SC Denies IBC Relief to Personal Guarantors

The Supreme Court allowed banks to initiate insolvency proceedings against personal guarantors of loans taken by defaulter companies without giving them an opportunity to present their stand, in what experts said was a key ruling that could speed up the bankruptcy process.

A bench led by chief justice of India DY Chandrachud dismissed a set of petitions filed by former promoters of bankrupt companies, including Anil Ambani, Venugopal Dhoot and Sanjay Singal, challenging personal insolvency proceedings initiated against them. It also upheld various provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) that had been challenged on grounds such as the alleged absence of due process and violation of natural justice principles.

The court said the IBC provisions did not suffer from arbitrariness as contended by the petitioners, “IBC cannot be held to be operating in a retroactive manner in order to hold it violative of the constitution,” it said. “We hold that the statute does not suffer from the vices of manifest arbitrariness.”

In November 2019, the Centre tweaked the bankruptcy law to allow personal insolvency cases against guarantors of corporates that fail to honour debt.

Promoters of high-debt companies often furnish personal guarantees on corporate loans.

An advocate specializing in bankruptcy law, said the ruling will lead to “new proceedings being filed against personal guarantors.” Cases pending before the National Company Law Tribunal (NCLT) will “move forward to their logical consequence, unless the guarantors pay up, they will be declared undischarged insolvent, which will result in quick recovery for banks.”