Summary:
In a significant ruling, the Honourable Supreme Court of India has disallowed personal guarantors of loans from obtaining relief under the Insolvency and Bankruptcy Code, 2016 (IBC). The Court dismissed a set of petitions, including those filed by former promoters such as Anil Ambani, Venugopal Dhoot, and Sanjay Singal, challenging the initiation of personal insolvency proceedings against them. This decision, seen as a pivotal judgment, is anticipated to expedite the bankruptcy process by enabling banks to initiate insolvency proceedings against personal guarantors without affording them a pre-opportunity to present their stance.
Key Points:
- The Supreme Court upheld the provisions of the IBC, asserting that they do not suffer from arbitrariness, thereby dismissing contentions raised by the petitioners regarding the absence of due process and the violation of natural justice principles.
- The Court emphasized that the IBC cannot be considered retroactive and, thus, does not violate the constitution. It specifically stated, “Thus, we hold that the statute does not suffer from the vices of manifest arbitrariness.”
- The central government, in November 2019, amended the bankruptcy law, allowing for personal insolvency cases against guarantors of corporate entities failing to meet their financial obligations.
- The judgment now permits smooth insolvency proceedings against personal guarantors, removing legal impediments.
- Personal guarantees by promoters of high-debt companies are common, and this ruling affects figures like Anil Ambani, Sanjay Singal, Arti Singal, and Venugopal Dhoot.
- The Supreme Court rejected pleas for an adjudicatory process before the appointment of a resolution professional (RP) under Section 97 of the IBC, stating that this would render other sections of the IBC meaningless.
- Adjudication under Section 99 begins at the admission or rejection stage, and the RP’s role is that of a facilitator without adjudicatory powers.
- The Court accepted the government’s position that the IBC provisions imposing a stay on legal proceedings against corporate debtors aim to protect the debtor from legal actions related to debt.
- The Supreme Court had previously transferred personal insolvency cases from various high courts to itself in October 2020.
- The petitioners had challenged the validity of specific IBC provisions applicable to personal guarantors, alleging arbitrariness, unconstitutionality, and a violation of fundamental rights.
- The Court held that the moratorium under Section 96 is protective, primarily safeguarding the corporate debtor from legal actions related to debt.
- The impugned provisions were alleged to be susceptible to abuse, as they did not mandate the National Company Law Tribunal (NCLT) to provide an opportunity for alleged debtors to be heard or raise objections on various issues.
In essence, the Supreme Court’s ruling has far-reaching implications, allowing banks to initiate insolvency proceedings against personal guarantors without preliminary hearings, thus streamlining the bankruptcy process.
