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SC upholds Centre's notification permitting banks to proceed against personal guarantors under IBC

The Supreme Court had transferred the petitions from the High Courts to itself on the request made by the government.

The Supreme Court on Friday upheld a government move to initiate proceedings under the Insolvency and Bankruptcy Code against personal guarantors, usually promoters of big business houses, to corporate debtors facing corporate insolvency resolution process.

In a judgment which will ring loud and clear across the business community, a Bench of Justices L. Nageswara Rao and S. Ravindra Bhat held that the November 15, 2019 notification of the Centre allowing creditors, usually financial institutions and banks, to move against personal guarantors under the Insolvency and Bankruptcy Code (IBC) was “legal and valid”.

The notification of November 15, 2019 invoking IBC against personal guarantors was challenged before several High Courts initially. The Supreme Court had transferred the petitions from the High Courts to itself on the request made by the government.

The court had transferred the cases from the High Courts in October last year, saying the IBC was at a “nascent stage” and the interpretations of the provisions of the Code should be taken up by the apex court to avoid any confusion and to authoritatively settle the law.

The concept of ‘guarantee’ is derived from Section 126 of the Indian Contracts Act, 1872. A contract of guarantee is made among the debtor, creditor and guarantor. If the debtor fails to repay the debt to the creditor, the burden falls on the guarantor to pay the amount owed to the lender. The creditor reserves the right to begin insolvency proceedings against the personal guarantor if the latter does not pay. Usually, promoters of big businesses submit personal guarantees to creditors to secure loans and assure repayment.

Under the notified Rules of November 2019, the IBC provides that where an application for insolvency resolution or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal (NCLT), an application relating to insolvency resolution or liquidation or bankruptcy of a corporate guarantor or a personal guarantor can be filed before the Tribunal. Insolvency resolution, liquidation or bankruptcy proceeding of a corporate guarantor or a personal guarantor of a corporate debtor pending in any court or tribunal should stand transferred to the NCLT.

The IBC envisages reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets and to promote entrepreneurship, availability of credit and balance the interests of stakeholders.

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