In a blow to promoters of several companies facing insolvency action, the SC ruled that personal assets of chairpersons and directors, who stood guarantee for corporate loans from banks that turned into bad debts, would face liability in the resolution process under IBC. A bench of Justices L N Rao and SR Bhat upheld the validity of the November 15, 2019 notification issued by the Centre fastening liability of bad debts on corporate guarantors for loans obtained by their companies, which later failed to pay and went into resolution proceedings under the IBC.
The apex court ruling will help banks go after those who have offered guarantees to recover dues if the resolution amount is short of the claims filed by them in the NCLT. Over the years, many companies have repeatedly defaulted in loan repayment and got banks to restructure the debt, often citing systemic issues. But as part of the clean-up initiated five years ago, the IBC was enacted, and banks were told to go after those who were not paying their dues. The court said NCLT would consider the whole picture, as it were, about the nature of the assets available, either during the corporate debtor's insolvency process or even later. It further said that this would facilitate the CoC in framing realistic plans, keeping in mind the prospect of realising some part of the creditors' dues from personal guarantors.
Justice Bhat said that the 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 the 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 contractor. The bench stated that approval of a resolution plan relating to a corporate debtor does not operate to discharge the liabilities of personal guarantors (to corporate debtors). It is, therefore, clear that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor's liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. 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.
The petitioners had furnished personal guarantees to banks and financial institutions, which led to the release of advances to various companies with which they (the petitioners) were associated with directors, promoters or in some instances, as chairman or managing directors. In many cases, the personal guarantees furnished by the writ petitioners were invoked, and proceedings are pending against companies which they are or were associated with and the advances for which they furnished bank guarantees. In several cases, recovery proceedings and later insolvency proceedings were initiated. The insolvency proceedings are at different stages, and the resolution plans are at the stage of finalisation. In a few cases, the resolution plans have not yet been approved by the adjudicating authority, and in some cases, approvals granted are subject to challenge before the appellate tribunal.
The SC said the resolution proceedings and the committee of creditors under the IBC would now look into the assets of personal guarantors while formulating a resolution plan. The rationale for allowing directors to participate in meetings of the CoC is that the directors' liability as personal guarantors persists against the creditors, and an approved resolution plan can only lead to a revision of the amount of exposure for the entire amount.
Rejecting the plea of petitioners that the November 2019 notification was illegal, arbitrary, and against personal liberty, the bench said 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.
Thus, explaining the ruling, the bench said that thus if A, an individual, is the subject of a resolution process before the DRT and he has furnished a personal guarantee for a debt owed by a company B, in the event a resolution process is initiated against B in an NCLT, the provision results in transferring the proceedings going on against A in the DRT to NCLT.
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