SC allows banks to invoke personal guarantees of defaulters under IBC

New Delhi, May 21

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In a significant verdict spelling troubles for personal guarantors to corporate debtors, the Supreme Court on Friday upheld the validity of the Centre’s notification allowing banks to proceed against such persons for recovery of loans given to a firm under the Insolvency and Bankruptcy Code (IBC).

A Bench comprising Justices L Nageswara Rao and S Ravindra Bhat held that approval of the resolution plan for revival of sick companies under the IBC does not discharge personal guarantors of their liability to pay back the banks or financial institutions (FIs) as they are bound by separate contracts.

Upholds Centre’s notification

It is held that approval of a resolution plan (for revival of a sick company under IBC) does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee — Apex court verdict

“It is held that approval of a resolution plan (for revival of a sick company under IBC) does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee,” Justice Bhat, writing the judgment for the Bench said.

“As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, that is by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract,” the 82-page judgment said.

The Bench held that the notification is “legal and valid” and that the approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors of corporate debts.

The verdict came on as many as 75 petitions, including some transfer petitions, filed by various firms and by those who had given their personal guarantees to the banks and FIs for loans advanced to companies.

The plea filed by one Lalit Kumar Jain, against the November 15, 2019 notification issued under the IBC related to personal guarantors to corporate debtors, was taken up as the lead matter.

Upholding the validity of the notification, the SC ruled initiation of an insolvency resolution plan for a company does not absolve corporate guarantees given by individuals from paying up the dues to lenders. — PTI