Bad loans: SC allows banks to proceed against personal guarantors under bankruptcy law

In a landmark verdict, the Supreme Court has upheld the Centre’s decision to initiate proceedings against personal guarantors, usually promoters of big business houses and corporate debtors, for recovery of loans under the Insolvency and Bankruptcy Code (IBC). A bench comprising Justices L. Nageswara Rao and S. Ravindra Bhat held that the November 15, 2019 notification of the Centre allowing creditors, usually financial institutions and banks, to move against personal guarantors under the Insolvency and Bankruptcy Code (IBC) was “legal and valid”.

It is held that approval of a resolution plan (for revival of a sick company under IBC) does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee, Justice Bhat, writing the judgement for the bench said.

As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, that is by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract, the 82-page judgement said.

The Verdict allows lenders to file personal bankruptcies against several top Indian promoters whose companies have been sent to the NCLT (National Company Law Tribunal) for debt resolution. The bench held that the notification is legal and valid and that the approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors of corporate debts.

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The verdict came on as many as 75 petitions, including some transfer petitions, filed by various firms and by those who had given their personal guarantees to the banks and FIs for loans advanced to companies. The plea filed by one Lalit Kumar Jain, against the November 15, 2019 notification issued under the IBC related to personal guarantors to corporate debtors, was taken up as the lead matter.

Upholding the validity of the notification, the top court ruled that initiation of an insolvency resolution plan for a company does not absolve corporate guarantees given by individuals from paying up the dues to financial institutions. The common question in all the pleas assailed the the vires and validity of the notification of the Central Government by alleging that the power conferred under the IBC could not have been resorted to in the manner as to extend the provisions of the Code to personal guarantors of corporate debtors.