The Supreme Court said promoters or directors who have furnished personal guarantees will still be on the book if a company is taken to bankruptcy court or goes into liquidation. The ruling clears the way for banks to attach the P personal assets of Reliance Group’s Anil Ambani, Dewan Housing Finance NSE 4.83% Ltd’s Kapil Wadhawan. De Videocon NSE 4.71% Group’s Venugopal Dhoot and Bhushan Power & Steels Sanjay Singal among others.

Creditors can initiate insolvency proceedings against such persons in the National Company Law Tribunal (NCLT, the court said Friday, upholding a government notification of November 2019 Ambani, Wadhawan, Dhoot and Singal had challenged proceedings against them under the Insolvency and Bankruptcy Code (IBC) to recover loans for which they had given personal guarantees

They had argued that the resolution process would discharge them of all personal liabilities and guarantees and that the government was wrong to issue a notification that permitted lenders to initiate separate insolvency proceedings against them. Their case was argued by senior advocate Harish N Salve. The banks were represented by attorney general KK Venugopal and solicitor general Tushar Mehta. State Bank of India (SBI) was represented by senior advocate Rakesh Dwivedi and standing counsel Sanjay Kapur.

*Approval of a resolution plan does not ipso facto discharge a personal guarantor of his or her liabilities under the contract of guarantee.” said a two judge bench, comprising justices L Nageswara Rao and Ravindra Bhatt.

Banks Welcome Verdict

“Release or discharge of a principal borrower from the debt owed by it to its creditors, by an involuntary process, ie, by operation of the 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 top court said.

Banks welcomed the ruling.

“We will have to wait and watch to see how much impact this judgment will have on recovery.” said SBI chairman Dinesh Khara. “We will go through the judgment carefully to see what specific actions can be taken. It will be debated and deliberated with joint committees of banks.

The top court upheld the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

“Parliament is conscious of the fact that personal guarantors of the corporate debtors are generally promoters or close relatives of the corporate debtors and, in many cases, the corporate’s indebtedness was due to acts of misfeasance and siphoning of funds by personal guarantors, Dwivedi argued for SBI.

SBI was also one of the respondents to the 74 petitions and challenges by promoters on invocation of personal guarantees. It had invoked Rs 1.200 crore of guarantees given by Ambani on loans to Reliance Communications NSE 294% and Reliance Infratel. In January, ET reported SBI had approached the Mumbai bench of the NCLT over guarantees by the Dhoot brothers totalling Rs 11,500 crore. It had also taken Singal to court to recover Rs 12.276 crore.

‘Huge Deterrent’

This order will realise the exact intent of the bankruptcy act,” said J Samuel Joseph, deputy managing director, IDBI Bank “One does not know how much impact it will have on recoveries from wealthy promoters because personal guarantees are a small part of the outstanding claims on companies, but as the IBC has created a deterrent for wilful defaulters who could lose their companies, this will be a huge deterrent to prevent defaults for fear of losing their personal assets.

The ruling will help settle jurisprudence finally on simultaneous initiation and proceeding with insolvency resolution against principal borrower and guarantors or co guarantors/co-obligers as well,” said Misha, partner Shardul Amarchand Mangaldas Co, who uses only one name. The decision would now enable a creditor to proceed against corporate borrower and personal guarantor simultaneously under the provisions of the code and enable a consolidated process of insolvency resolution.

The ruling will allow banks to pursue their remedies against personal guarantors to corporate debtors, said Ajay Monga, Ateev Mathur and Amol Sharma of SNG and Partners, who represented one of the leading banks in the case.

“Having faced bankruptcy proceedings of their owners, these conglomerates may settle the disputes and pay off their debts to the banks,” they said in a joint email. This is a welcome judgment for the banking industry and a progressive step towards resolution of claims”