SC Ruling on Personal Guarantor’s Liability for Corporate Debt

What is the News?

The Supreme Court has upheld the government’s move to allow lenders to initiate insolvency proceedings against personal guarantors.

Who is a personal guarantor?

• To showcase their intent to repay the bank loan on time, the promoters of some big business houses submit a personal guarantee to the lenders. It secures them loans easily and timely.
• It is sort of like an assurance from the owner or the owners of the company that the money borrowed by their company for various purposes shall be repaid on time as per the agreed schedule.
• Furthermore, it is different from the collateral. Indian corporate laws say that individuals such as promoters are different from businesses and the two are very separate entities. Thus, a promoter can give a guarantee for the company it is running

What is the issue?

• In 2019, the Government issued a notification. It allowed creditors, usually financial institutions and banks, to make a move against personal guarantors under the Indian Bankruptcy and Insolvency Code(IBC).
• The intention was to hold the guarantor promoters liable for the defaulting companies against loans.
• However, the notification was challenged by the promoters, claiming that it was always a management board that ran the company. Therefore, the promoters alone should not be held liable for the default on debt repayment.

What has the Supreme Court said?

• The Supreme Court has upheld the notification issued by the Government.
• The court said that there is a close connection between personal guarantors and their corporate debtors. Hence, it was this connection that made the government recognise personal guarantors as a separate category under the IBC.

Significance of this judgment:

• This judgment assumes significance as it will now allow lenders to go after personal guarantors even while bankruptcy proceedings against the ailing companies are pending. This will speed up the process for the recovery of dues.

Source: The Hindu