Home Judgments & Orders Supreme Court Supreme Court Upholds IBC Provisions On Insolvency Of Personal Guarantors

Supreme Court Upholds IBC Provisions On Insolvency Of Personal Guarantors

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The Supreme Court on Friday upheld provisions of the Insolvency and Bankruptcy Code (IBC) related to insolvency of personal guarantors brought in by the Union Government in 2019. The ruling will now allow banks to file personal bankruptcies against Guarantors of companies even when the insolvency of firms is yet to be resolved.

A batch of petitions had challenged the validity of the notification dated 15.11.2019 enforcing specific provisions Code, related to insolvency of personal guarantors. The Supreme Court had earlier transferred all the petitions to itself in October last year.

A Division Bench comprising Justice L Nageshwara Rao and Justice Ravindra Bhat said that, “It is clear from the above analysis that Parliamentary intent was to treat personal guarantors differently from other categories of individuals. The intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as the possibility of two separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals, for whom the Adjudicating authority was common with the corporate debtor to whom they had stood guarantee. The fact that the process of insolvency in Part III is to be applied to individuals, whereas the process in relation to corporate debtors, set out in Part II is to be applied to such corporate persons, does not lead to incongruity.”

The bench also held that the impugned notification is not an instance of legislative exercise, or amounting to impermissible and selective application of provisions of the Code. There is no compulsion in the Code that it should, at the same time, be made applicable to all individuals, (including personal guarantors) or not at all. There is sufficient indication in the Code- by Section 2(e), Section 5(22), Section 60 and Section 179 indicating that personal guarantors, though forming part of the larger grouping of individuals, were to be, in view of their intrinsic connection with corporate debtors, dealt with differently, through the same adjudicatory process and by the same forum (though not insolvency provisions) as such corporate debtors.

The Court further noted that, “the impugned notification is legal and valid. It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors). The writ petitions, transferred cases and transfer petitions are accordingly dismissed in the above terms, without order on costs.”

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