Mint Explainer: What the Subhash Chandra case means for personal guarantors

This is one of the most high-profile insolvency cases since the Supreme Court judgement on personal guarantors under the Insolvency and Bankruptcy Code (IBC) in November 2023. It has implications for Reliance ADA Group chairman Anil Ambani, Videocon chairman Venugopal Dhoot, and Bhushan Power and Steel promoter Sanjay Singal, who also face personal-insolvency proceedings.

Mint delves into the case and explains how the Supreme Court judgement allows creditors to take high-profile personal guarantors into insolvency, leading to a rise in such litigations.

What’s the background of the case?

In 2016, Indiabulls Housing Finance (IHF) entered into four loan agreements totaling ₹726 crore with Vivek Infracon and other entities. Chandra assumed the role of personal guarantor on 5 December 2018, committing to repay the lender ₹726 crore in case the borrowers defaulted.

On 4 February 2019, IHF exercised its right to recall the entire loan amount, prompting the invocation of Chandra's personal guarantee. A formal demand notice was sent to him on 18 January 2022 seeking repayment ofVivek Infracon's  ₹178.78-crore loan.

IHF initiated insolvency proceedings against Chandra under the IBC on 8 February 2022. In response, Chandra argued that the NCLT could not rule on an individual's insolvency. However, on 30 May 2022, the NCLT ruled it had the power to adjudicate Chandra's insolvency and appointed a resolution professional to consider Indiabulls's application and investigate Chandra's debt.

Also read: NCLT admits Subhash Chandra into personal insolvency on Indiabulls plea

Chandra challenged the NCLT's decision in the National Company Law Appellate Tribunal (NCLAT), but the case was closed following Indiabulls's announcement of a settlement. During this time, several petitions challenging the validity of certain provisions of the IBC, including those concerning personal guarantors, were filed in the Supreme Court, which halted all personal-guarantee insolvency proceedings. In November 2023, the court upheld the law allowing creditors to take personal guarantors into insolvency.

In February 2024 Indiabulls revived the case after unsuccessful attempts to settle the dispute, ultimately leading to Chandra's admission into personal insolvency.

What is the law on personal guarantors?

A personal guarantor assumes liability for debt and pledges to repay it in case a borrower defaults.

Under the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, and a subsequent notification dated 15 November 2019, personal guarantors are directly subjected to insolvency proceedings, with no requirement for the creditor to initiate proceedings against the corporate debtor.

What was the landmark Supreme Court ruling?

In a ruling on 9 November 2023 the Supreme Court upheld key provisions of the IBC, including the appointment of the resolution professional, denying relief to a group of personal guarantors who had challenged parts of the law.

The court ruled against around 350 petitions filed by personal guarantors, including Anil Ambani, challenging the constitutional validity of several provisions of the IBC concerning personal guarantors, including sections 95 to 100.

Also read: A Supreme Court ruling has given personal insolvency a fresh start in India

The petitions claimed there was a lack of due process in these IBC provisions. The court ruled that the IBC was not retroactive but held that sections 95 to 100 could not be deemed unconstitutional simply because they did not give personal guarantors a chance to be heard before creditors’ insolvency petitions were admitted against them, because a moratorium was automatically imposed on them at the time of filing the insolvency petition.

The judgement was welcomed by many as it allowed lenders to recover portions of debt that had not been recovered through corporate-insolvency proceedings against the principal debtor. However, some feared it would open the floodgates for creditors to take personal guarantors into insolvency.

What do experts say?

Dhiraj Mhetre, partner at Khaitan Legal Associates, noted, “The insolvency proceedings against Subhash Chandra serve as a precedent for cases pending over similar objections on Constitutional validity. Tribunals are moving with great speed on personal-guarantor petitions since the Supreme Court judgement."

Shruti Maniar, partner at Solomon & Co, emphasised the responsibility of personal guarantors and advised caution when providing such guarantees. She said, "The initiation of personal-insolvency proceedings against personal guarantors pierces the corporate veil. Personal guarantors must be cautious before providing any guarantees."

Durgesh Khanapurkar, partner at Desai & Diwanji, said a significant number of applications have been filed against personal guarantors of late, indicating a growing trend in such proceedings. In the 296 cases admitted as of December 2023, lenders have recovered ₹91.67 crore, a figure that’s expected to rise in the coming months.

Also read: The SC’s ruling on personal debt guarantees will help unlock dead capital