On Friday, the Supreme Court ruled that the personal properties of chairpersons and directors who stood guarantee for corporate loans from banks that turned into bad debts would be subject to liabilities in the resolution process under the IBC, dealing a blow to promoters of many corporations facing insolvency action.
The relevance of the Centre’s November 15, 2019 notification fastening responsibility for bad debts on corporate guarantors for loans secured by their firms that later failed to pay up and went into restructuring proceedings under the Insolvency and Bankruptcy Code was affirmed by a bench of justices L N Rao and SR Bhat.
The Supreme Court’s decision would aid banks in pursuing those that have proposed guarantors about the claim. The State Bank of India had told the court via advocate Sanjay Kapur that the bank or a group headed by SBI had initiated proceedings against Singhals (Rs 12,276 crore), Punj (Rs 3,400 crore), Surendra (Rs 2,130 crore), Ambani (Rs 1,900 crore), and Reddy (Rs 1,900 crore) (Rs1,250 crore).
In 16 proceedings, he told the Supreme Court, SBI had used personal guarantees of corporate guarantors to recover Rs20,000 crore. NCLT would be entitled to see the whole scenario, as it is, of the existence of the properties available, even though the corporate debtor’s insolvency proceedings or even afterwards, according to the court. This will make it easier for the CoC to make concrete arrangements, possibly recovering any of the creditor’s debts from personal guarantors.
The SC stated that when formulating a resolution agreement, the resolution proceedings and the IBC committee of creditors will now look at the properties of personal guarantors. “The reason for urging directors to attend CoC meetings is that the directors’ role as personal guarantors against creditors continues, and a negotiated settlement deal will only result in a modification of the resolution plan for disclosure of creditors, and a reached resolution agreement will only result in a review of the resolution plan for exposure of creditors.”
“Parliamentary goal was to regard personal guarantors differently from other groups of individuals,” the bench said, rejecting petitioners’ claims that the November 2019 notification was unconstitutional, unreasonable, and against personal liberty. Personal guarantors were created as a separate species of individuals, with adjudicating authority shared with the corporate debtor to whom they had proclaimed. The prospect of two separate proceedings being carried out in various forums, with unclear results, led to the creation of personal guarantors as a distinct species of individuals, with adjudicating authority shared with the corporate debtor to whom they had ordained.
Thus, where an applicant is the target of a settlement process before the DRT, and he has given a personal pledge for a debt owing by a corporation B, the clause results in moving the litigation against A in the DRT to the NCLT if a resolution process is launched against B in an NCLT.”