The Supreme Court on Friday held that the Centre’s notification of November 15, 2019, which allowed financial institutions to proceed against individual corporate guarantors for recovery of loans of a company under Insolvency and Bankruptcy Code (IBC) proceedings, “is legal and valid”.
A bench of Justices L. Nageswara Rao and S. Ravindra Bhatt said: “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.”
In the 82-page judgment, the top court said 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,” it said.
A batch of 75 petitions had challenged the validity of this notification, which brought into force provisions of Part III of the IBC, extending insolvency and bankruptcy for individuals and partnership firms to the promoters too. Several industrialists had challenged the 2019 notification.
The petitioners contend that the power conferred upon the Union under Section 1(3) of the Insolvency and Bankruptcy Code, 2016 could not have been resorted to in the manner as to extend the provisions of the Code only as far as they relate to personal guarantors of corporate debtors. They argued that the Centre has no authority – legislative or statutory – to impose conditions on the enforcement of the Code. They further contended as a corollary, that the enforcement of Sections 78, 79, 94-187 etc. in terms of the impugned notification of the code only in relation to personal guarantors is ultra vires the powers granted to the Centre.
But, the top court said: “It is 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.”
It noted that there is sufficient indication in the IBC, by Section 2(e), Section 5(22), Section 60 and Section 179 indicating the 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.
“However, this court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability,” said the bench.
“The impugned notification, similarly inter alia, makes the provisions of the Code applicable in respect of personal guarantors to corporate debtors, as another such category of persons to whom the Code has been extended. It is held that the impugned notification was issued within the power granted by Parliament, and in valid exercise of it. The exercise of power in issuing the impugned notification under Section 1(3) is therefore, not ultra vires; the notification is valid.”
The top court added the adjudicating authority for personal guarantors will be the National Company Law Tribunal, if a parallel resolution process or liquidation process is pending in respect of a corporate debtor for whom the guarantee is given.