The Honourable Supreme Court on 21.05.2021 decided on the validity of the Notification issued by the Central Government on 15.11.2019 on the Insolvency and Bankruptcy Proceedings against Personal Guarantors and the validity of the Regulations issued by the IBBI on 20.11.2019. This being an extremely relevant issue especially in these distressed times for both promoters and lenders; our analysis this time is a bit more detailed than usual. Kindly bear with that – the idea is to provide the thought process of both sides.

BACKGROUND:

• The State Bank of India (“SBI”) filed Company Petitions No 916 and 917 of 2020 against Anil Dhirajlal Ambani as the Personal Guarantor for Reliance Communications Limited (“RCOM”) and Reliance Infratel Limited (“RITL”) on 12.03.2020 under Section 95 of the Insolvency and Bankruptcy Code 2016 before the Hon’ble NCLT Mumbai Bench, as on 11.06.2020. Subsequently, NCLT appointed Mr. Jitender Kothari as the Resolution Professional, hence commencing the Insolvency proceedings of the Guarantor Mr. Anil Dhirajlal Ambani.
• Mr. Anil Ambani challenged the Order passed by the Hon’ble NCLT, Mumbai Bench before the Hon’ble High Court of Delhi by way of a Writ Petition. The High Court of Delhi as on 27.08.2020 ordered a stay of the proceedings against the Petitioner (Mr. Anil Ambani).
• SBI filed an appeal before the Hon’ble Supreme Court against Delhi HC Order challenging the Interim Order of stay on the Insolvency proceedings.
• The Hon’ble Supreme Court however on 17.09.2020 while dismissing the Appeal held that there was no vacation of stay on the Order granted by the Hon’ble High Court.
• Several other similar Writ Petitions were filed before the Hon’ble High Court of Delhi challenging Orders to initiate Insolvency Proceedings under the Part III of the Code and challenging the constitutionality of Part II of the IBC (basically proceedings under IBC against personal guarantors).
• On 12.10.2020, the Hon’ble High Court directed all these similar Writ Petitions be clubbed and heard together and further held that the Interim Order passed on 08.2020 shall continue.
• On 10.2020, the Hon’ble SC of India, allowed a Transfer request Petition filed by the IBBI praying that all the Writs filed before different High Courts challenging the validity of Notification dated 15.11.2019 to be clubbed together and be transferred and be heard by the Hon’ble Supreme Court.

INSC- CONTENTIONSRAISED BY PETITIONERS(PERSONAL GUARANTORS):

• The Liability of the Personal Guarantor (“PG”) is coextensive with the Corporate Debtor (“CD”) under Section 128 of the Indian Contract Act 1872.
• The Creditors being allowed to claim from the PG in spite of getting their share from the Corporate Insolvency Resolution Process (“CIRP”) of the CD is to be disallowed.
• The impugned Notification allows creditors to claim from the PG without accounting for the amount realized by them in the CIRP of the CD would be unjust enrichment.
• The impugned notification of December 2019 is ultra vires the Code and contrary to the power granted by the Parliament.
• Applications against PGs once admitted, a Moratorium under Section 101 of the Code automatically applies thereby initiating a stay on all the pending proceedings or legal claims in respect of all debts including that of the CIRP of the CD as the debt of the PG is effectively the CD’s debt and hence stay the CIRP also.
• Section 29A promoters of the CD who are the PGs in most cases are barred to file a Resolution Plan which is a disadvantage as compared to the individuals other than the PG.
• The Central Government’s move to enforce specific Sections 78, 79, 94 to 187, only in relation to PGs to CDs is an exercise of legislative power wholly impermissible in law and amounts to an unconstitutional usurpation of legislative power by the executive.
• That the impugned Notification is ex facie in violation of the principles of delegation as the Insolvency of one category of individuals, i.e. PGs to CDs is considered along with Insolvency proceedings of CDs.

CONTENTIONS RAISED BY THE CENTRAL GOVERNMENT & SBI, RESPONDENTS (BANKS):

• Section 2(e) includes three different classes- PGs, partnership, and proprietorship and All three are to be looked at separately.
• The Central Government has assumed that the Modification made under Section 2 (e) automatically amends Section 1(3) of the Code.
• The amendment made to IBC in the year 2018 was brought with necessary statutory backing for the Central Government to apply the Code to PGs of the CD when provisions are brought in.
• The Executive has the power to bring into force any one provision of a statute at different times for different purposes.
• BLRC committee recognized that PGs were a category of entities to whom individual insolvency proceedings applied, and acknowledged the link between them and CDs and found that under a common Code, there could be synchronous resolution.
• The Notification authorizes the Central Government and the Board to frame rules and regulations on how to allow the pending actions against a PG to a CD before the Adjudicating Authority. The intent of the Notification, facially, is to allow for pending proceedings to be adjudicated in terms of the Code.
• The legislative intent has been to make NCLT is a common forum for insolvency resolution of CD’s their corporate guarantors (CG’s) & PG’s (who are mostly promoters, directors, family and close associates). The objective is to achieve a holistic resolution/settlement/solution to the ongoing insolvency of the CD. Right from the 2018 amendment factoring in the Bankruptcy Law Committee Report, etc – work had started at that point itself to bring the above in one fold.
• The clubbing of personal insolvency of the PG with CIRP of CD will facilitate payouts by PG’s to the  lenders in the COC thereby reducing the debt  and  hence making the CD possibly more attractive for the potential resolution applicants for acquisition/takeover by the NCLT route.
• The law of the land is that unless the complete liability of the principal debtor (usually the CD) is paid off; it does not discharge the liability of the guarantor’s and in this case the PG’s – hence passing of Resolution Plans would not automatically extinguish their liabilities. The liability of the PG continues even after the liquidation of the CD.

JUDGMENT:

 The Hon’ble Supreme Court made the following observations in its Final Order:

• That within the broad sphere of delegated legislative power, as long as essential legislative powers were not delegated, the provisions would not be ultra vires.
• Section 60(2)- In case of CIRP of CD or Liquidation of CD, the Adjudication of PGs will be in NCLT and the SC has totally agreed with the contention of the Central Government and banks that insolvency proceedings of a CD, PG & Corporate Guarantor which are all with respect to the same debt should be adjudicated under one framework and forum being the NCLT for a more practical and holistic resolution.
• Section 60(3)- Any Insolvency proceeding pending before any Court or Tribunal stands automatically transferred to the NCLT once CIRP of CD is initiated.
• It is the intent of the Parliament to treat the PGs different from individuals as they are related to CDs
• The Code has been enforced in stages and hence the exercise of power in issuing the impugned notification under Section 1(3) is therefore, not ultra vires; the Notification is The Notifications enforcing specific sections of IBC from time to time clearly indicate that the intent was to implement the law in a phased manner stage by stage.
• The SC has in a large part of its judgment, analysis has analyzed the catena of judgments relied upon on constitutional aspect of delegated legislation, allowing selective notification of PG insolvency alone, etc. but ultimately has held them to be valid.
• Approval of a resolution plan does not ipso facto discharge a PG of CD of her or his liabilities under the contract of guarantee.

VIEWS OF AMA

1. We are a promoter driven economy and ecosystem. It is primarily the promoter and its family members that provide Personal Guarantees to the lenders.
2. Financial discipline took a backseat and a dip in the last two decades; resulting in stringent laws like the IBC and now the recourse to lenders to use the same IBC not just for the Company but also for the Personal Guarantors.
3. There are various aspects that will have to be seen as to the timing of the initiation of CIRP against the CD versus initiation of Insolvency proceedings against the Personal Guarantor under IBC and its impact on the larger Resolution Plan of the CD itselft.
4. The sections that have been notified with respect to insolvency and bankruptcy of PG’s have many such areas which could be potential areas of conflicts/disputes and are likely to see an evolution of legal precedents and judgements on the same.
5. It will be a difficult situation for promoters who are not barred and are trying to work on a Resolution Plan when at the same time the lenders will be invoking the Personal Guarantees which will engulf them in the related legal proceedings. Hence the focus would be to save the personal assets and in parallel to be working on a Resolution Plan for the CD may be next to impossible.
6. The above aspect connected with the point that passing of Resolution Plans will not absolve the Personal Guarantor’s liabilities and proceedings against them are likely to continue will certainly create a major unrest amongst the business fraternity which will either lead to eventual changes/amendments and the law or the financial/banking ecosystem vis-à-vis businesses and Personal Guarantors in the coming years.
7. Also this is a wake-up call for promoters who are doing well at this point in time or at least have not gone completely red to try and see if they can substitute the Personal Guarantees with specific collaterals especially in the case of family members at least.