Teesha
The Supreme Court upheld the government’s notification of 2019 which brought in force provisions of the part II of the Insolvency and Bankruptcy Code, to invoke personal guarantees of promoters whose companies defaulted on bank loans.
The judgement is in limelight because it will now allow the lenders to simultaneously invoke personal guarantees of promoters even while bankruptcy proceedings against the ailing firms are pending, therefore speeding up the process for recovery of dues.
The Bench of Justice L Nageshwar Rao and Justice S Ravindra Bhat held, that the impugned notification is legal and valid.
The judgement stated that “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…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 surety/guarantor of his or her liability, which arises out of an independent contract,”
While dismissing the 75 petitions against the notification of 2019, the court observed that an involuntary act of the principal debtor leading to loss of security would not waive off its liability.
Furthermore, the court stated that there is no compulsion in the code that it should be made applicable at the same time to all the individuals or not at all.