Personal Guarantors accountable in IBC: Supreme Court

 The Supreme Court on Friday upheld a government notification of 2019 to invoke personal guarantees of promoters whose companies defaultedon bank loans.

 The ruling will allow banks to file personal bankruptcies against top Indian promoters whose companies have been sent to the National Company Law Tribunal (NCLT)for debt resolution.

The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 and the government amended the IBC in November 2019 and gave additional powers to lenders to invoke the personal guarantees of defaulters.

Lenders have invoked the personal guarantees of companies including Bhushan Steel,Bhushan Power and Steel, Punj Lloyd, and Reliance Communications, which were sent to the NCLT for defaulting on bank loans.

Some of these promoters have moved high courts across India when banks started invoking their personal guarantees. The Supreme Court later transferred all the cases to itself following petitions from Indian lenders.

In its order the Supreme Court Bench, led by Justice L Nageshwara Rao and Justice S Ravindra Bhat, held that approval of a resolution plan did 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,” the bench wrote in its order.

The law will be prospective from December 1, 2019, and will be applied to those cases which were invoked after that date.