The Supreme Court of India recently delivered a landmark judgment that upheld the validity of the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) that enable creditors to initiate insolvency proceedings against personal guarantors of corporate debtors. This ruling has far-reaching implications for the resolution of bad debts and the protection of creditors’ rights in the country.
Key Provisions and Their Implications
A personal guarantor is an individual who promises to repay a debt in case the borrower (corporate debtor) fails to do so. The liability of a personal guarantor is co-extensive with that of the corporate debtor, as per section 128 of the Indian Contract Act, 1872. This means that the creditor can recover the entire amount or the remaining amount from either or both of them.
The IBC, which came into force in 2016, is a comprehensive law that provides for the resolution of insolvency and bankruptcy of various entities, including corporate debtors, personal guarantors, partnership firms and individuals. The IBC aims to maximise the value of assets, promote entrepreneurship, ensure timely recovery of dues and balance the interests of all stakeholders.
In 2019, the government notified the rules for action against personal guarantors to corporate debtors under the IBC. However, these rules were challenged by several prominent businessmen and politicians who were personal guarantors to some of the biggest defaulters in the country. They argued that these rules were arbitrary, discriminatory, retrospective and violative of their fundamental rights.
On November 9, 2023, a bench of Justices L. Nageswara Rao and S. Ravindra Bhat dismissed over 200 petitions that challenged the validity of the 2019 notification and upheld the constitutionality of the IBC provisions on personal guarantors’ insolvency resolution.
The court held that there was no illegality or irrationality in treating personal guarantors differently from other categories of individuals under the IBC. The court observed that personal guarantors have a direct nexus with the corporate debtors and their insolvency resolution process (CIRP). The court also noted that personal guarantors have voluntarily undertaken to pay the debts of the corporate debtors and have benefited from their credit facilities.
The court further held that there was no violation of Article 14 (equality before law) or Article 19 (freedom of trade and profession) of the Constitution by subjecting personal guarantors to insolvency proceedings under the IBC. The court reasoned that there was a reasonable classification based on an intelligible differentia and a rational nexus with the objective of the IBC. The court also rejected the argument that the 2019 notification was retrospective in nature and said that it only applied to existing debts and not to past transactions.
The court clarified that the approval of a resolution plan for a corporate debtor under
the IBC does not extinguish or discharge the liability of a personal guarantor. The court said
that a resolution plan only binds the corporate debtor and its creditors and does not affect
the rights and obligations of third parties such as personal guarantors. The court also said
that a creditor can initiate insolvency proceedings against a personal guarantor either
simultaneously or consecutively with respect to the same debt.
These provisions have significant implications for the resolution of bad debts and
the protection of creditors’ rights in India. They enable creditors to recover their dues from
personal guarantors who have backed some of the largest corporate defaulters in India.
They also strengthen the position of creditors in negotiating with corporate debtors and their
promoters during CIRP. They also increase the accountability and responsibility of personal
guarantors who have often used their influence and clout to evade or delay repayment.
Impact on Stakeholders
The Supreme Court judgment has a direct impact on various stakeholders involved in
the insolvency process, such as creditors, corporate debtors, personal guarantors and their
dependents.
For creditors, especially financial institutions and banks, the judgment is a boon as it
gives them higher leverage to recover their dues from personal guarantors who have backed
some of **the largest corporate defaulters in India**. According to some estimates, there are over
**Rs 1.8 lakh crore worth** of loans backed by personal guarantees in India. Some of the prominent names who are facing insolvency proceedings as personal guarantors include **Anil Ambani,
Sanjay Singal, Kapil Wadhawan, Venugopal Dhoot and Shivinder Singh** . The judgment
creates a dual safety-net for creditors to maximise their recovery by allowing them to pursue
personal guarantors separately from corporate debtors.
For corporate debtors, the judgment may have a mixed impact. On one hand, it may
create pressure on them to settle their debts with creditors or to submit viable resolution plans
during CIRP, as their personal guarantors may also be dragged into insolvency proceedings.
On the other hand, it may also provide them an opportunity to negotiate with creditors and
personal guarantors for a mutually beneficial resolution plan that can protect the interests of
all parties.
For personal guarantors, the judgment is a setback as it exposes them to the risk of
losing their personal assets and income in case of default by the corporate debtors. The
judgment also limits their scope of protection under the IBC as it does not grant them any
discharge or relief from their liability even after the approval of a resolution plan for the
corporate debtor. The judgment also subjects them to the rigours and uncertainties of the
insolvency process, which may affect their reputation and livelihood.
For the dependents of personal guarantors, such as their family members and employees,
the judgment may have a negative impact as it may jeopardise their financial security and
well-being. The judgment may also affect their rights and interests in relation to the personal
assets and income of the personal guarantors, which may be subject to attachment or
liquidation by the creditors or the resolution professional.
Conclusion
The Supreme Court judgment on personal guarantors’ insolvency resolution is a landmark decision that has settled a long-pending legal dispute and has given a boost to the IBC regime in India. The judgment has upheld the constitutional validity and rationality of the IBC provisions on personal guarantors and has affirmed the rights and powers of creditors to recover their dues from them. The judgment has also clarified some of the legal aspects and implications of PGIRP under the IBC. However, the judgment has also highlighted some of the practical difficulties and challenges in implementing PGIRP effectively and efficiently. The judgment has thus opened up new avenues and opportunities for further reforms and improvements in the insolvency law and practice in India.