In a welcome move, the Hon'ble Supreme Court, in its Order dated 29th October 2020 in Transfer Petition (Civil) No. (s). 1034 of 2020 ("Transfer Petition"), directed transfer of all writ petitions challenging the constitutionality of the provisions of the Insolvency and Bankruptcy Code, 2016 ("IBC"), relating to personal guarantors to itself. The Transfer Petition was filed by the Insolvency and Bankruptcy Board of India ("IBBI") requesting transfer of writ petitions pending before all High Court across the country to the Hon'ble Supreme Court to avoid any confusion caused by divergent rulings with regard to the provisions of personal guarantee under the IBC.
The Notification dated 15th November 2019 ("said Notification") of the Central Government bringing into force provisions of the Part III of the IBC, providing for insolvency and bankruptcy for individuals and partnership firms was the basis for the writ petitions filed before the High Courts. The said Notification brought into force Section 78 and 79 of the IBC relating to applicability of the insolvency and bankruptcy of individuals and partnership firms where the amount of the default is not less than one thousand rupees and definitions under Part III of the IBC respectively. Further, the said notification brought into force Section 94 to 187 of the IBC providing the framework for the initiation of insolvency resolution process and bankruptcy proceedings of individuals and partnership firms. Section 179 of the IBC provides for the Debt Recovery Tribunal to be the adjudicating authority in relation to insolvency matters of individuals and firms.
Promoters challenging constitutional validity of the said Notification providing for insolvency and bankruptcy for individuals and partnership firms.
It is perceived that the said Notification was meant to nudge financial institutions to proceed against promoters in their capacity as personal guarantors of defaulting corporate debtors. A series of challenges have already been filed challenging the constitutional validity of the said Notification. Promoters of Reliance Communications Ltd., Punj Lloyd and Bhushan Power & Steel Ltd. are among those that have filed writ petitions before the Hon'ble Delhi High Court challenging the said Notification.
The issue pertaining to the consequences of default by guarantors of corporate debtors has been a bone of contention since the inception of the IBC. The Hon'ble Supreme Court's decision to transfer all writ petitions challenging the constitutionality of the said Notification will avoid conflicting decisions by High Courts. Vide the Order dated 29th October 2020, the High Courts across the country have been directed not to entertain any writ petitions challenging the provisions brought into force by the said Notification. The Hon'ble Supreme Court has allowed interim orders staying the insolvency proceedings against personal guarantors to continue until further orders.
Resolving issues with regards guarantors.
As the law relating to insolvency and bankruptcy continues to evolve in India, the Supreme Court has in the past ensured the effectiveness of the IBC. In its judgement in State Bank of India v. V. Ramakrishnan and Ors. - (2018) 17 SCC (Civ) 458 it was clarified that guarantors could not avail the umbrella of protection against the moratorium declared under Section 14 of the IBC providing the borrowers with better chances of recovery. The Hon'ble Supreme Court, in the case of Committee of Creditors of Essar Steel India Limited v. Satish Gupta Kumar Gupta & Ors. (Civil Appeal No(s). 878/2019), recognized the need of the Resolution Applicant taking over the business of the Corporate Debtor to commence operations with a fresh slate and accordingly clarified that the right of subrogation and right of indemnification conferred on a guarantor under the Indian Contract Act, 1872 were extinguished if specifically stated in the resolution plan.
Having stated as aforesaid, the fact remains that the IBC lacks a comprehensive mechanism for enabling a creditor to simultaneously lodge its claim with the corporate borrower as well as the corporate guarantor where both are undergoing the corporate insolvency resolution process. Moreover, the National Company Appellate Law Tribunal in Vishnu Kumar Agarwal v. Piramal Enterprises Ltd. (Company Appeal (AT) (Insolvency) No. 346/2018) held that once an application by a financial creditor against one corporate guarantor is admitted, an application (if any) filed against the other guarantor cannot be maintained for the same set of claims. An appeal (Civil Appeal No(s). 878/2019) against the aforesaid ruling is pending before the Hon'ble Supreme Court.
A ruling against the validity of the said Notification is likely to further impair the rights of the creditors as they will be left with no option but to pursue traditional routes to enforce their claims against personal guarantors which will substantially delay the recovery process.
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