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"Demystifying the Responsibilities of Personal Guarantors in Bankruptcy and Insolvency Cases"

In what will be seen as a landmark judgment in the Insolvency and Bankruptcy Code, 2016 regarding personal guarantors, the Supreme Court in Surendra B. Jiwrajika and Anr. vs. Omkara Assets Reconstruction Private Limited upheld the constitutionality of the provisions under sections 95 to 100 of the Insolvency and Bankruptcy Code, 2016. “Personal Guarantor” under Section 5(22) of IBC means an individual who is the surety in a contract of guarantee to a corporate debtor. In situations where a corporate debtor is unable to fulfill its financial obligations towards a creditor, the guarantor of the debt steps in to take responsibility for making the necessary repayments. The guarantor acts as a safety net, ensuring that the creditor is not left with unpaid debts in the event of the debtor's failure to meet their financial commitments. Sections 95 to 100 of the IBC deal with the initiation of insolvency proceedings against a debtor by his/her creditor(s). A huge sum of three hundred and eighty-four writ petitions were filed under Article 32 of the Constitution of India challenging the constitutionality of Sections 95 to 100 of the IBC.

 

Background and contentions

Subsequent to the Insolvency and Bankruptcy (Second Amendment) Act 2018 and Notification No. SO 4126 dated 15 November 2019, it has been stipulated that all personal guarantors of a corporate debtor can be subjected to insolvency proceedings directly, without the need for creditors to primarily initiate the proceedings against the debtor. This essentially means that if a corporate debtor defaults on its debts and its personal guarantors have provided a guarantee for the same, those guarantors can now be directly pursued for insolvency. This move aims to strengthen the insolvency process by ensuring that personal guarantors are held accountable for their obligations and that creditors have a better chance of recovering their dues. The petitioners contended that Sections 95 to 100 of the IBC were against the principles of natural justice. They argued that no opportunity was given to the personal guarantors of the corporate debtor to present their case against the appointment of a Resolution Professional. This would make the provisions arbitrary and violate Article 14 and Article 21 of the Constitution of India. It has been contended that the regulations governing the IBC are not in line with the due process of law when it comes to personal guarantors as compared to corporate debtors. The petitioners also argued that the resolution professional has an adjudicatory function while reporting its recommendations for either approval or rejection of the application by the Adjudicating Authority.

 

The decision

A three-judge bench led by Chief Justice D.Y Chadrachud with Justice J.B Pariwala and Justice Manoj Mishra upheld the constitutionality of the said sections 95 to 100 of IBC which allowed the creditors of the corporate debtor to initiate insolvency proceedings against an individual as well as partnership firm debtors. The court held that there is no violation of natural justice under Section 95 to Section 100 of IBC as the debtor is not deprived of an opportunity to participate in the process of the examination of the application by the resolution professional. The court has held that not giving an opportunity to be heard to the personal guarantors during the appointment of a resolution professional is not unconstitutional as the application of the principle of natural justice varies from case to case. The bench observed the following:

“When interpreting Part II of the IBC, the Courts have inferred the necessity of granting an opportunity to a debtor before initiating the insolvency resolution process against them. This includes the provision of a copy of the application and all relevant documents. Although Section 100 of the IBC does not explicitly mention a hearing for a debtor, the requirement of a hearing has to be read into Section 100. In legal interpretation, when a statute is silent on a specific aspect, like a hearing, and there is no explicit prohibition, the courts may imply or read in such a requirement. The key point is that the lack of explicit mention of a hearing in a provision does not automatically make it unconstitutional because such a requirement can be read into the statute.”[1]


The court was of the opinion that the resolution professional didn’t have any adjudicatory function nor impose any binding conclusion on the corporate debtor or the creditor. It was held that the report after examination of the application for the commencement of the insolvency proceedings under Section 95 by the Resolution Professional appointed under Section 97 is recommendary in nature and does not bind the adjudicating authority when it exercises jurisdiction under Section 100 of IBC.

The court also dismissed the petitioner’s plea to add an adjudicatory stage during the appointment of a resolution professional. The bench was of the view that an introduction of an additional adjudicatory stage could cause delays and complexities to the code. The court clarified that the whole purpose of an interim moratorium under section 96 is to protect the interest of the debtor and to stop further legal proceedings against the debtor.

 

Conclusion

This decision by the Apex Court gave a clear picture of the vulnerability of the personal guarantors to the insolvency resolution process under IBC. Now onwards the personal guarantors will be on guard as to the debtors they are guaranteeing.  This judgment has benefited the creditors a lot as they can now be less worried about the money they are lending as the debtor as well as their personal guarantors can be taken to insolvency proceedings if there is any default in the payment. It depicts the two sides of the coin where the personal guarantors will be more cautious, and at the same time, the creditors will be more confident.


This verdict of the Supreme Court regarding personal guarantor insolvency is expected to have significant implications. It simplified the resolution process for lenders and brought clarity to the legal framework. The ruling also helps in resolving pending cases swiftly. Moreover, it enables lenders to pursue their claims more efficiently without any legal ambiguities or delays. Overall, this verdict is a positive development for the economy and the financial sector as it reinforces the rule of law and promotes a stable and transparent business environment.

 

 Adv. Niketh Vinod Jr Associate, Artis Law House

 


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24. Feb.
Mit 4 von 5 Sternen bewertet.

Good one👌

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