Relief For Lenders Against Personal Guarantors

A significant boost has been received by the lenders in the available recourses against defaulting personal guarantors.

The Supreme Court of India in the judgment delivered in Lalit Kumar Jain Vs Union of India & Ors. [Trans. Case (Civil) No. 245/2020] has upheld the notification issued by the Central Government on 15.11.2019, enabling the creditors to initiate corporate insolvency process against personal guarantors of corporate debtors under the provisions of The Insolvency and Bankruptcy Code, 2016 “(IBC”).

The IBC was enacted to streamline the insolvency resolution process against corporate persons, partnership firms and individuals in order to settle the issues in a time-bound manner however, all the provisions of the IBC have not yet been notified by the Central Government. Under the IBC, any financial creditor, such as banks and financial institutions or any operational creditor to whom any debt is owed out of transactions with the corporate debtor can initiate an insolvency process against the corporate debtor for the realization of the debt.

In most cases, the promoters or directors of companies act as personal guarantors to loans availed by the corporate debtor from the creditors including banks and financial institutions. However, in an action brought by the financial creditor under the IBC, there was no available recourse against the personal guarantors

On November 15, 2019, Central Government issued a notification (“Notification”) notifying certain provisions in the IBC in so far as they related to personal guarantors, in effect enabling creditors to initiate proceedings under the IBC against personal guarantors. As a result, the personal guarantors began receiving demand notices and were forced to approach various High Courts challenging the notification so issued on November 15, 2019.

All the petitions pending before different High Courts were transferred to the Hon’ble Supreme Court and were heard in a consolidated manner. On May 21, 2021, the Hon’ble Supreme Court delivered a judgment upholding the vires of the Notification and rejected the argument of personal guarantors that the Central Government acted beyond its powers under the IBC in issuing the Notification by singling out the application of provisions to Corporate individuals. It held that the liability of the personal guarantor cannot be absolved since it arises out of an independent contract with the lender even if the corporate insolvency process has been initiated against the corporate debtor.

Thus, going forward, any lender/ financial creditor will be at liberty to initiate the insolvency process against the personal guarantor under the provisions of the IBC. Although the exhaustive implications of this ruling are yet to be seen, it is being viewed by the financial creditors as a significant relief.