No relief to personal guarantors under bankruptcy code: Supreme Court

The Supreme Court on Thursday in a significant ruling upheld the constitutionality of Insolvency and Bankruptcy Code (IBC), including allowing creditors to initiate insolvency proceedings against personal guarantors. The Court dismissed over 200 petitions that challenged the legal validity of the code.

The provisions relating to personal guarantors were introduced under the Insolvency and Bankruptcy Code (IBC) in 2019 but were subsequently challenged before various Courts and the matter traveled to the Supreme Court.

The main point of contention of petitioners was that these IBC provisions (Sec 95-100) did not afford personal guarantors the opportunity to dispute the initiation of insolvency resolution processes against them before the petition is admitted which is a violation of principles of natural justice in the process followed under the code (IBC).

A Bench of Chief Justice of India (CJI) D Y Chandrachud with Justices J B Pardiwala and Manoj Misra held that the provisions (Sections 95 to 100) held that IBC provisions on personal guarantors’ insolvency process did not suffer from arbitrariness as contended by petitioners.

The above judgment removes uncertainties and gives a boost to the lenders’ (mostly banks) efforts to recover dues of corporate debtors from personal guarantors, who are mostly promoters of companies.

The personal guarantors who were facing bankruptcy proceedings include the high-profile individuals. Since the year 2019 as many as 2289 insolvency applications involving corporate debt amount of Rs.1,63,916 crore has been filed under the IBC.