personal guarantor ibc supreme court

Similarly, the banks have also moved personal insolvency application against Anil Ambani after two companies promoted by him failed to pay dues on Rs 1,200 crore that they had borrowed from SBI. The Supreme Court in its judgement in Ramakrishnan Case held that guarantors cannot take benefit of Section 133 of the Contract Act and the scaling down of the debt of the principal debtor in terms of the sanctioned resolution plan would not always relieve the guarantor for the remainder debt as the guarantor is bound by the terms of the resolution plan as per Section 31 (1) of the Bankruptcy … In September this year, SBI invoked the personal guarantees submitted by Sanjay Singhal. With the recovery proceedings under the IBC not moving at the pace that it should, the government had always wanted to make promoters of loan defaulters, wilful or otherwise, accountable for their actions when they were at the helm of companies that are now undergoing insolvency resolution. To secure loans easily and effectively and to showcase their intent to repay bank dues on time, the promoters of some of the big business houses submit a personal guarantee to the lenders. The apex court has not only upheld the primacy of financial creditors but also allowed them to go after guarantors for debt that hasn’t been settled under the resolution plan. We combine Bloomberg’s global leadership in business and financial news and data, with Quintillion Media’s deep expertise in the Indian market and digital news delivery, to provide high quality business news, insights and trends for India’s sophisticated audiences. Similar classification of creditors as financial, secured, unsecured, operational etc. Aashish AryanAashish Aryan is a Principal Correspondent With The Indian Express. The arguments in this case were heard by a two-judge bench of Justices L Nageswara Rao and S Ravindra Bhat. This made way for creditors to go after individual promoters and others who stood as guarantors for loans granted to the companies undergoing insolvency proceedings. Industrialists like Anil Ambani, Kapil Wadhawan, Sanjay Singhal, Venugopal Dhoot and 42 others have taken the central government and the insolvency regulator to court. The date of the judgment is not known yet. Bloomberg | Quint is a multiplatform, Indian business and financial news company. Why endemic species can go extinct unless Paris pact goal is met, LIVE: 44 seats go to polls in fourth phase of Bengal polls, Bollywood Rewind | Sahib Bibi Aur Ghulam: Of assertive women and the society that crushes them, Karnan movie review: Dhanush, Mari Selvaraj deliver a profound cinematic experience, Man's Twitter thread on telling parents about girlfriend from different community gets netizens hooked, Man nearly marries wrong woman after Google Map leads him to wrong address, MI vs RCB Report: A proven saviour, and an unexpected one, Wrestlers miss out in Almaty, coach still on the way from Delhi, The virus threatens India’s economic recovery again. Furnishing a personal guarantee in simpler words refers to a situation wherein, a corporate debtor becomes unable to repay the debt, the individual assumes personal liability for the outstanding arrears/dues. List of creditors: A list of creditors shall be prepared by the resolution professional within 30 (thirty) … The very recent similar defaulter is Reliance Communications, wherein SBI invoked Personal Guarantee of Anil Ambani in NCLT Mumbai. This singling out of personal guarantors of corporate debtors violates Article 14—Right to Equality—of the Constitution. Why Personal Guarantors under Insolvency and Bankruptcy Code (IBC) is in the news? A personal guarantee is most likely to be furnished by a promoter or promoter entity when the banks demand for collateral which equals the risk they are taking by lending to the firm, which may not be doing so well. Section 14 of IBC states that after the admission of the insolvency application there shall be moratorium prohibiting instituting of recovery proceedings against the corporate debtor but the section nowhere used the term “personal guarantor” Section 5(22), IBC defines personal guarantor as an individual who is a surety to corporator debtor. The proceedings against Ambani have been stayed for now. It is well settled, he pointed out, that merely because a legislative policy is being implemented in phases, does not render it violative of Article 14. The second key argument of the promoters is vis-à-vis the rights of the creditors. The case is pending and may become a Landmark for cases like recovery of loans from Guarantor, where borrowers failed to repay. A bench of three Judges of the Supreme Court on Thursday decided to transfer to itself a batch of writ petitions filed against provisions concerning personal guarantee under the Insolvency and Bankruptcy Code (IBC) which are pending before various High Courts in the country. Explained: Why is the issue of personal guarantors under IBC in SC? The objects and reasons of the Insolvency and Bankruptcy Code state that once a resolution plan approved by the committee of creditors takes effect, it shall be binding on the corporate debtor as well as the guarantor. Last week, the parties concluded their arguments and the apex court has reserved its judgment in the case. The outcome of the case can affect debt recovery for a number of pending as well as settled cases going as far back as the first insolvency list of the RBI, says Kumar Saurabh, partner at Khaitan & Co., who had advised several clients involved in the matter. Join our, Submission by the Solicitor General of India. First, that the debt of a personal guarantor co-exists with the corporate debtor and once the insolvency process is complete for either of the two, the creditor’s claim will cease to extinguish. Under the Insolvency and Bankruptcy Code, 2016, the treatment of liability of personal guarantor has been emerged with time due to various contradicting views and opinions taken up by tribunals and courts. Though the National Company Law Appellate Tribunal (NCLAT) has, in the past, held that corporate insolvency can not be initiated twice for the same set of default, banks have argued that apart from getting the appropriate bids for debt-laden companies, owners who have been declared to be wilful defaulters should also be held liable and their personal guarantees be invoked. The Supreme Court observed that a separate moratorium is applicable in the case of personal guarantors under Sections 96 and 101 of the IBC. But, it cannot operationalise portions of a part of the code or make them applicable only to a select class, they’ve stated. Reason being there is no rational basis that can justify the singling out of personal guarantors from others. Second, granting the opportunity to creditors to pursue two remedies for the same debt may give rise to a possibility of unjust enrichment. What are the issues under challenge in these cases? What is the decision of the Supreme Court? The use of the word ‘provision’ gave the section a wide ambit and allowed the central government to operationalise provisions of the Code in the manner it did for personal guarantors. Personal Guarantors Can’t Be Singled Out, Promoters Say. 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Their gripe? The Supreme Court on Friday transferred to itself all the petitions challenging the Insolvency and Bankruptcy Code (IBC) provisions relating to initiation of insolvency proceedings against personal guarantors. The promoters have argued that the power under Section 1(3) does not allow the central government to make Part III applicable selectively to personal guarantors of corporate debtors. A view of the Supreme Court (Source: PTI). The SBI has sought the Supreme Court view on whether the liability of a personal guarantor of a company under insolvency resolution process can … If the court were to accept the argument of the petitioners, it would result in reading down of the section as well as the IBC, he submitted. The High Court of Delhi has explained that the proceedings would proceed regarding the corporate debtor and while dealing with these proceedings, the obligation of the personal guarantor may also be analysed. Personal Guarantors Can’t Be Singled Out, Promoters Say At the heart of the case is interpretation of Section 1 (3) of IBC. On September 6, 2017, the Allahabad High Court in the case of Sanjeev Shriya vs. State Bank of India (“Sanjeev Case”) decided the question of the liability of personal guarantors of a company where moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC“) is in force. That the manner in which personal insolvency provisions for guarantors were notified in 2019 was unconstitutional. Personal guarantors under bankruptcy and insolvency laws refers to an individual who is the surety in a contract of guarantee to a corporate debtor [1]. Industrialists like Anil Ambani, Kapil Wadhawan, Sanjay Singhal, Venugopal Dhoot and 42 others have taken the central government and the insolvency regulator to court. What is Joe Biden's radical tax proposal? 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But don’t panic yet, Prince Philip passes away: Some unseen pictures and anecdotes from his life, Asus ROG Phone 5 review: A dream smartphone for mobile gamers, Every single time Rahul Dravid screamed, he would say, ‘Why am I doing this? Suspension of IBC also plays a vital role in such invocation of Personal Guarantee. The apex court will now hear on December 2 the pleas challenging the Insolvency and Bankruptcy Code provisions relating to initiation of insolvency proceedings against personal guarantors. Hell hath no fury like the targeted Personal Guarantors; with the 15 th November 2019 notification [1] that was brought into force on 1 st December 2019 by the Central Government of India under the Insolvency and Bankruptcy Code 2016 (“ IBC ”). One of the major contentions is that if insolvency tribunals start accepting the plea of banks on personal insolvency, it could lead to the initiation of insolvency twice for the same debt. The safeguards provided under the IBC, the SG said, ensure that in the second claim the amount received is proportionately reduced to the value which the creditor has already received in the first. Express Explained is now on Telegram. In December 2019, the government came out with a new provision that empowered banks to move an application for initiation of insolvency against personal guarantors to corporate debtors. Third, on the argument of violation of Article 14, the SG defended the notification saying it made a reasonable classification. But the notification split up this category by enforcing the provisions to only personal guarantors of corporate debtors, they’ve said. What happens to promoters or personal guarantors after these insolvency petitions? It is different from the collateral that firms give to banks to take loans, as Indian corporate laws say that individuals such as promoters are different from businesses and the two are very separate entities. The principle of ‘‘double dip’’ which allows a creditor to recover debt from two different proceedings is well recognised internationally. Their gripe? The Supreme Court today reserved its order in a batch of petitions filed by the Insolvency and Bankruptcy Board of India (IBBI) seeking … The new rules and regulations will allow creditors to simultaneously proceed against the principal borrower, i.e. What To Expect? So why is the issue of personal guarantee and guarantors in the Supreme Court? the company, and the personal guarantor before National Company Law Tribunals. At the heart of the case is interpretation of Section 1(3) of IBC. Rule 3 (e) of Personal Guarantor Rules: “debtor who is a personal guarantor to a corporate debtor and in respect of whom guarantee has bee invoked by the creditor and remains unpaid in full or part” A "contract of guarantee " is a contract to perform the promise, or discharge the liability, of a third person in case of his default. under IBC has been upheld by the apex court, Mehta added. The Supreme Court, in State Bank of India v. V. Ramakrishnan, observed that liability of the personal guarantors is not extinguished upon approval of the resolution plan. Ltd v Satish Kumar Gupta, again got the opportunity to deal with this issue as the financial creditors of Essar Steels proceeded against the personal guarantor to recover the outstanding debt.However, instead of delving into the issue, the court preferred not to touch upon it. IBC To Come Back To Life Again. Explained: Why has OYO moved NCLAT challenging insolvency plea against a subsidiary? The Supreme Court (SC) has decided to transfer a batch of petitions challenging the Insolvency and Bankruptcy Code (IBC) provisions relating to personal guarantee to itself from various high courts (HCs). While it applies to partnerships and individuals, the government had operationalised the provisions in November 2019 only for personal guarantors. Recently, the Supreme Court on Friday transferred to itself all the petitions challenging the Insolvency and Bankruptcy Code (IBC) provisions relating to initiation of insolvency proceedings against personal guarantors.. What is a personal guarantee? IBC provisions on insolvency of personal guarantor: Supreme Court expresses inclination to transfer all petitions to itself, reserves order. After a brief hearing on the issue of transfer, the Court reserved its order while expressing its inclination to allow the plea. This implies that the liability of a guarantor is immediate and is not deferred until the creditor exhausts its remedies against the principal debtor. Combine that with the personal guarantors’ insolvency regime effective from Dec. 1, and creditors can hope for a much higher and faster recovery of their dues. The court noted that the law as it stands does not refer to the personal guarantor but only to corporate debtors. Finally, the petitioners’ apprehensions of unjust enrichment by the creditors through two different proceedings is unfounded, he pointed out. For instance, in June last year, State Bank of India took to the National Company Law Tribunal, Mumbai to recover more than Rs 1,200 crore from Anil Ambani as he had given a personal guarantee for loans extended to Reliance Communications Ltd. and Reliance Infratel Ltd. The Apex Court, while adjudicating upon the case of Committee of Creditors of Essar Steel India Pvt. Due to this, an amendment was brought in Section 14 [iv] of the Insolvency and Bankruptcy Code, 2016, by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 … Under these rules, if insolvency proceedings against a corporate debtor under the Insolvency and Bankruptcy Code are already in process, the same bench of the bankruptcy court would also deal with the … However, any or all assets mentioned in the list provided at the time of sanctioning of the loan, even if transferred to someone else, can also be attached and sold. The new provision, however, was challenged by as many as 19 promoters before different high courts, claiming that it was always a management board that ran the company and, therefore, the promoters alone should not be held liable for the default on debt repayment. Soon after, several promoters approached various high courts challenging the government’s notification. For all the latest Explained News, download Indian Express App. Here, they’ve raised two main concerns: There Was A Valid Exercise Of Powers, Government Argues. PERSONAL GUARANTOR UNDER IBC. Therefore, in order to ensure that maximum recovery could be made for lenders along with the resolution of debt of companies, the Finance Ministry nudged banks to also pursue personal insolvency cases against promoters who had furnished personal guarantees for the loans taken by their firms, which later was not re-payed as per the agreed schedule. A similar constitutional challenge to the Employee State Insurance Act being implemented at different points in time for different parts of the state of Bihar was dismissed by the apex court, Mehta pointed out. 1, the Court has held that the principal borrower need not be a 'corporate person' for insolvency process to be initiated against a company which stood as its guarantor, under the Insolvency and Bankruptcy Code, 2016 ("IBC"). Click here to join our channel (@indianexpress) and stay updated with the latest headlines. Missing BloombergQuint's WhatsApp service? NEW DELHI: Spelling trouble for industrialists whose personal guarantees helped corporate entities owned by them get huge loans only to later default, the Supreme Court has ruled that banks can act against guarantors even as proceedings under the Insolvency and Bankruptcy Code are on. The Supreme Court on Tuesday ruled that banks can sell off assets of personal guarantors even when corporate resolution proceedings are … The apex court will now hear on December 2 the pleas challenging the Insolvency and Bankruptcy Code provisions relating to initiation of insolvency proceedings against personal guarantors. First, he called the petitioners’ interpretation of Section 1(3) as ‘hypertechnical’. An RP, if the insolvency application is filed personally by the Guarantor or … In a recent judgment delivered by the Supreme Court of India ("Court") in Laxmi Pat Surana vs. Union Bank of India & Anr. Second, the larger power to enforce provisions of the code subsumes within itself the power to extend it to certain categories with the only limitation that it should not alter the character of the law. This prompted the insolvency regulator to approach the Supreme Court, which transferred all the cases to itself in October 2020. The protection of moratorium under these provisions is … In cases of most big companies that were in the Reserve Bank of India’s list for being big defaulters, the actions of erstwhile promoters have been under the lens of the government as well as its probe agencies. He... read more, * The moderation of comments is automated and not cleared manually by, Copyright © 2021 The Indian Express [P] Ltd. All Rights Reserved. Ambani had given personal guarantees against these loans. There is also a risk of the stigma of insolvency as some of them may be staring at a possibility of being declared insolvent within months, Saurabh added. Before the Supreme Court, the personal guarantors mainly contended as follows: Section 60 (2) of the IBC provides that where the insolvency proceeding of a corporate debtor is pending before the NCLT, an application relating to insolvency resolution or bankruptcy of a personal guarantor of such a corporate guarantor will also be before NCLT. The government was within its rights to bring in force sections, chapters or parts of IBC. In Industrial Investment Bank v. BishwanathJhunjhunwala it was held that liability of a guarantor and principal debtor are co-extensive and not alternative. The personal insolvency provisions apply to individuals and partnership firms as a whole. 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