Government’s move to begin proceedings against personal guarantors, usually promoters of big business houses, under Insolvency and Bankruptcy Code (IBC) was upheld by the Supreme Court.
Bench of Justices L. Nageswara Rao and S. Ravindra Bhat observed that the November 15, 2019 notification of the Centre which permitted creditors, usually institutions and banks, to take action against personal guarantors was “legal and valid”.
The notification was challenged in several High Courts and then the Supreme Court transferred the petitions to itself in October last year on the request made by the government.
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The rationale of the apex court was that the IBC was at a “nascent stage” and the interpretations of the provisions of the Code better be taken at the apex court to prevent any confusion and also to settle the law authoritatively.
‘Guarantee’ concept is derived from Section 126 of the Indian Contracts Act, 1872, which claims that a contract of guarantee is made among the debtor, creditor, and guarantor.
If the debtor fails to repay the debt, then the creditor reserves the right to begin insolvency process against the personal guarantor.
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Personal guarantees were often offered by promoters of big businesses to creditors to secure loans and assure repayment.
When an application related to insolvency resolution or liquidation or bankruptcy against guarantor is pending before a National Company Law Tribunal (NCLT), then the notified Rules of November 2019 provide for action against the personal guarantor.
With an eye towards promoting entrepreneurship, credit, and balance the interests of all stakeholders, the IBC looks forward to reorganise the process.
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