A bench led by chief justice of India DY Chandrachud dismissed a set of petitions filed by former promoters of bankrupt companies, including Anil Ambani, Venugopal Dhoot and Sanjay Singal, challenging personal insolvency proceedings initiated against them. It also upheld various provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) that had been challenged on grounds such as the alleged absence of due process and violation of natural justice principles.
The court said the IBC provisions did not suffer from arbitrariness as contended by the petitioners.
“IBC cannot be held to be operating in a retroactive manner in order to hold it violative of the constitution,” it said. “Thus, we hold that the statute does not suffer from the vices of manifest arbitrariness.”
In November 2019, the central government had tweaked the bankruptcy law to allow personal insolvency cases against guarantors of corporate entities that fail to honour their debt.
Promoters of high-debt companies often furnish personal guarantees on corporate loans. Anil Ambani, for instance, has given guarantees of approximately ₹1,384 crore to lenders of his troubled companies. Sanjay Singal and his wife Arti Singal jointly guaranteed about Rs 12,276 crore of loans to Bhushan Power and Steel Ltd. Videocon’s Venugopal Dhoot and other promoters have guaranteed loans worth ₹6,157 crore, according to lawyers involved in the case.
“The judgment will now pave the way for smooth functioning of insolvency proceedings against personal guarantors, clearing all the legal hurdles,” said counsel Sanjay Kapur, who represented State Bank of India (SBI).
Bishwajit Dubey, an advocate specialising in bankruptcy law, said the ruling will lead to “new proceedings being filed against personal guarantors.” Cases pending before the National Company Law Tribunal (NCLT) will “move forward to their logical consequence… Unless the guarantors pay up, they will be declared undischarged insolvent… I expect that this will result in quick recovery for banks,” he said.
The top court rejected the industrialists’ pleas for some form of an adjudicatory process where the corporate debtor was also heard before the appointment of a resolution professional (RP) under Section 97 of the IBC.
The argument cannot be accepted as “reading an adjudicatory role in Section 97 will render Section 99 and Section 100 of the IBC otiose”, the CJI said while orally pronouncing the judgment on a batch of about 200 similar petitions led by Surendra B Jiwrajka versus Omkara Assets Reconstruction.
True adjudication only begins at the stage of Section 100 (admission or rejection of application) of the IBC and the SC cannot “rewrite the statute,” he said.
“The role under Section 99 which is ascribed to the RP is that of a facilitator who has to gather relevant information and recommend acceptance or rejection of application,” the CJI observed. It “leaves no manner of doubt that the resolution professional is not intended to perform an adjudicatory function or to arrive at binding decisions on facts and it is only a recommendation which has no binding force.”
The industrialists had challenged the legal validity of Sections 95(1), 96(1), 97(5), 99(1), 99(2), 99(4), 99(5), 99(6) and 100 of the IBC.
The top court accepted the central government’s stand that the IBC provisions imposing a stay on other legal proceedings against corporate debtors was for the benefit of the debtors.
“The moratorium is primarily in respect of a debt as opposed to a debtor,” it said. “Purpose of the moratorium under Section 96 is protective and the solicitor general was correct that the moratorium was to insulate the corporate debtor from the legal action of the debt.”
The Supreme Court had in October 2020 transferred all the personal insolvency cases from various high courts to itself and restrained them from entertaining fresh suits.
“The decision is a significant move towards a non-interference role in the well-formulated insolvency process of the personal guarantors under IBC,” said Shally Bhasin, partner at Shardul Amarchand Mangaldas & Co. “The pendency of the matter had stalled all the proceedings across the country relating to the personal guarantors, affecting recovery of thousands of lenders across the board.”
Lenders will now be able to recover their dues from personal guarantors in a time-bound manner, she said.
Senior advocate Percival Billimoria pointed to the possibility of multiple guarantors facing demand for the same debt.
“The scheme of the IBC does not envisage that the debt due from the company be proved again against the guarantors,” he said. “However, the amount owed by the guarantor is seldom the same. There may be more than one guarantor and it results in a demand being raised against all for the same amount of the debt of the company… When there is a fire sale of the company’s assets, for instance, the amount of liability of the surety is not crystallised until the auction is complete.”
Challenging the validity of provisions of Part III of IBC that are applicable to personal guarantors of a corporate debtor, the petitions stated that they were manifestly arbitrary, unconstitutional, and violated fundamental rights. They also alleged that there was a conflict of interest as an RP named and nominated by a financial creditor files the insolvency petition and is “naturally interested in favourable outcome” of the petition.
At no point is the NCLT statutorily mandated to give the alleged debtor an opportunity to be heard or raise objections on issues of quantum of debt, limitation, illegal claim, abuse of court processes, suppression of material facts, etc, they stated, adding that the impugned provisions are susceptible to routine abuse by individuals who may wrongfully claim to be creditors.