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Supreme Court Provides No Relief For Personal Guarantors Under IBC

By Sunil Garodia
First publised on 2023-11-10 07:43:02

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Author of Cyber Scams in India, Digital Arrest, The Money Trap and The Human Hack

The Supreme Court on Thursday upheld the constitutional validity of many sections of the IBC. More than 200 petitions had been filed challenging various provisions of the law. The main challenges were to Section 95 which allows creditors to initiate insolvency proceedings against personal guarantors and to Section 97 which defined the appointment and role of the resolution professional (RP).

Regarding Section 95, the apex court bench was of the view that the Section was neither arbitrary nor did it fall foul of the Constitution. It is strange that promoters, directors and others of companies that have become insolvent and who had provided personal guarantees against the loans or other credit availed by the said companies seek to wash their hands off the matter. What is a personal guarantee if not the promise to pay if the company fails to pay? In personal guarantees, there is no condition attached that the guarantor will not be liable to pay if the company goes insolvent. In fact, the personal guarantee is taken by creditors for the precise reason that the promoters are competent enough and have the resources to repay the amount if the company goes insolvent or otherwise defaults on the payments. Hence, if the company fails to pay and has become insolvent, obviously those who provided the personal guarantees have to honour them. The court has rightly held them accountable and upheld the said Section.

Regarding Section 97, the court was of the view that the role of the RP was that of a facilitator and "reading an adjudicatory role in Section 97 will render Section 99 and Section 100 of the IBC otiose". It said that "the role under Section 99 which is ascribed to the resolution professional is that of a facilitator who has to gather relevant information and recommend acceptance or rejection of application". It further said that there is "no manner of doubt that resolution professional is not intended to perform an adjudicatory function or arrive at binding decisions on facts and it is only a recommendation which has no binding force". This is also correct as the final say in the matter rests with the committee of creditors under the IBC which may, or may not, accept the recommendation of the RP. 

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