SC upholds provisions of IBC on corporate debt recovery from personal guarantors

NEW DELHI: The Supreme Court on Friday upheld the Centres notification of November 15, 2019, which allowed financial institutions to proceed against individual corporate guarantors for recovery of loans of a company under Insolvency and Bankruptcy Code (IBC) proceedings.

A batch of 75 petitions had challenged the validity of this notification, which brought into force provisions of the Part III of the IBC, extending insolvency and bankruptcy for individuals and partnership firms to the promoters too.

A bench comprising L. Nageswara Rao and S. Ravindra Bhat ruled that initiation of insolvency for a company does not absolve corporate guarantees given by individuals for securing loans for their companies.

Reading the operative part of the verdict, the bench said the notification has been held to be “legal” and “valid”.

Several Industrialists had challenged the 2019 notification, which had extended the personal insolvency provisions of IBC to the promoters as well.

The promoters had argued before the top court that the Centre did not have the power to bring in IBC provisions selectively to personal guarantors of corporate debtors.

The top court ruling would clear the path for creditors to recover the debt from personal guarantors after Corporate Insolvency Resolution Process (CIRP) has been concluded.

The top court had transferred to itself petitions challenging November 15, notification. The Insolvency and Bankruptcy Board of India (IBBI) had sought the transfer of all cases pending before various High Courts to the Supreme Court stating that it would avoid conflicting rulings by different courts.

The top court had also passed an interim order, staying the insolvency proceedings against personal guarantors.

The apex court also added that the approval of the resolution plan in connection with the corporate debtor will not operate as an estoppel so as to discharge the liabilities of the personal guarantor.

The promoters also contended that singling out of guarantors was violative of the fundamental right to equality.