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SC stay on guarantee invocation may delay personal insolvencies
A recent Supreme Court stay on a personal guarantor case is likely to be used across the country in all personal guarantee cases pending before various national company law tribunals, legal experts said
A recent Supreme Court stay on a personal guarantor case is likely to be used across the country in all personal guarantee cases pending before various national company law tribunals, legal experts said.
In the matter, Gurmeet Sodhi, a personal guarantor, filed a petition before the Supreme Court, raising a constitutional challenge to the personal insolvency provision under the Insolvency and Bankruptcy Code (IBC).
The case will be key for personal guarantors as it will require the court to explore the subject of personal guarantor rights, said advocate Srijan Sinha.
On the other hand, Anushkaa Arora, principal and founder of ABA Law Office, said that though there won’t be any direct impact on other cases of NCLT, an implied effect can be seen in cases involving similar questions or points of law. “This can be a catch for guarantors of pending cases for obtaining interim relief on the same lines,” she said.
“In granting interim relief to Sodhi, the top court took a forward step displaying its intention to decide the matter on merits. We will have to wait for a few more months to see how the law will evolve with respect to personal guarantors,” Arora said, adding that if the issue is not decided within six months, the interim relief will automatically get vacated. However, the court indicated that the issue of personal guarantors in IBC would be decided soon.
According to Insolvency and Bankruptcy Board of India data, applications invoking personal guarantees against corporate debtors filed by creditors surged to 637 as of March 2022 from 191 in FY21 and 16 in FY20. The total debt currently stands at ₹95,656.6 crore, while the guaranteed amount is ₹71,672.65 crore.
Ajay Shaw, partner, DSK Legal, said the Supreme Court order may result in other personal guarantors wanting to tag along to the matter filed by Sodhi, so that the proceeding against them under IBC is stayed till a final order is passed.
“Earlier, in the Lalit Kumar Jain case, the personal guarantor challenged the vires (power) of certain provisions of the IBC before the Supreme Court, and a number of personal guarantors tagged their matters to the petition filed by Lalit Kumar Jain. However, the order passed by the Supreme Court in the Lalit Kumar Jain matter upheld the right of creditors to proceed against the personal guarantors under the provisions of IBC and disregarded the arguments furnished by the personal guarantors. Questions of law not already covered under the Lalit Kumar Jain matter and now being raised in the Gurmeet Sodhi matter will be decided by the Supreme Court so that the same cannot be taken up subsequently by others. Hopefully, with the final order in this matter, grounds for challenges on this issue will get minimized,” said Shaw.
The personal guarantor (Sodhi) had filed a writ petition with the Supreme Court under Article 32, alleging that the impugned provisions violate the fundamental right to natural justice by failing to provide for the personal guarantor’s right to be heard before entertaining the creditor’s insolvency petition and appointing a resolution professional.
In his plea before the apex court, Sodhi claimed that as a personal guarantor, he was entitled to notice and a hearing by the adjudicating authority before a resolution professional is appointed, and initiation of an interim moratorium is under sections 95, 96, and 97 of the code.
A bench led by Justices Vineet Siran and J.K. Maheshwari, as an interim relief, restrained the resolution professional in the personal guarantor’s insolvency proceedings from submitting the statutory report before the adjudicating authority while issuing notice in the writ petition.
The supreme court directed the personal guarantor shall not transfer, alienate, encumber or dispose of any of his assets or his legal rights or beneficial interest therein.
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First Published:16 May 2022, 12:50 AM IST
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