SC allows banks to directly initiate insolvency proceedings against personal guarantors – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/money-and-banking/sc-allows-banks-to-directly-initiate-insolvency-proceedings-against-personal-guarantors/article65404775.ece

Apex court dismisses appeal against NCLAT order; refuses to interfere with NCLAT ruling

Financial creditors, especially banks, will now get a new preferred route to make recoveries from debt defaulting companies, with the Supreme Court giving the green signal to them to directly initiate insolvency proceedings against personal guarantors of corporate loans, irrespective of pendency of any proceedings against the corporate debtor under the insolvency and bankruptcy code (IBC).

The apex court has dismissed an appeal against an NCLAT order in the State Bank of India versus Mahendra Kumar Jajodia, and reaffirmed the right of lenders to decide their recourse against borrowers/obligors independently, without linking the exercise of rights in insolvency against the guarantor to initiation of insolvency against the borrower.

“We have heard the learned Solicitor General and learned Senior Counsel for the parties and perused the record. We do not see any cogent reason to entertain the appeals. The judgment impugned does not warrant any interference. The Appeals are dismissed,” said the SC order.

It maybe recalled that the National Company Law Appellate Tribunal (NCLAT) had, in January, ruled in the SBI Stressed Asset Management Branch vs Mahendra Kumar Jajodia ( personal guarantor to corporate debtor) case, that there is no bar or prohibition against insolvency and bankruptcy proceedings being instituted against a personal guarantor in the absence of proceedings against the corporate debtor. 

While Mahendra Kumar Jajodia (personal guarantor) preferred an appeal before the SC against the NCLAT order, the Apex Court had, in March 2022, stayed the NCLAT ruling. 

Now, the apex court has ruled that it does not want to interfere in the NCLAT order, implying that banks can initiate insolvency proceedings against personal guarantors even when no IBC proceeding exists against the corporate debtor.

The significance of this SC judgment can be understood from the fact that guarantees amounting to ₹1.6-lakh crore have so far been given by promoters of top companies facing huge debts. Further, after the decision in Lalit Kumar vs Union of India, lenders invoked a total of ₹8,437 crore worth of personal guarantees of the defaulting promotors in the first quarter of 2021-22 itself. 

Vasanth Rajasekaran, Partner, Phoenix Legal, said the recent judicial pronouncement by SC in SBI vs Mahendra Kumar Jajodia related to liability of personal guarantors, has certainly increased the bite power of the IBC. The judgment reinforces the law laid down in Lalit Kumar Jain vs Union of India that the liability of the personal guarantors is co-extensive in nature and operates parallelly to that of the corporate debtor. “

Ruby Singh Ahuja, Senior Partner – Karanjawala & Co, said the option given to the lender to initiate proceedings against the personal guarantor directly will have far-reaching consequences. It will not be an exaggeration to say that it might become a preferred route for lenders, specially in cases where the promoters are personal guarantors, she added.

Kumar Saurabh Singh, Partner, Khaitan & Co, said: “Since contractually, the remedies against borrower and guarantors are usually independent in an event of default, this judgment will provide flexibility to the lenders to take decision in this regard as per their discretion. In taking such a decision, they may be guided by their commercial interest and value of assets at different entities which are their obligors to take a decision rather than being tied to a procedure/sequence of action. This can also result in avoiding insolvency proceedings against entities where there may not be any value left”.

Pritika Kumar, Founder, Cornellia Chambers, said: ”With this dismissal by the Supreme Court, the position of law on initiating insolvency proceedings against personal guarantors is abundantly clear. To my mind, it is now settled that an application to initiate insolvency proceeding against a personal guarantor cannot be rejected only on the ground that no corporate insolvency resolution proceeding, or liquidation proceeding is pending against the corporate debtor.”

Published on May 11, 2022

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