SC upholds IBC provisions for personal guarantors

The apex court, while dismissing the petitioners’ plea, said Sections 95 to 100 of the IBC did not suffer from arbitrariness as contended by them.

The IBC in 2019 had introduced the personal guarantor’s insolvency resolution process, which earlier was limited to only corporates.

In a set back to personal guarantors of highly indebted firms, the Supreme Court on Thursday upheld key provisions of the Insolvency and Bankruptcy Code (IBC) regarding start of the resolution process by creditors against them. The court’s decision will mean that personal guarantors would not get an opportunity to be heard, even before the appointment of resolution professional (RP). Also, moratorium on such guarantor’s assets will come to play as soon as the debtor files the insolvency petition.

The apex court, while dismissing the petitioners’ plea, said Sections 95 to 100 of the IBC did not suffer from arbitrariness as contended by them. The petitioners asked for an additional layer in the process for adjudication, and a chance for the personal guarantors to be heard even before appointment of RP.

The court has rejected the petitioners’ arguments on the ground that the present mechanism already provides adequate provisions for the personal guarantor to be heard at the appropriate time to present its case before the Adjudicating Authority (AA). The SC bench led by Chief Justice of India DY Chandrachud observed that to accept that adjudication should be permissible at the stage of appointment of an RP by the AA would amount to “rewriting the statute”.

Sudhir Chandi, Partner, Resurgent Resolution Professional LLP said, “the RP has not been given unlimited powers under the code as alleged by the petitioners…the judgement is welcome in the interest of economic reforms and speedier handling of the economically stressed corporates.”

The court, as an interim order in this matter, had earlier granted a stay on submission of report by the RP under Section 99, which is required to provide recommendation to the AA on whether to approve or reject the application for insolvency against the personal guarantor.

“With the final judgement upholding the constitutionality of these provisions, this interim order also stands vacated and there is no bar on continuance of personal guarantor insolvencies,” said Anoop Rawat Partner, Shardul Amarchand Mangaldas &Co.

The IBC in 2019 had introduced the personal guarantor’s insolvency resolution process, which earlier was limited to only corporates. Section 95 allows creditors to initiate insolvency proceedings against personal guarantors. Once the proceedings are initiated, the personal guarantor can’t challenge the appointment of the RP. Section 96 deals with the moratorium.

Under Section 99, the RP must review the application filed under section 95 and submit a report to the AA – suggesting either rejection or acceptance of the application – within 10 days of their appointment. Section 100 asks the AA to make a decision within 14 days of the submission of the report.

Ajay Monga, Partner, SNG & Partners, Advocates & Solicitors, said, “the pronouncement is a sigh of relief for banks and financial institutions to take proactive measures against the personal guarantors under the IBC. The judgement will strengthen the remedial measures that are available to the creditors to effectively achieve the objectives for which the code was enacted in 2016.”

Siddharth Srivastava, Partner, Khaitan & Co, said, “This judgement is likely to give a massive fillip to initiation of personal insolvency process by the lenders against personal guarantors. The personal insolvency market will pick up pace with RPs, consultants becoming busier with such cases. This will also give more teeth to the lenders to exercise their remedies leading to perhaps better recovery of their bad debts.”

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