Date of Order:
Justice L. Nageswara Rao and Justice S. Ravindra Bhat
Lalit Kumar Jain vs. Union of India and Others
Sec. 1,31, 60 78, 79, 94-187 of the Insolvency and Bankruptcy Code, 2016.
- As a matter of fact, often Promoters/ Guarantors/ Directors gives personal guarantees for loans so as to bring capital into the companies. The Ministry of Corporate Affairs notified vide notification dated 15 November 2019 which enables financial institutions to initiate insolvency proceedings against personal guarantors like Promoters/ Guarantors/ Directors. After publication of the notification many Promoters/ Guarantors/ Directors of companies who are also the personal guarantors were served with Demand Notices proposing to initiate insolvency proceedings against personal guarantors under IBC. This notification created created a lot of chaos in financial and corporate market.
- Therefore, these personal guarantors, promoters, directors moved to various High Courts of different States holding notification to be ultra vires. As a result, IBC Board moved an application to the Supreme Court to be hard at expedited speed and to solve legal situation with regard to upholding the notification dated 15 November 2019.
- The case of Lalit Kumar vs. UOI upheld the said notification.
No power with Centre to pass such notification in congenial legislation.
- SC upheld the notification dated 14 November 2019 very clearly and crisply stated that the centre had been modifying provision of this code in a very systematic manner. Firstly, invoking the procedural aspect and secondly, incoming the substantive aspect of the Court. They are very rightly doing so. SC also stated that the rationale for allowing directors erstwhile guarantors/ promoters to the meeting of community of creditors despite of the fact that the erstwhile management they does not hold any say in the company now despite of them allowing them to sit for these meetings is that Director’s liability as a personal guarantor persists against those creditors who are forming part of the committee of creditors. Therefore the approval of a resolution plan can only lead to revision of the amount or lead to the revision of entire exposure of the amount that they goes to the creditor. Therefore the sanction resolution of the plan also per se does not operate as. Discharge of guarantor against its liability even if it is approved by sec. 1
- The SC very clearly stated that the approval of a resolution plan is not at all the discharge of liability of a personal guarantor. Thus, the clean slate query does not apply in this case, since the concept of guarantee still upholds. Therefore, personal guarantor still has liability towards creditors under the contract of guarantee.
- In the background, SC upheld the notification which paved a way for Banks and Financial institution to initiate insolvency proceedings against personal guarantors of the company which are undergoing insolvency/liquidation proceedings before Company Law Tribunal.
- The consequence of this SC judgment is that multiple insolvency proceedings against personal guarantor of a company which are undergoing insolvency, also includes the personal assets of the guarantor, not only within the jurisdiction of India but also across different countries of the world with whom India has reciprocators treaties can also be Mae a part of the insolvency proceedings against them.
ARGUMENTS ADVANCED BY THE APPELLANT
- Powers delegated to centre under code is only as regard to point in time when different provision of this code can be brought into effect. That it does not actually permit the Centre to notify either part of the provisions of the Code or to limit the application to only certain category of people vide this notification. However, the notified provision of this Code has been made applicable only so far to personal guarantors of the corporate debtors and not to other categories of people. Therefore it is alleged that the notification is ultra vires because Centre does not have the power to make these separate categories.
ARGUMENTS ADVANCED BY THE RESPONDENT
- The Union of India contended that a clear distinction had been made between personal guarantors and corporate guarantors in sec 60(2) vide the amendment of 2018. As the intention of the parliament had been to tackle the matters of personal guarantors distinctly with the partnership firms. The 2018 amendment also brought in a clear distinction in the above said classes. Liability of a personal guarantor is co extensive with liability of Principal borrower under sec.125 of Indian Contracts act, 1872.
- The Contention upon insolvency proceedings against principal debtor, the same amounts to extension of all the claims against that principal debtor, except the amount that is admitted in the insolvency resolution process. Therefore, it is very clear from sec. 31 of IBC, that once a resolution plan is approved and admitted by the adjudicating authority, it is binding on all stake holders including guarantors.
The present decision is in favour of banks and financial institution where public money is involved at large is a very effective tool for effective recovery of bank loans.
NCLT now has vide power to attach foreign assets of these personal guarantors of these company under notification. However, with concentration of power with banks and financial institutions, have made them gain power and a dominant position with respect to lenders and borrowers.
Now the question arises, how prudent will the banks and financial institutions be while dealing with minor lapses and defaults on part of small borrowers with limited resources and given the pandemic situation, especially they charge interest at compound rate. Possibility of settlement which small defaulters which often do as a normal course in such kind of transactions.
In transactions involving debt financing, it is a common feature for a director/ promoter/ guarantor of a company to provide a personal guarantee.
It is significant to note now how the interest of such personal guarantors is protected in light of these exorbitant legal provisions where the entire stake is involved, including their personal assts and if these provisions are not wisely then it will only restrict small businesses and young entrepreneurs as they are already hesitant to take loans in order to expand their businesses. Now that the personal assets of personals guarantors are also insolvent, it has undoubtedly raised the risk graphs for small businesses and companies as compared to well established and fund stable institutions.