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PERSONAL GUARANTOR AND THE VALIDITY OF PART III OF INSOLVENCY AND BANKRUPTCYCODE

Author: Almas Fatima, BA.LLB (H) from Jamia Millia Islamia



The Insolvency and Bankruptcy Code ("IBC") had attracted the interests of NPA-loaded Indian Banks, enterprisers (Indian and International), and professionals and lawyers alike. However, it was hit by difficulties and complexities in its interpretation and enactment like any other law in its initial stage. Yet, with the number of patterns setting choices conveyed by the legal precedent combined with felicitous revisions to the Code, a considerable lot of IBC's teeth issues have been explained or removed.


On November 15, 2019, the Indian government informed the initiation of Part III of the Insolvency and Bankruptcy Code, 2016 (IBC), which provides for the insolvency resolution process for individuals and corporates. The significant provisions to the extent that they identify with personal guarantors of corporate debtors came into force on December 1, 2019. According to this notification, creditors are now allowed to initiate bankruptcy procedures against a personal guarantor of a corporate debt holder if the guarantor neglects to respect its commitments despite an interest being raised.


An application to initiate insolvency against a Personal Guarantor can be made by the borrower, or a creditor either independently or all in all alongside other creditors; or through a resolution professional. This operation of commencement of insolvency is indistinguishable from that of a corporate debtor.


The Government established a new provision that enabled banks to move an application to initiate insolvency against personal guarantor to corporate borrowers. Accordingly, to guarantee that utmost recovery could be made for lenders alongside the resolution of debt of companies, the Finance Ministry pushed banks to also seek after personal insolvency cases against promoters who had furnished personal guarantees for the advances taken by their organizations, which later was not re-payed according to the agreed plan


THE VALIDITY OF THE PROVISIONS

These IBC arrangements have come into concentrate as of late as the State Bank of India (SBI) looked to authorize the personal guarantors (Guarantees) issued by Anil Ambani (Guarantor) to secure the debts of Reliance Communications Limited (RCOM) and Reliance Infratel Limited (RITL). This update examines the order passed by the National Company Law Tribunal (NCLT) in this matter and the ensuing appellate proceeding initiated under the watchful eye of the Delhi High Court.


In the above case Anil Dhirajlal Ambani v. State Bank of India, W.P. (C) 5712/2020, dated 27 August 2020, Mr. Anil Ambani challenged the validity of provisions relating to personal guarantee and bankruptcy, passed by the Government of India in the year 2019, and questioned whether was an arrangement under the IBC for such a request to be passed by the NCLT. Advocates for Mr. Anil Ambani had alluded to a prior request of a similar seat of the Delhi High Court, wherein a stay on personal insolvency procedure was conceded to Mr. Lalit Kumar Jain over a comparative personal guarantee, guaranteeing that personal bankruptcy proceedings under IBC were ultra vires.[i]

In the said matter SBI documented the insolvency application to secure its interests as Section 96 of the IBC provides the levying of an interim moratorium promptly upon the filing of the application. Further, given the deferral brought about by the Covid-19 pandemic and the subsequent lockdown in India, SBI appealed for the urgent appointment of a resolution professional.


Accordingly, the Guarantor contended that SBI's urgency was not well established as an interim moratorium was already in force. Given this, SBI's interests were ensured and the Chinese banks couldn't control the Guarantor's assets. Besides, the Guarantor contended that the process of finalizing the insolvency resolution plans for RCOM and RITL was at that point already in progress and post-implementation thereof, the organizations would have the option to reimburse the Facilities. Given this, the Guarantor's commitments would stand released, and hence, there was no earnestness in the matter.


Relying on a past decision of the Supreme Court, the NCLT saw that Section 60(2) of the IBC grants the synchronous commencement of insolvency proceedings against, both, the corporate debtor and the personal guarantor. Given this, the NCLT held that it is misleading to expect that no action could be made against the personal guarantor while the resolution plans submitted regarding the corporate debtor were being considered. Further, the NCLT additionally relied on established provisions regarding the law of guarantees to hold that a creditor's right of action against a guarantor is protected regardless of whether the principal debtor is released from his liability except if such discharge is through an act of the creditor which takes place without the consent of the guarantor.


The NCLT additionally observed that when an insolvency application is filed against a personal guarantor, Section 97 of the IBC requires the NCLT to issue a direction under 7 days to the IBBI for the proposal of the resolution professional.


The High Court of Delhi has explained that the proceedings would proceed regarding the corporate debtor and while dealing with these proceedings, the obligation of the personal guarantor may also be analysed. In any case, the proceedings against the personal guarantor under Part-III of IBC will remain.

Further, the IBBI had filed the different Transfer Petitions under Article 139 (A) read with Article 142 of the Constitution of India to move the Writ Petitions recorded under different High Courts to Hon'ble Supreme Court to evade the turmoil brought about by conceivable difference of opinions communicated by the High Courts.


A full bench of the Hon'ble Supreme Court heard the matter and expressed that the IBC is at an early stage and it is better than the understanding of the provisions of the Code is taken up by this Hon’ble Court to avoid any uncertainty, and to settle the law.


Accordingly, the Hon'ble bench directed the Writ Petitions pending before the High Courts to be transferred to it. It also ordered that no Writ Petitions challenging part III of the Insolvency and Bankruptcy Code, 2016 regarding personal guarantors to corporate debtors shall be entertained by any High court. However, any interim orders passed by the High Courts shall pursue.


CONCLUSION

The Insolvency Process for the Personal Guarantors has numerous questions unanswered and one of the critical inquiries is the concurrent cases under both the provisions of Personal Guarantor Insolvency and the Insolvency proceeding of a Corporate Debtor. Furthermore, legal points of reference will explain with regards to how the creditor can avail dual claims and how it very well might be set off against every proceeding.


One of the major concerns is that the timelines between the proceedings of the personal guarantor and the Corporate Insolvency of the Corporate Debtor are substantially different. On the off chance that there is a synchronous proceeding then the personal guarantor should endure the hard shot of the repayment while the Corporate debtor undergoes through the CIRP and accordingly Liquidation, which is a more extended cycle. It is a defective framework if the personal guarantor will have to give away their assets for the organization even before the Organization has gotten an opportunity to go into a systematic resolution. Another perspective for thought is that the insolvency process is to rebuild the corporate body and not a cash recuperation system. Nonetheless, the enactment of the provisions relating to Personal Guarantor Insolvency is contrary to this principle.


Significantly, the businesses understand the connotation of this new law and its process at the earliest to keep away from harms that happened to a decent number of organizations at the beginning of the corporate insolvency system wherein great organizations were conceded into bankruptcy and insolvency because of obliviousness towards the law.


[i]Lalit Kumar Jain v. Union of India Ministry of Law and Justice & Ors., W.P. (C) 4849/2020.


Author's Biography

Almas Fatima, a 2020 BA.LLB (H) graduate from Jamia Millia Islamia, New Delhi and enrolled with the Bar Council of Delhi. She has a keen interest in the General Corporate field of law with an inclination towards company law and insolvency and bankruptcy code.

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