NEW DELHI: In a blow to promoters of several companies facing insolvency action, the Supreme Court on Friday ruled that personal assets of chairpersons and directors, who stood guarantee for corporate loans from banks that turned into bad debts, would face liability in the resolution process under IBC.
A bench of Justices L N Rao and S R Bhat upheld the validity of the November 15, 2019 notification issued by the Centre fastening liability of bad debts on corporate guarantors for loans obtained by their companies, which later failed to pay up and went into resolution proceedings under the Insolvency & Bankruptcy Code.
The apex court ruling will help banks go after those who have offered guarantees to recover dues in case the resolution amount is short of the claims filed by them in the National Company Law Tribunal.
The ruling will disappoint high-profile petitioners such as Sanjay Singhal and Aarti Singhal of Bhushan Power and Steel, Reliance group’s Anil Ambani, Punj Lloyd’s Atul Punj, infrastructure firm IVRCL’s E Sudhir Reddy and Sabbineni Surendra, the promoter of Hyderabad-based Coastal Projects, who had challenged the validity of the central notification. They had argued that once a resolution plan for the distressed company is approved by NCLT, the personal guarantors stood absolved of their liability.
Companies promoted by them have been part of the insolvency drive initiated by lenders due to a massive pile-up of bad debt. Over the years, many companies have repeatedly defaulted in loan repayment and got banks to restructure the debt, often citing systemic issues. But as part of the clean-up initiated five years ago, the IBC was enacted and banks were told to go after those who were not paying their dues
The State Bank of India, through advocate Sanjay Kapur, had informed the court that the bank or a consortium led 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 1,250 crore).
He had informed the SC that cumulatively, SBI had invoked personal guarantees of corporate guarantors in 16 cases for recovery of nearly Rs 20,000 crore.
The court said NCLT will be able to consider the whole picture, as it were, about the nature of the assets available, either during the corporate debtor’s insolvency process, or even later. “This would facilitate the CoC in framing realistic plans, keeping in mind the prospect of realising some part of the creditors’ dues from personal guarantors,” it said.
Writing the 82-page judgment, Justice Bhat said, “Approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.”
The bench said, “Approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors)… It is, therefore, clear that the 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, this 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 petitioners had furnished personal guarantees to banks and financial institutions which led to release of advances to various companies which they (the petitioners) were associated with as directors, promoters or in some instances, as chairman or managing directors.
In many cases, the personal guarantees furnished by the writ petitioners were invoked, and proceedings are pending against companies which they are or were associated with, and the advances for which they furnished bank guarantees. In several cases, recovery proceedings and later insolvency proceedings were initiated. The insolvency proceedings are at different stages and the resolution plans are at the stage of finalisation. In a few cases, the resolution plans have not yet been approved by the adjudicating authority and in some cases, approvals granted are subject to challenge before the appellate tribunal.
The SC said the resolution proceedings and the committee of creditors under the IBC would now look into the assets of personal guarantors while formulating a resolution plan. “The rationale for allowing directors to participate in meetings of the CoC is that the directors’ liability as personal guarantors persists against the creditors and an approved resolution plan can only lead to a revision of amount or exposure for the entire amount,” it said.
Rejecting the plea of petitioners that the November 2019 notification was illegal, arbitrary and against personal liberty, the bench said, “Parliamentary intent was to treat personal guarantors differently from other categories of individuals. The intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as the possibility of two separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals, for whom the adjudicating authority was common with the corporate debtor to whom they had stood guarantee.”
Explaining the ruling, the bench said, “Thus if A, an individual, is the subject of a resolution process before the DRT and he has furnished a personal guarantee for a debt owed by a company B, in the event a resolution process is initiated against B in an NCLT, the provision results in transferring the proceedings going on against A in the DRT to NCLT.”