LI Network
Published on: November 11, 2023 at 00:28 IST
The Supreme Court affirmed the constitutional validity of crucial provisions within the Insolvency and Bankruptcy Code (IBC), 2016.
These provisions empower lenders to initiate insolvency proceedings against personal guarantors without affording them the opportunity to present their stance.
The court explicitly stated, “IBC cannot be held to be operating in a retroactive manner in order to hold it violative of the constitution. Thus, we hold that the statute does not suffer from the vices of manifest arbitrariness.”
Additionally, the Supreme Court asserted that sufficient safeguards are embedded in the IBC to ensure that the recommendations made by a resolution professional are advisory to the National Company Law Tribunal (NCLT) and not definitive.
Saloni Kothari, Group General Counsel at BDO India, expressed, “In a welcome move, Supreme Court has passed long-pending decisions on key aspects of the IBC personal guarantor process. This finality has strengthened the enforcement of a personal guarantee and will propel the law ahead, allowing the adoption of these processes to achieve the intent of the IB Code. Now, promoters will be compelled to exercise diligence when issuing guarantees, and it will be an added deterrent regarding defaults.”
The legal battle was initiated by former promoters of bankrupt companies, including Anil Ambani, Venugopal Dhoot, Sanjay Singhal, and others.
They contested the personal insolvency proceedings initiated against them and questioned the legal validity of various IBC provisions on grounds such as the alleged absence of due process and violation of natural justice principles.
The central government, in November 2019, amended the bankruptcy law to permit personal insolvency cases against guarantors of corporate entities failing to meet their debt obligations.
Ateev Mathur, Partner at SNG & Partners, Advocates & Solicitors, remarked, “With this pronouncement of the Apex court, the promoters and directors now, who have stood as guarantors at the time of availing the facilities, would not be able to hide behind the veil. The legislative intent behind incorporating such specific provisions for the Insolvency Resolution process for individuals has found favor with the Court, and the path is now clear for the creditors to pursue the process of Insolvency.”
In October 2020, the Supreme Court consolidated all personal insolvency cases, transferring them from various high courts and prohibiting the entertaining of fresh cases.