purpose for avoiding the possibility of contradictory judgments being passed by different constitutional courts.

The move of the IBBI will help avert similar petitions being filed and set a benchmark for future proceedings, according to Dey.

Published on October 20, 2020

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