Applicability of Insolvency Laws to Personal Guarantors

0

INTRODUCTION

Apex Court on May 21, 2021 at Lalit Kumar Jain V. Union of India & Golds[1] recognized and upheld the 2019 Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors Rules, as notified by the central government on November 15, 2019.

Prior to these 2019 rules, the debt collection court was empowered to deal with insolvency and bankruptcy cases against personal guarantors. However, once the newly notified rules enter into force, any insolvency grievances against debtor companies must now be referred to the contracting authority as established by the 2019 rules.

IN SHORT

After a wait of almost four years, the Ministry of Commercial Affairs introduced new rules which made it possible to rule on insolvency and bankruptcy proceedings against personal guarantors under the Insolvency and Bankruptcy Code of 2016 (“hereinafter referred to as the Code”). Part III of the Code, read with the 2019 rules, extends the insolvency and bankruptcy of individuals and partnerships to personal guarantors and corporate debtors. By this notification, both the personal guarantors and the corporate debtors were made separately liable for their actions.

Although the notice has been welcomed by creditors due to a greater liability imposed on personal guarantors, numerous court applications challenging the notice have been considered by different high courts on the grounds that the rules are ultra vires the Constitution. India, because the central government does not have the power to impose conditions on the application of the Code.

On all the briefs filed, Lalit Kumar Jain V. Union of India & Golds became the main case in which the outcome of the case would be determined. The applicants in this case had provided a guarantee to the financial institutions and banks with which they were associated (as managing directors, chairman, directors and promoters) and had alleged that the Indian government had acted beyond the scope conferred by article 1 (3) of the code [2] and therefore did not have the power to limit the provisions of the Code relating to personal guarantors or corporate debtors.

The main reasons given by the applicants for challenging the rules were as follows:

  • Excessive delegation: It was alleged that the central government acted outside the scope of Article 1 (3) of the Code which provides for the implementation of the provisions of the Code by the central government. The petitioners insisted that the law was complete in itself and that the central government only had the power to implement the law and not to make changes to it.
  • No differentiation between the financial creditor and the operational creditor: It has been alleged that there is a distinction between the nature of loan agreements authorized by financial creditors and contracts for goods and services by operational creditors and the 2019 rules do not take into account the distinction drawn by the Parliament.
  • Double recovery: The Plaintiffs stated that bringing legal proceedings against the Corporate Debtor and the Personal Guarantor would lead to a double recovery which is prohibited by the code.
  • Joint liability of the Personal Guarantor and the Principal Debtor: To trust somebody Essar Steel India v. Satish Kumar Gupta [3] the applicants stated that under section 128 of the Indian Contract Act, 1872[4] the Principal Debtor and the Personal Guarantor share joint liability, i.e. if all claims against the principal obligor are extinguished once the resolution plan is accepted, then the responsibilities of the Personal Guarantor are also extinguished. It was alleged that the new notification removed the protection afforded by law to personal guarantors.

APEX COURT JUDGMENT

The Apex Court dismissed the applicants’ plea and upheld the 2019 rules indicating that the central government had devised an appropriate introduction of the code with the aims and purpose of the code in mind, which is permitted by law. . The central government-friendly Supreme Court ruled that the rules were aimed at strengthening the corporate insolvency resolution process (CIRP) and added that in cases where a debt is written off by operation of law, the liability of the personal guarantor would always prevail, whether the liability of the debtor Company has ceased or not. The Apex court ruled that the said rules had been drafted keeping in mind the close link between the personal guarantor and the debtor company.

The Honorable Supreme Court, while clarifying the legislative intention to keep the debtor company and the personal guarantor on different pedestals, ruled that the rules are not the product of excessive legislation as no hardship has been imposed to the application of the code, that it should, simultaneously, be made applicable to all individuals, including personal guarantors, or not at all. The Supreme Court said the drafters’ intention was to treat personal guarantors differently from other categories of people. Due to the intrinsic relationship of personal guarantors with debtor companies, the central government introduced new rules, which treat personal guarantors differently from debtor companies, but through the same arbitration authority in order to avoid results. uncertain and arbitrary.

With regard to the joint liability of the Personal Guarantor and the Corporate Debtor, the Apex Tribunal relied on its earlier decision in SBI v V. Ramakrishnan[5] and ruled that the liability of the Personal Guarantor (the Corporate Debtor) under a guarantee contract is not ipso facto discharged upon approval of a resolution plan. The Supreme Court has ruled that a principal borrower does not automatically exonerate the guarantor / guarantor from liability under an independent contract when discharging or discharging a debt that it owes to its creditors in as part of an involuntary process, such as law enforcement, liquidation or insolvency proceedings.

It should be noted that the general concept of guarantee derives from section 126 of the Indian Contract Act 1872,[6] which explains why the guarantee contract includes 3 parts namely the debtor, the creditor and the guarantor in such a contract when a debtor does not reimburse the debt that he owes to the creditor, the burden falls on the guarantor to discharge debt. In a situation like this, the creditor has in effect the right to initiate insolvency proceedings against the personal guarantor on the debtor’s failure to pay his debt to the creditor.

CONCLUSION

The Honorable Supreme Court, while maintaining the validity of the notification, relieved the creditors who are now legally entitled to collect their contributions not only from debtor companies, but also from personal guarantors by applying the provisions of the 2019 rules.


Source link

Share.

About Author

Comments are closed.