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SC upholds personal guarantors cannot be absolved from the liability of corporate debtors under IBC

Upholding the validity of the Centre’s Notification dated 15 November 2019, the Apex court ruled that initiation of an insolvency resolution process for a company does not absolve corporate guarantees given by individuals from paying up their dues to financial institutions.

The Supreme Court observed that 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, Supreme 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 Supreme Court upheld the constitutionality of the Centre’s Notification of 15 November 2019, published in the official Gazette that had allowed financial institutions to pursue proceedings against personal guarantors, commonly promoters, of stressed companies facing insolvency.

A Division Bench of the Supreme Court comprising of Justices Ravindra Bhat and L. Nageswara Rao delivered the ruling, which will enable banks to file personal bankruptcies against personal guarantors, even though the insolvency of companies is yet to be settled.

Reading out the operative part of the verdict, the bench said that the Centre's notification has been held to be "valid" and "legal."

"The approval of resolution plan relating to the corporate debtor does not operate so as to discharge the liabilities of the personal guarantor. Writ petitions dismissed without cost," Justice Ravindra Bhat said during the hearing.

"In the judgment, we have upheld the Notification," Justice Bhat stated while reading out the conclusion of the judgement which decided as many as 75 petitions pertaining to the validity of the notification.

The Apex court's order will clear the decks for lenders to recover their remaining debt from personal guarantors following the conclusion of the Corporate Insolvency Resolution Process (CIRP).

India's top business tycoons including Anil Ambani, Venugopal Dhoot, Kapil Wadhawan and Sanjay Singhal had contested the central government's 2019 notification, which widened the ambit of personal insolvency provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) to include the promoters as well.


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