The Supreme Court clearing the path for creditors to move against personal guarantors in the event of resolution of corporate debt should come as a boost to the former. In the Dilip B Jiwrajka vs Union of India judgment, the apex court has struck down persistent pleas by personal guarantors (384 petitions) that the IBC process does not give them the right to be heard. Personal guarantors, largely the promoters of entities under IBC, had challenged Sections 95-100 of the IBC law in particular as being violative of Articles 14 and 21 of the Constitution. These sections lay down the process of admitting or rejecting claims with respect to individual insolvencies. The apex court has upheld these IBC provisions as being Constitutionally sound.
The crux of the claim made by personal guarantors is that they should be ‘heard out’ by the Resolution Professional when the latter is drawing up a report in relation to their dues. The RP seeks material information on the nature of the claim from the personal guarantor and submits this to the National Company Law Tribunal, which is empowered under Section 100 of IBC to either admit or reject the report. The apex court has now ruled that, under Section 100, the debtors can, and indeed must, be adequately heard by the NCLT or any other forum, as it is the adjudicating authority — but not at an earlier stage when the RP is preparing the report. The RP, the SC has clarified, is merely a facilitator with an administrative role — of expediting the process, making the task of the NCLT easier. Here, it implicitly concedes a drafting flaw in Section 100, when it says (para 79): “Although Section 100 of the IBC does not explicitly mention a hearing for a debtor, the requirement of a hearing has to be read into Section 100.” Hence, natural justice has not been compromised and the provision is not ‘unconstitutional’, the judges have said.
The import of what seems like a legal quibble should not be missed here. Personal guarantors may have liked to prevail upon the RP, by raising questions of whether they owe anything at all in the first place, or trying to establish that their dues have been settled. That route has been closed. The present ruling, along with the apex court order in Lalit Kumar Jain vs Union of India (2021), comes as a shot in the arm for creditors to act upon their claims. In the latter, the court has said that personal guarantors’ dues do not vanish simply because the corporate debt has been resolved. The IBC process can become smoother now.
As a result of a legal challenge, proceedings against personal guarantors in about 2,000 cases have been stalled. Now, recoveries may improve. Creditors can lend with the assurance that personal guarantees can be easily invoked. Promoters will think twice before inflating personal assets to bag a big loan. A systemic correction in the lending scene will help all stakeholders.