Money & Banking

Personal Guarantors: SC transfers to itself writ petitions challenging certain IBC provisions

New Delhi | Updated on October 29, 2020 Published on October 29, 2020

The Supreme Court, on Thursday, directed the transfer to itself a batch of writ petitions challenging IBC provisions related to insolvency of personal guarantors to corporate debtors.

A three-member bench comprising Justices L Nageswara Rao, Hemant Gupta and Ajay Rastogi had, on Wednesday, reserved its order after a brief hearing on the issue of transfer and expressed its inclination to allow the plea of IBBI for transfer of all pending writ petitions before various High Courts.

However, the apex court on Thursday said that no High Court will entertain any further writ petitions on any challenge of MCA notification ( November 15, 2019) by which Part III of the IBC in so far as they related to insolvency of personal guarantors to corporate debtors were brought into force. The Supreme Court has also now said that the interim orders passed by the High Courts, if any, shall continue till further orders.

The Insolvency and Bankruptcy Board of India (IBBI) , which is the insolvency regulator, had sought the transfer of all the matters pending before the High Courts to the apex court so as to avoid conflicting rulings by different constitutional courts.

The Supreme Court will now take up the matter on December 2, by which time all pleadings are required to be completed.

High-profile individuals

Some of the high-profile individuals 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 Supreme Court had, on September 17, declined to vacate a stay, earlier granted by Delhi High Court towards the ongoing IBC proceedings against Reliance Group Chairman Anil Ambani.

However, on October 19, the Supreme Court had agreed to hear the pleas seeking transfer of a bench of petitions challenging the IBC provisions relating to insolvency of the personal guarantor from various High Courts.

All of the pending writ petitions challenge the constitutional validity of part III of IBC, which deals with insolvency resolution for individuals and partnership firms, as regards provisions around insolvency of personal guarantors to corporate debtors.

It maybe recalled that Sections 95,96,99,100 and 101 of the IBC also have been assailed to the extent of being applicable to personal guarantors. Also, the rules framed by the Centre in 2019 under the IBC stand challenged.

Of the pending writ petitions, the maximum number of pleas remain pending before the Delhi High Court, which is expected to take up the matter for final hearing on November 10. The Delhi High Court had also passed an interim order in that batch of petitions including a petition by Anil Ambani.

Experts’ take

Abir Lal Dey, Partner, L&L Partners, said that the purpose of IBBI to transfer all matters pending before all High Courts to the Apex Court was to avoid conflicting rulings by different Constitutional Courts and prevent contradictions in IBC proceedings. “Today’s ruling will further restrict filing of writ petitions on this issue. The interim orders passed by the High Courts will continue to be in operation till further orders. Since the matter is now sub judice, it would be interesting to see how the matter will unfold by Supreme Court,” he said.

Mayank Mishra, Partner, IndusLaw, said that the Supreme Court decision will avoid conflicting decisions on the constitutional validity of Part III of the IBC as applicable to personal guarantors. The Supreme Court will now decide the question of law. “This may not affect the position of individual writ petitioners before various high courts as these petitions will be transferred to the Supreme Court from the stage they are”, he said.

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.

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Published on October 29, 2020
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