Government’s move to begin proceedings against personalguarantors, usually promoters of big business houses, under Insolvency andBankruptcy Code (IBC) was upheld by the Supreme Court.
Bench of Justices L. Nageswara Rao and S. Ravindra Bhatobserved that the November 15, 2019 notification of the Centre which permittedcreditors, usually institutions and banks, to take action against personalguarantors was “legal and valid”.
The notification was challenged in several High Courts andthen the Supreme Court transferred the petitions to itself in October last yearon the request made by the government.
The rationale of the apex court was that the IBC was at a “nascentstage” and the interpretations of the provisions of the Code better be taken atthe apex court to prevent any confusion and also to settle the lawauthoritatively.
‘Guarantee’ concept is derived from Section 126 of theIndian Contracts Act, 1872, which claims that a contract of guarantee is madeamong the debtor, creditor, and guarantor.
If the debtor fails to repay the debt, then the creditorreserves the right to begin insolvency process against the personal guarantor.
Personal guarantees were often offered by promoters of bigbusinesses to creditors to secure loans and assure repayment.
When an application related to insolvency resolution orliquidation or bankruptcy against guarantor is pending before a NationalCompany Law Tribunal (NCLT), then the notified Rules of November 2019 providefor action against the personal guarantor.
With an eye towards promoting entrepreneurship, credit, andbalance the interests of all stakeholders, the IBC looks forward to reorganisethe process.