Personal guarantors liable for the corporate debt, upholds SC

New Delhi: In a significant verdict, the Supreme Court Friday held that individual guarantors to corporate loans will also undergo insolvency proceedings along with firms under the Insolvency and Bankruptcy Code (IBC) and they are not absolved of liabilities even after resolution plans to revive the sick companies are approved.

The verdict, upholding Centre's November 15, 2019 notification bringing personal guarantors of corporate debtors under the net of the IBC, assumes significance in view of the fact that various high-profile industrialists may now face insolvency proceedings along with their debt-ridden firms under the IBC.

Lenders had last year filed bankruptcy cases against promoters of alleged delinquent companies including Reliance Group's Anil Ambani, Dewan Housing Finance Corp Ltd.'s Kapil Wadhawan and Bhushan Power and Steel Ltd.'s Sanjay Singhal. The cases were however stayed on appeals filed in higher courts.

A bench comprising justices L Nageswara Rao and S Ravindra Bhat held that approval of the resolution plan for revival of sick companies under the IBC does not discharge personal guarantors of their liability to pay back banks or financial institutions (FIs) as they are bound by separate contracts.

It is 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 guarantee. As held by this court, 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, Justice Bhat, writing the judgement for the bench, said.