The Supreme Court has granted banks and other financial creditors the liberty to start recovery proceedings against the promoters of insolvent companies who had provided personal guarantees for loans to these entities.

The decision — which upheld a notification issued on November 15, 2019 amending the IBC Code with the introduction of the relevant proviso — comes as a massive setback to Anil Ambani, Kapil Wadhawan and around 70 other promoters who now will have to brace for action from the lenders.

A bench comprising Justices L. Nageswara Rao and S. Ravindra Bhat held that the approval of the resolution plan under IBC does not discharge the personal guarantors of their liability towards the banks.

In over a dozen cases, several industrialists stood personal guarantors for their own corporate entities for availing huge loans from public and private sector banks. But after the corporate entities turned insolvent, the personal guarantors pleaded they cannot be fastened the liability in the insolvency proceeding by the creditors before the National Company Law Tribunal (NCLT).

It was their argument that their liability to pay the debt as personal guarantors for the corporate debtors stood extinguished once the insolvency and bankruptcy proceeding commenced before the NCLT.

Moreover, it was argued that any recovery proceedings for the guarantee can at best be challenged before the debt recovery tribunal dealing with individuals and partnership firms.

Hence, the industrialists-cum-personal guarantors challenged the notification of November 15, 2019, issued by the central government making them liable for the debt as being unconstitutional.

There were multiplicity of petitions challenging the notifications in different high courts.

The matter was transferred to the Supreme Court early this year for an authoritative pronouncement.

Several top banks such as the SBI which had extended loans running into several thousands of crores had supported the central legislation and insisted that the personal guarantors ought to be saddled with the debt and had already initiated the process of revoking the guarantee.

While dismissing the batch of petitions filed by the industrialists, the bench said: “It is held that 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. For the foregoing reasons, it is held that the impugned notification is legal and valid.”