Individual guarantors to face insolvency proceedings along with firms

New Delhi, May 22 (PTI): In a significant verdict, the Supreme Court has held that individual guarantors to corporate loans will also undergo insolvency proceedings along with firms under the Insolvency and Bankruptcy Code (IBC) and they are not absolved of liabilities even after resolution plans to revive the sick companies are approved.
The verdict, upholding Centre’s November 15, 2019 notification bringing personal guarantors of corporate debtors under the net of the IBC, assumes significance in view of the fact that various high-profile industrialists may now face insolvency proceedings along with their debt-ridden firms under the IBC.
Lenders had last year filed bankruptcy cases against promoters of alleged delinquent companies including Reliance Group’s Anil Ambani, Dewan Housing Finance Corp Ltd.’s Kapil Wadhawan and Bhushan Power and Steel Ltd.’s Sanjay Singhal. The cases were however stayed on appeals filed in higher courts.
A bench comprising justices L Nageswara Rao and S Ravindra Bhat held that approval of the resolution plan for revival of sick companies under the IBC does not discharge personal guarantors of their liability to pay back banks or financial institutions (FIs) as they are bound by separate contracts.
It is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract, Justice Bhat, writing the judgement for the bench, said.
The top court also permitted simultaneous insolvency proceedings against corporate guarantors before National Company Law Tribunals (NCLTs).
It is held 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, the 82-page judgement said.
Now if a corporate debtor faces insolvency proceedings then the same proceedings can be triggered against individual guarantors too, it said.
Likewise, a personal guarantor to a corporate debtor, facing insolvency, can be subjected to insolvency proceedings. All this is to be resolved and decided by NCLT. In other words, the amendment by Section 60(2) too achieved a unified adjudication through the same forum for resolution of issues and disputes concerning corporate resolution processes, as well as bankruptcy and insolvency processes in relation to personal guarantors to corporate debtors, the verdict said.