The Divisional Bench consisting of Justice L Nageswara Rao and Justice Ravindra Bhat gave this judgment on Friday 21, May 2021.
The Apex Court of India i.e. The Supreme Court of India transferred all the petitions challenging the Insolvency and Bankruptcy Code [IBC] provisions relating to initiation of insolvency proceedings against personal guarantors. This was done so to avoid the conflicting ruling by the different courts. Hence the Insolvency and Bankruptcy Board of India [IBBI] had transferred all the matters pending before the high court to the supreme court.
The Provision of Insolvency and Bankruptcy Code [IBC] on “Insolvency of Personal Guruantors” was brought by the Union Government in 2019.
This judgment will now allow the Lenders to file Insolvency Proceedings against the Promoter Guarantors of Companies facing the Corporate Insolvency Resolutions process. It will also allow Banks to file Personal Bankruptcies against personal guarantors even if the insolvency of the company/firm is yet to be resolved. This is decided in the case "Insolvency and Bankruptcy Board of India v. Lalit Kumar Jain & Ors"
Who is a Personal Guarantor?
To get loans from a bank or lender, in an easy and effective way is showing their interest to repay the bak dues on time, and to back this the promoters of big corporate sectors submit a personal guarantor to the lenders. It acts as an assurance to the bank or lender, that if the person fails to repay his liabilities there’s an assurance who can sum up his liabilities on the debtors' behalf. A personal guarantee is most likely to be furnished by a promoter or promoter entity when the banks demand collateral which equals the risk they are taking by lending to the firm, which may not be doing so well.
After Supreme Court upheld the provision of the Insolvency and Bankruptcy Code [IBC] on insolvency proceedings against personal guarantors, there will be a major setback for big corporate giants like Sanjay Singhal, Anil Ambani, and Venugopal Dhoot.
As in the case of Bhushan Power and Steel, the former Promoter Sanjay Singhal had given his guarantee worth up to Rs 24,550 crore to take loans from a consortium of banks which was led by SBI [State Bank of India]. But the group later defaulted the payments amounting to Rs 48,000 crore. In September 2020, SBI invoked the personal Guarantees submitted by Sanjay Singhal. Only amounting to his part of the liability.
Similarly, the banks have also moved their application of personal insolvency of guarantor against Anil Ambani after two companies promoted by him failed to pay dues on Rs 1,200 crore that they had borrowed from SBI [State Bank of India]. A personal guarantee was given by Anil Ambani while taking this loan from SBI.