Accounting for the Right of the Personal Guarantor: Critique of the Plea Challenging Validity of IBC – By Lolita Delma Crasta

Accounting for the Right of the Personal Guarantor: Critique of the Plea Challenging Validity of IBC

Authored by:
Lolita Delma Crasta, 4th B.A. LL.B. (Hons.), CHRIST (Deemed to be University), Bangalore 

On August 2022, Anil Ambani filed a plea challenging the constitutionality of certain IBC provisions in response to the insolvency proceedings initiated against Reliance Group.[1] The validity has been raised against Section 95 (Application by creditor to initiate insolvency resolution process), 96 (Interim-moratorium), 97 (Appointment of resolution professional), 99 (Submission of report by resolution professional), 100 (Admission or rejection of application) of the IBC Code, 2016.

In the plea, it has been contended that these provisions regarding the personal guarantor are violative of Articles 14, 19 and 21 of the Constitution. That they extend no provision of the copy of Resolution Professional’s report to the guarantor who constitutes the petitioner. Furthermore, there is no application of mind; or verification of constitution of proceedings by the creditor before DRT or SARFAESI against the personal guarantor. The plea further contends that the natural justice principle of Audi Alteram Partem is never afforded to the personal guarantor.

Extent of Liability of Personal Guarantor

In the case of Lalit Kumar Jain v. UOI,[2] the court had explicitly observed that the liability of the personal guarantor subsists independent to that of the corporate debtor. The principle of co-extensiveness[3] states that the guarantor’s liability cannot be more than that of the principal debtor. Upon invocation of the guarantee by a creditor, to recover the same from the corporate debtor, the debtor and the guarantor are considered as one entity.[4] Thus, the analysis can be drawn that all rights of the debtor during the proceedings is assumed to be extended to the guarantor as well.

Nonetheless, this argument holds accurate when the precedent of Lalit Kumar case is accepted and applied in effect with no consonance. Interpretation of the judgement reveals that “Discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.”

Section 100 of the Code[5] clearly states that the Adjudicatory Authority shall pass an order either accepting or rejecting the insolvency application made under Section 94 or 95 within 14 days of the submission of Resolution Professional’s Report. Thus, here lies the opportunity for the corporate debtor and the personal guarantor to corporate debtor to present their side of the story. Even in the case of acceptance of the report, it issues instructions for the purpose of conducting negotiations between the debtor and creditors and for arriving at a repayment plan before ordering liquidation.

Applicability of Resolution Professional’s Report

The contention of non-provision of the Resolution Professional’s report to the guarantor cannot be raised until the same is remedied at the level of the corporate debtor.

The right of audi alteram partem comes post the institution of proceedings, whereas the plea submits the same at the stage of admission of the claim to recover by the creditor. Approaching the judicial forum is the right of the creditor, the actual initiation of winding up depends on the report of the Resolution Professional. Under Section 33 of the code, an application made to initiate insolvency resolution process can only be referred to liquidation upon such satisfaction of the Adjudicating Authority. It will be detrimental to the right of the creditor to delay the proceedings of recovery of debt until the inquisitorial process of the NCLT commences, i.e. the RP report.

In the case of Committee of Creditors of Essar Steel India Ltd., Through authorized signatory vs Satish Kumar Gupta & Ors.,[6] the Court held that the Resolution Plan can be contended and sent back to CoC if the NCLT deems certain parameters lacking. Thus, the submission of resolution plan isn’t binding but subject to Adjudicating Authority’s approval. Admittance of Audi Alteram Partem at this stage isn’t barred, and hence the personal guarantor preserves this right. It is only when a resolution plan gets approved by the Adjudicating Authority, does it become binding on the personal guarantor under section 31 of IBC.[7]

In the case of Committee of Creditors of Essar Steel (I) v. Satish Kumar Gupta,[8] Supreme Court’s clear ruling was that the resolution professional is simply needed to gather, compile, and admit claims without taking on an adjudicative role. These claims must be finally discussed and resolved by the CoC. Thus, the Adjudicating Authority takes on a more hands on role, realising the Indian insolvency law favours the creditor, and is a creditor – driven process.[9]

This is however in grave conjecture & inconsistency with the Lalit Kumar Case that prescribes 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.”

Conclusion

This isn’t the first instance of raising questions of validity against the above-mentioned provisions. In the case of Gurmeet Sodhi v. Union of India & Ors[10] before the Hon’ble Supreme Court, it was contended that the impugned provisions denude the personal guarantors of the opportunity to raise objections on jurisdictional issues such as double dipping, period of limitation, inconsistent, illegal & false claims, quantum, suppression of facts, etc. at the very threshold. In two May[11] and July[12] petitions of 2022, the submissions were similar.

In the past, the constitutional validity of the code has been raised on multiple occasions, and it has always emerged triumphant.[13]

In either of the side, the plea has raised questions between the consonance of the interpretation of IBC  provisions and judiciary’s stance in light of Lalit Kumar Case. The law heavily favours the corporate creditor, besides the fact that the relief provided to the debtor does not necessarily extend to the personal guarantor to the corporate debtor.

Reference

[1] Anil Dhirajlal Ambani vs Union of India, WP(c) 519/22.

[2] 2021 SCC OnLine SC 396.

[3] Sriram Venkatavaradan and Saai Sudharsan Sathiyamoorthy, General Principles Relating to the Treatment of Personal Guarantors Under the Indian Insolvency Regime (2022) 5 SCC J-8.

[4] Lalit Mishra & Ors.  v. Sharon Bio Medicine Ltd. & Ors., 2018 SCC OnLine NCLAT 669.

[5] Section 100, Insolvency and Bankruptcy Code, 2016.

[6] [2019] ibclaw.in 07 SC. See also Bank of Maharashtra vs Videocon Industries Ltd. & Ors. (2022) ibclaw.in 21 NCLAT.

[7] Section 31, Insolvency and Bankruptcy Code, 2016.

[8] (2020) 8 SCC 531.

[9] Karad Urban Cooperative Bank Ltd. V. Swwapnil Bhingardevay and Ors., AIR 2020 SC 4381 [14].

[10] Writ Petition(s)(Civil) No(s).307/2022.

[11] Surendra B. Jiwrajka Vs Omkara Assets reconstruction Pvt. Ltd. Special Leave Petition No. 16464 of 2021.

[12] Gaurav Garg v. Union of India and ors.

[13] Manish Kumar v. Union of India, 2021 SCC OnLine SC 30.

 

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