05 June 2021

Creditors/lenders can initiate insolvency proceedings against personal guarantors

The Supreme Court in a recent judgment has held that the Notification dated 15 November 2019 (‘Notification’), which notified the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (Rules), is ‘legal and valid’.

The said Notification was challenged before several High Courts and therefore, the Supreme Court had directed transfer of petitions from High Courts to itself to provide uniform interpretation on the said Notification and the Rules.

The Petitioners inter alia contended that the said Notification which brought into force Section 2(e) of the Insolvency and Bankruptcy Code, 2016, thus making the Code applicable to ‘personal guarantor to corporate debtor’, was ultra vires as it selectively made the provisions of the Code applicable to a specific category of persons.

Rejecting the said contention, the Supreme Court was of the view that the Central Government has followed a stage-by-stage mechanism to bring in force various provisions of the Code depending upon the priorities and with an aim to fulfil the objectives of the Code.

The Supreme Court in the case Lalit Kumar Jain v. Union of India observed that the Central Government had consulted the body of experts which recommended that personal guarantors to corporate debtors facing insolvency process should also be involved in proceedings by the same adjudicator and for this, necessary amendments were required.

It held that therefore, the issuance of the impugned notification was well within the powers conferred by the Parliament under Section 1(3) of the Code.

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