Insolvency and Bankruptcy Code: Personal guarantors get no SC reprieve
In a landmark judgment, the Supreme Court on Thursday refused to give reprieve to personal guarantors in case of default by a company under the Insolvency and Bankruptcy Code (IBC). The court upheld the constitutionality of key provisions of the IBC, including the initiation of insolvency proceedings against such guarantors.
Over 200 petitions had been filed against various provisions of the IBC, such as applications by creditors to initiate the insolvency resolution process against personal guarantors, interim moratorium, and appointment of the resolution professional (RP).
Reliance Group Chairman Anil Ambani, who was among the petitioners, had said in his appeal that the IBC left personal guarantors without any remedy and at the mercy of RPs. In 2017, two loan accounts of Reliance Communications and Reliance Infratel Ltd — both part of Reliance Group — were classified as non-performing assets, and personal insolvency was initiated against Ambani, who was the guarantor.
Upholding the provisions, the three-judge Bench of Chief Justice D Y Chandrachud and justices J B Pardiwala and Manoj Misra said the IBC provisions did not suffer from arbitrariness and were constitutionally sound. “The IBC cannot be held to be operating in a retroactive manner in order to hold it violative of the Constitution. Thus, we
hold that the statute does not suffer from the vices of manifest arbitrariness,” the Bench said.
The petitioners had challenged the constitutional validity of the IBC on grounds like absence of due process and violation of natural justice principles. The main issue, they had said, was that the personal guarantor was not given an opportunity to present their case or contend the initiation of the insolvency resolution process or have a say in the appointment of the RP.
IBC experts welcomed the court order for bringing more clarity to the law. “The financial sector would be able to effectively pursue their remedies under the code against personal guarantors as well, who in most cases are the brains of corporate debtors. Creditors are hopeful that the process will now kick-start and timelines under the IBC would be met,” said Ateev Mathur, partner, SNG & Partners.
Anoop Rawat, partner, Shardul Amarchand Mangaldas & Co, agreed: “The judgment brings great relief to lenders as it allows them to recover the portion of debt that had not been recovered in the corporate insolvency resolution process of the principal debtor through the insolvency resolution of the personal guarantor.”
Some pointed to the flip side as well. “While conceptually correct, it is a setback to promoters who have guaranteed debt. Even the promoters of solvent companies would be wary of giving personal guarantees,” said Anshul Jain, partner, PwC India.
On the issue of allowing judicial intervention before the appointment of RPs under Section 97, the Supreme Court Bench said: “We are of the view that the argument that an adjudicatory role be imposed before Section 97 cannot be accepted… We have come to the conclusion that reading an adjudicatory role in Section 97 will render Section 99 (Submission of report by the RP) and Section 100 (admission of a resolution plan) of the IBC otiose.”
An RP looks after the operations of a sick company after the start of an insolvency process and coordinates the resolution process among the committee of creditors, adjudicating authorities and prospective bidders.
“(For the) Court to enter here will be to rewrite the statute. What is described as a jurisdiction question is not a simple matter of law to be decided as urged by the petitioner,” the judgment said. The court also said that if any adjudicatory role was read into Section 97 of the IBC, the timelines under the code would be of no importance.
The three-judge Bench said the role of the RP was that of a facilitator who had to gather relevant information and recommend acceptance or rejection of an application. “(It) leaves no manner of doubt that a resolution professional is not intended to perform an adjudicatory function or to arrive at binding decisions on facts. It is only a recommendation which has no binding force.”
On the provisions of moratorium, the court agreed with the arguments of Solicitor General Tushar Mehta, who was appearing for the Centre, that IBC provisions staying legal proceedings against corporate debtors once the insolvency process started was for the benefit of debtors. “The moratorium is primarily in respect of a debt as opposed to a debtor,” the court said.
The legislature carefully assessed the role of the resolution professional, imposition of moratorium, and the stage at which adjudicating authority would step in, the Bench said. “This is based on intelligible differentia between individual debtors, partnerships and corporate debtors.”