Big victory for banks! SC upholds IBC rule, says personal guarantors liable for corporate debt

The Supreme Court on Friday upheld the constitutionality of the Centre's November 15, 2019, notification that had allowed financial institutions to pursue proceedings against personal guarantors, commonly promoters, of stressed companies facing insolvency.

The apex court's order will clear the decks for lenders to recover their remaining debt from personal guarantors following the conclusion of the Corporate Insolvency Resolution Process (CIRP).

An SC bench of Justices Ravindra Bhat and L Nageswara Rao delivered the ruling, which will enable banks to file personal bankruptcies against personal guarantors, even though the insolvency of companies is yet to be settled.

Also Read: Personal bankruptcy against Anil Ambani to force promoters to take IBC seriously

Reading out the operative part of the verdict, the bench said that the Centre's notification has been held to be "valid" and "legal."

"The approval of resolution plan relating to the corporate debtor does not operate so as to discharge the liabilities of the personal guarantor. Writ petitions dismissed without cost," Justice Ravindra Bhat said during the hearing.

"In the judgment, we have upheld the notification," Justice Bhat stated while reading out the conclusion of the judgement which decided as many as 75 petitions pertaining to the validity of the notification.

Also Read: Insolvency, bankruptcy proceedings against corporate debtors, personal guarantors can go together: Sitharaman

Upholding the validity of the notification, the top court ruled that initiation of an insolvency resolution plan for a company does not absolve corporate guarantees given by individuals from paying up their dues to financial institutions.

India's top business tycoons including Kapil Wadhawan, Anil Ambani, Venugopal Dhoot, and Sanjay Singhal had contested the central government's 2019 notification, which widened the ambit of personal insolvency provisions of the Insolvency and Bankruptcy Code (IBC) to include the promoters as well.