Audi Alteram Partem: A Right not accorded to Personal Guarantors – By Swena Prashant & Soham Das

Audi Alteram Partem: A Right not accorded to Personal Guarantors

Authored by:
Swena Prashant & Soham Das
5th year and 2nd year students at the West Bengal National University of Juridical Sciences, Kolkata

As an interim relief, the Supreme Court of India, in Gurmeet Sodhi v. Union of India, recently restrained a resolution professional from submitting a statutory report before the National Company Law Tribunal (NCLT). It was granted after a petition was filed questioning the constitutionality of specific provisions of the Insolvency and Bankruptcy Code 2016. (IBC). 

The petitioner (a personal guarantor to a company) contends that the impugned provisions violate the right of the personal guarantor to be heard before acting upon the insolvency petition filed by the creditor and the appointment of a resolution professional. In the capacity of a personal guarantor, one should be entitled to notice and hearing by the Adjudicating Authority, and non-adherence to the same being a violation of principles of natural justice is the conflict that arises.

Given that this case could be of landmark precedence for personal guarantors and their rights, it is significant to look into the constitutionality of certain provisions of the IBC. To understand the relevance of the issues that have been contended, a bare perusal of the factual background of this case adds a lot contextually.

Factual Background

The petitioner, in this case, Mrs. Gurmeet Sodhi, is the former Director of Kudos Chemie Limited (Corporate Debtor), a company that recently underwent corporate insolvency resolution process. As a director, she had undertaken personal guarantees to secure credit for her company. The aforementioned issues are in consideration now, as the financial creditors have initiated an insolvency resolution process in order to invoke the guarantees.

At the time of hearing of this case, the court also noted the pendency of a similar issue in Surendra Jiwrajkar v. Omkara Assets Reconstruction Private Ltd. (2021) ibclaw.in 26 HC. It has decided to club the proceedings of both the cases, thereby making the facts of the latter relevant. Surendra Jiwrajkar, the personal guarantor, challenged the insolvency resolution process initiated against him by Omkara Assets Reconstruction Private Limited (Omkara) because the outstanding debt had already been assigned to JM Financial Asset Reconstruction (JM) Limited. The issue of maintainability arose as Omkara sought to recover this debt, already sold for consideration to JM Ltd. 

Thus, the constitutional vires of Sections 95, 96, 97, 99 and 100 have been challenged on the grounds of lack of notice & hearing by the Adjudicating Authority and the subsequent denudation of the right of personal guarantors to raise objections on the maintainability issue. Since the above-mentioned provisions have been challenged, the scope and the interpretation of the said provisions need to be examined to understand their statutory connotations.

Scope of the Impugned Provisions

Section 95 of IBC deals with the application by a creditor to initiate the insolvency resolution process. The provision bestows upon the creditor the right to initiate the process either by himself, jointly with other creditors, or through a resolution professional by applying to the Adjudicating Authority. It also mandates the requirements of certain details, documents and the notification of the application to the debtor. 

Whereas Section 96 provides for the initiation of the interim moratorium. The moratorium period commences on the exact date that the application is filed. Thus, as per the current law provided in IBC, the Adjudicating Authority, by order, declares a moratorium on the assets of the debtor by prohibiting any action from foreclosing, recovering or enforcing any security interest created by the corporate debtor in respect of its property, including any action under the act.

Section 97 deals with the appointment of a resolution professional. Post application of insolvency resolution, the Adjudicating Authority directs the Insolvency and Bankruptcy Board of India to nominate a resolution professional within 7 days. Post nomination by the Board, the Adjudicating Authority appoints the resolution professional.

Under Section 99, the resolution professional must examine the insolvency application and submit a report to the Adjudicating Authority recommending its approval or rejection within 10 days of appointment. The resolution professional can also require the debtor to prove repayment of the debt and seek further information on the insolvency application, and such information has to be furnished within 7 days of receipt of the request. On the subject of recommendation, the resolution professional is required to record reasons in both eventualities, either recommending acceptance or rejection of the application.

That brings us to Section 100 of IBC, dealing with the admission or rejection of the application. It mandates that the Adjudicating Authority shall, within 14 days from the date of submission of the report under Section 99, pass an order either admitting or rejecting the application referred to in Sections 94 or 95, as the case may be.

Issues concerning Personal Guarantors

Gurmeet Sodhi (personal guarantor) in this case, has filed a writ petition under Article 32 of the Constitution of India before the Supreme Court. She raised the point of contention that the impugned provisions do not provide for the personal guarantor’s right to be heard before hearing the insolvency petition, which is initiated by the creditor and upon the appointment of a resolution professional. She contends that the moment an insolvency application under Section 95 is accepted, an interim moratorium commences, thereby causing serious prejudice to personal guarantors. Subjecting them to such insolvency proceedings without even being given a chance to defend their position impacts the guarantor’s standing in the industry and violates principles of natural justice.

In India, the principles of ‘natural justice’ have long been recognized and are duly established in the philosophy behind the framing of the Constitution. Article 14 of the Constitution of India guarantees ‘Audi alteram partem’ (the right to be heard) to a person adversely affected by any administrative direction. The Supreme Court of India in Maneka Gandhi v. Union of India held that Article 14 of the Constitution of India enshrines the proposition that principles of natural justice are an integral part of the constitutional guarantee of equality, and any direction depriving a person of his opportunity to be heard lacks natural justice.

NCLT, being a quasi-judicial body, is bound by the principles of natural justice and the adherence to the same is enrooted in Section 420 of the Companies Act, 2013, as held in Innoventive Industries Ltd. v. ICICI Bank [2017] ibclaw.in 02 SC. The principles can only be overlooked if the statute excludes them by necessary implications, which is not the case with IBC. Since principles of natural justice are fundamental to the concept of ordered liberty, statutory silence concerning its applicability implies compliance with the same.

Thus, the issue arises during the initiation of the insolvency resolution process against the personal guarantor, as they are not given notice of the said initiation. This hinders the personal guarantor from raising questions pertaining to the debt owed.

In the matter of Swiss Ribbons Private Limited v. Union of India [2019] ibclaw.in 03 SC, concerning corporate insolvency, the court had referred to the various provisions of the Companies Act and NCLT Rules to hold that the Adjudicating Authority must serve a copy of the application onto the Corporate Debtor, thereby notifying it. A similar stance was taken in Ravi Kulkarni v. State Bank of India (2021) ibclaw.in 396 NCLAT, which pertained to the rights of personal guarantors. The court held that the adjudicating authority is duty-bound to prevent abuse of process. As such, limited notice to appear may be given to personal guarantors so that he may provide information to the resolution professional under Section 99(2) and afford his opportunity to be heard.

Similarly, in Sree Metallics v. Union of India [2017] ibclaw.in 03 HC, the court accepted that most insolvency proceedings are adversarial in nature, and there can be drastic consequences if people are condemned unheard. It held that principles of natural justice should be read into the Code, even though its application is not expressly mentioned.

Although one might point to, Section 238, which provides for the non-obstante clause, in favour of the government, it still falls short of violating fundamental principles. Section 238 signifies the authority bestowed upon IBC provisions to override other laws but the Companies Act restricts the same, under Section 424. It has been held that procedural requirements would be followed as prescribed under the Code and it shall have a mandatory and overriding effect as envisaged. Thus, the Tribunal shall be bound by the provisions of the Companies Act insofar as the provisions in connection with the duties/ obligations and how the Tribunal should function are concerned.

Thus, the personal guarantors are indeed discriminated against to a certain extent by not providing them with the opportunity to be heard. This is a pertinent issue for consideration, and there is sufficient material to establish the case for the personal guarantors.

Conclusion

The IBC was enacted to provide a streamlined and faster process for dealing with the insolvency of individuals and corporate entities. However, it should ensure that personal guarantors don’t miss out on their fundamental rights in the garb of speedy redressal.  It is high time that the courts recognize the significance of the role that is played by personal guarantors and vest them with fairness, in line with principles of natural justice. By granting interim relief, the Supreme Court has made its intention clear that the subject of rights of personal guarantors requires further scrutiny. It is left to be seen what the court adjudges, but optimizing the resolution process to accommodate all parties on the same pedestal, is of utmost need.

Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.