SC transfers to itself pleas challenging IBC law on personal guarantors

The top court’s order comes in response to a transfer petition filed by the Insolvency and Bankruptcy Board of India (IBBI) in this matter
The Supreme Court (SC) has decided to transfer a batch of petitions challenging the Insolvency and Bankruptcy Code (IBC) provisions relating to personal guarantee to itself from various high courts (HCs).

A three-judge Bench comprising Justices L Nageswara Rao, Hemant Gupta, and Ajay Rastogi has directed the HCs to not entertain any further writ petitions on this issue.

“Transfer of the writ petitions to this court would avoid conflicting decisions by the HCs... The IBC is at a nascent stage and it is better that the interpretation of the provisions of the Code is taken up by this court to avoid any confusion, and to authoritatively settle the law,” the SC stated in its order. 

The top court said that considering the importance of the issues raised in the writ petitions which need finality of judicial determination at the earliest, it is just and proper that the writ petitions are transferred from the HCs to this court. “The interim orders passed by the HCs, if any, shall continue till further orders.”

The next date of hearing is scheduled for December 2. According to industry sources, there are at least 19 writ petitions invoking the personal guarantee of a corporate debtor across Delhi, Telangana, and Madhya Pradesh HCs. 

The top court’s order comes in response to a transfer petition filed by the Insolvency and Bankruptcy Board of India (IBBI) in this matter. Among the personal guarantees invoked by the banks are Anil Ambani, chairman of ADA Group, for Rs 1,200 crore. 

The IBBI in its petition said, “Various writ petitions have been filed in more than one HC, which raises substantial questions of the law of general importance.”

The story so far

  • Rules for insolvency of personal guarantors to corporate debtors came on Nov 15 
  • Move part of first phase of individual insolvency and bankruptcy rules
  • While CIRP is suspended till December, lenders allowed to invoke personal guarantees
  • Constitutional validity of the law challenged in high courts
  • Petitions to be decided by the Supreme Court 

Additional Solicitor General Madhavi Divan had presented the IBBI’s argument to the court on Wednesday. 

In August this year, Ambani had appealed against State Bank of India’s (SBI’s) petition invoking his personal guarantee. The SC had rejected SBI’s pleas and directed the HC to hear Ambani’s challenge to the government’s IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019.

The rules for invoking personal guarantee of a corporate debtor were introduced in November 2019. The idea was to empower creditors to get the under-recovered amount from the corporate insolvency resolution process through a personal guarantor. The IBBI rules allowed that such cases of personal guarantee be dealt with by the National Company Law Tribunal. 

However, personal guarantors have found gaps in the law which do not make it clear whether lenders have any right of recovery from them after agreeing to a resolution plan and taking a haircut in the corporate insolvency process.  

Personal guarantors have also sought a declaration that Sections 95, 96, 99, 100, and 101 of the IBC, 2016, are unconstitutional insofar as they apply to them. These Sections deal with applications by creditors to initiate the insolvency resolution process, their admission, and rejection.

While the provisions of initiating corporate insolvency resolution are suspended till December, lenders are allowed to invoke insolvency of personal guarantors to corporate debtors.

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