1. The Hon’ble Supreme Court vide its Judgment dated 21.05.2021, has dismissed the challenge to the vires and constitutional validity of the Notification dated 15.11.2019 issued by the Central Government whereby the provisions pertaining to insolvency proceedings against the personal guarantors under the Insolvency and Bankruptcy Code, 2016 were notified and brought into force with effect from 01.12.2019. Also, the challenge to the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 and Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 which were notified on 20.11.2019, has been rejected. The Hon’ble Supreme Court has also dismissed the challenge to the constitutional validity of the proceedings being initiated against the Personal Guarantors of the Corporate Debtors in terms of Part III of the Insolvency & Bankruptcy of India, 2016, which dealt with Insolvency Resolution and Bankruptcy for individuals and partnership firms.

2. The key features of the Judgment of the Hon’ble Supreme Court are as under:-

a) The Hon’ble Supreme Court has decisively held that the impugned Notifications were not an instance of legislative exercise or amounting to impermissible and selective application of provisions of the Code. The Hon’ble Supreme Court was of the view that there is sufficient indication in the Insolvency Code by Section 2(e), Section 5(22), Section 60 and Section 179 indicating that personal guarantors, though forming part of the larger grouping of individuals, were to be, in view of their intrinsic connection with corporate debtors, dealt with differently, through the same adjudicatory process and by the same forum (though not insolvency provisions) as such corporate debtors. It has been accordingly held that the impugned Notification was issued within the power granted by Parliament and in valid exercise of it and accordingly, held that in issuing the impugned notification under Section 1(3) is therefore, not ultra vires and the Notification was accordingly held to be valid.

b) The second important issue raised by the Personal Guarantors was that since the liability of the Guarantor was co-extensive with that of the Principal Debtor i.e. the Corporate Debtor and that once the Resolution Plan was accepted and the Corporate Debtor was discharged of the liability, the Guarantor also ought to be discharged simultaneously of all its liabilities. The Hon’ble Supreme Court has rather held that all the Creditors, who participate in the Resolution Process, are heard and the CoC accepts or rejects their pleas whereinafter they are entitled to vent their grievances before the National Company Law Tribunal, which results in finality as to the claim of the Creditors from the Corporate Debtor Company. Further, the Hon’ble Supreme Court by relying upon the Judgment of the Vijay Kumar Jain Vs. Standard Chartered Bank (2019) SCC OnLine SC 103 has held that the rationale for allowing the Directors to participate in meetings of the CoC is that the Directors’ liability as Personal Guarantors persists against the creditors and an approved resolution plan can only lead to a revision of amount or exposure for the entire amount. The Hon’ble Supreme Court had further relied upon the Judgments passed in the matters of State Bank of India Vs. V. Ramakrishnan & Ors. 2018 (17) SCC 394 and Committee of Creditors of Essar Steel (I) Ltd. Vs. Satish Kumar Gupta (2020) 8 SCC 531 to hold that the sanction of a Resolution Plan does not per se operate as a discharge of the Guarantor’s liability. It has been further held that the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract. Accordingly, the Hon’ble Supreme Court has held that approval of a Resolution Plan does not ipso facto discharge a Personal Guarantor of a Corporate Debtor of her or his liabilities under the contract of the guarantee.

The Hon’ble Supreme Court has thus upheld the Notification to be legal and constitutionally valid.

3. The decision of the Hon’ble Supreme Court has thus cleared the path for proceeding against the Personal Guarantors of the Corporate Debtors by the Creditors of the Company and is likely to result in mushrooming of proceedings against the Guarantors despite the successful Resolution Plans being drawn in respect of various entities or alternatively, resolution of debts of the Corporate Debtor through liquidation.

By Purti Gupta