SC: personal guarantors liable for corporate debt

#GS3 #ECONOMY # INSOLVENCY NORMS 

Context

● The Supreme Court upheld a government move to permit lenders to initiate insolvency proceedings against personal guarantors, who are usually promoters of massive business houses, along side the stressed corporate entities for whom they gave guarantee.

Lenders can recover dues from personal guarantors: Supreme Court - The  Economic Times

Background

  • The November 15, 2019, government notification allowed creditors, usually financial institutions and banks, to maneuver against personal guarantors under the Indian Bankruptcy and Insolvency Code (IBC) was “legal and valid”.
  • The November 15, 2019, notification was challenged before several High Courts initially.
  • The Supreme Court had transferred the petitions from the High Courts to itself on an invitation from the govt .

SC’s Findings

  • There was an “intrinsic connection” between personal guarantors and their corporate debtors.
  • it had been this “intimate” connection that made the govt recognise personal guarantors as a “separate species” under the IBC.
  • it had been again this intimacy that made the govt decide that corporate debtors and their personal guarantors should be addressed by a standard forum - National Company Law Tribunal (NCLT) - through an equivalent adjudicatory process.
  •  during this context, SC mentioned how the November 2019 notification had not strayed from the first intent of the IBC.
  • actually , Section 60(2) of the Code had required the bankruptcy proceedings of corporate debtors and their personal guarantors to be held before a standard forum - the NCLT.
  • The adjudicating authority for private guarantors are going to be the NCLT if a parallel resolution process is pending in respect of a company debtor for whom the guarantee is given.
  •  actually , side by side bankruptcy proceedings before an equivalent forum for both the company debtors and their personal guarantors would help the NCLT “consider the entire picture, because it were, about the character of the assets available, either during the company debtor’s insolvency process, or maybe later”.
  • this is able to facilitate the Committee of Creditors to border realistic plans, keeping in mind the prospect of realising some a part of the creditors’ dues from personal guarantors.
Bankruptcy will not void personal guarantees: Supreme Court - Times of India

Clears misconception

  • The court further corrected a misunderstanding among petitioners that approval of a resolution plan in respect of corporate debtors would also extinguish the liability of the private guarantor.
  • The petitioners, mostly personal guarantors to stressed companies, had argued that an approved resolution plan in respect of a company debtor amounts to extinction of all outstanding claims against that debtor.
  • Consequently, the liability of the guarantor, which is co-extensive thereupon of the company debtor, would even be extinguished.
  • The discharge or discharge of a principal borrower from the debt by operation of law, or thanks to liquidation or insolvency proceeding, doesn't absolve the surety/guarantor of his or her liability, which arises out of an independent contract.

Government’s argument

  • The govt had justified the November 2019 notification extending bankruptcy proceedings to non-public guarantors.
  • Attorney General argued that by roping in guarantors, there was a greater likelihood that they might “arrange” for the payment of the debt to the creditor bank so as to get a fast discharge.

BIASA BASICS 

Personal Guarantors under Insolvency and Bankruptcy Code (IBC)

  •  A private guarantee is presumably to be furnished by a promoter or promoter entity when the banks demand for collateral which equals the danger they're taking by lending to the firm.
  •  The promoters of a number of the large business houses submit a private guarantee to the lenders so as to secure loans easily and effectively and to showcase their intent to repay bank dues on time.
  • it's kind of like an assurance from the owner or the owners of the corporate that the cash borrowed by their company for various purposes shall be re-payed on time as per the agreed schedule.
  •  it's different from the collateral that firms give to banks to require loans, as Indian corporate laws say that individuals like promoters are different from businesses and therefore the two are very separate entities.

Amendment in IBC

  • As per Insolvency and Bankruptcy Code of India (IBC) Amendment Act,2019 a private Guarantor are often sued for recovery of dues by creditors within the NCLT.
  •  Earlier the “Debt Recovery Tribunals“ (DRT) were the adjudicating body and therefore the “National Company law Tribunal” (NCLT) only adjudicated for Corporate Insolvency.
  • But the 2019 IBC Amendment designated NCLT because the adjudicating body for fast and straightforward disposal as under DRT there was no time restraint.
  • A private Guarantor also can approach the tribunal for having himself declared insolvent.
  • Both secured and unsecured debt of the guarantor would be covered under the private Insolvency.
  • The “Fresh Start Process” deals with post clearance of dues with creditors.

 

SOURCE: THE HINDU 

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