SUPREME COURT RULES THAT PERSONAL GUARANTORS ARE NOT EXEMPT IN INSOLVENCY AND BANKRUPTCY MATTERS

In a recent judgement passed in the matter of State Bank of India vs. V. Ramakrishnan, decided on 14.08.2018, by Justice R. Nariman and Justice Indu Malhotra, the Supreme Court held that the moratorium period allowed under the Insolvency and Bankruptcy Code, 2016 (IBC) will not apply to a personal guarantor of a corporate debtor.

This case will have a significant impact on all personal guarantors of corporate debtors. Till date, personal guarantors sought exemption against invocation of personal guarantees given by them during the moratorium period of six months that was allowed to a corporate debtor during the insolvency resolution process.

Personal guarantors who were generally promoters of the sick company have sought refuge under Section 14 of the IBC and claimed that there was a prohibition not only against the corporate debtor which got a breather of six months in order to finalize the resolution plan but that it also applied to a corporate guarantor. This put banks and other lenders in a difficult situation as despite having a guarantee they were unable to invoke the same when the corporate debtor went in for bankruptcy proceedings.

The Section 14 that allows the moratorium period generally provides a stay in any legal action or proceeding pending in respect of any debts till the resolution plan is finalized. While the Section was very clear that the moratorium applied only to the corporate debtor, guarantors took advantage of this and claimed that the moratorium period applied to a corporate debtor also applied to the personal guarantors. This led to a situation where the lenders were left without remedy till the moratorium period ended.

With the passing of the present judgement it is now clear that since guarantees for loans of corporates are given by its promoters in the form of personal guarantees, if there is a stay of action against their assets during a resolution process such promoters (who are also corporate applicants) try to file frivolous applications to take advantage of this stay and guard their assets. Hence, there is an abuse of the moratorium period which in the first place is given only to enable the corporate debtor to get a brief respite while the resolution plan is finalized.

The Court has now held that the moratorium allowed by the IBC does not bar actions against assets of guarantors to the debts of corporate debtor and is restricted only to the assets of the corporate debtor.

With the passing of this judgement there is a great relief for lenders who can now proceed against the guarantors in spite of a pending IBC proceeding. This judgement is landmark for lenders who have been at the wrong and receiving end when corporate debtors file for bankruptcy or voluntary winding up creating a huge crunch in the economy that effects the growth of the country.

SUSHILA RAM

CHIEF CONSULTANT

THE INDIAN LAWYER