Personal Guarantor Insolvency Provisions Of IBC Under Challenge

  • Phoenix Legal Advises Höegh LNG

    Phoenix Legal Advises Höegh LNG

    By a gazette notification dated 15 November 2019, the Government of India had brought into effect Part III of the Insolvency and Bankruptcy Code, 2016 (IBC) (save and except provisions dealing with the fresh start process mainly set out in Chapter III) dealing with the insolvency and bankruptcy of individuals and partnership firms in so far as it is applicable to personal guarantors of a corporate debtor. We have recently seen a lot of discussion surrounding these provisions in several high profile matters. It has also been reported that Mr. Anil Ambani has challenged the validity of these provisions of the IBC which relate to personal guarantee and bankruptcy.

    In August 2016, Mr. Anil Ambani had given personal guarantees for two loans worth nearly INR 5,65,00,00,000 (Rupees five hundred and sixty-five crore) and INR 6,35,00,00,000 (Rupees six hundred and thirty-five crore) extended to his companies Reliance Communications (RCom) and Reliance Infratel Ltd (RITL) respectively. Reportedly, the loan accounts of RCom and RITL had been declared non-performing assets in 2017 after they failed to pay off the debt.

    In March 2020, the State Bank of India (SBI) had filed a petition before the National Company Law Tribunal (NCLT) Mumbai bench under Section 95 of the IBC, requesting the NCLT to appoint a Resolution Professional within seven days to look into the case. Last week, the NCLT had ordered insolvency proceedings against Mr. Anil Ambani for defaulting on the aforementioned loans and appointed a Resolution Professional in the matter. Mr. Anil Ambani filed a petition before the High Court of Delhi, challenging the appointment of a Resolution Professional by the NCLT to verify the factum of whether or not he had given a personal guarantee of approximately INR 12,00,00,00,000 (Rupees one thousand two hundred crores) against its loans to RCom and RIPL.

    The High Court of Delhi on Thursday passed an order, staying the personal insolvency resolution process proceedings initated against Mr. Anil Ambani in relation to the recovery of the aforementioned two loans from SBI and placing them on hold.[1] In the same order, the High Court of Delhi also restrained Mr. Anil Ambani from transferring, alienating, encumbering or disposing of his assets or legal rights and interests therein till the next date of hearing in the matter.

    Mr. Anil Ambani has also reportedly challenged the validity of provisions relating to personal guarantee and bankruptcy, passed by the Government of India last year, and questioned whether there was a provision under the IBC for such an order to be passed by the NCLT. Counsel for Mr. Anil Ambani had referred to an earlier order of the same bench of the Delhi High Court, wherein a stay on personal insolvency proceedings was granted to Mr. Lalit Kumar Jain over a similar personal guarantee, claiming that personal bankruptcy proceedings under IBC were ultra vires.[2]

    In both matters, the High Court of Delhi has clarified that the proceedings would continue in relation to the corporate debtor (companies) and while dealing with those proceedings, the liability of the personal guarantor may also be examined. However, the proceedings against the personal guarantors under Part-III of IBC shall remain stayed.

    The move to include personal guarantees issued by corporate promoters within the scope of IBC was made with a view to quicken the recovery process and improve chances of bad loan resolution by giving lenders strong leverage against erring promoters. Promoters of several renowned companies have given personal guarantees to lenders, including Jet Airways founder Mr. Naresh Goyal, Amtek Auto's Arvind Dham, Bhushan Power & Steel chairman Sanjay Singal, and defunct Kingfisher Airlines' chairman Mr. Vijay Mallya.

    The hope for lenders was that attachment of promoter's assets in the bankruptcy resolution process would increase their chance of recovery of dues. This could also potentially ensure that promoters take accountability and prevent them from getting away unscathed when the company is in trouble and several lenders are looking at crores worth in bad loans. However, with the validity of the provisions dealing with personal guarantee and bankruptcy under the IBC being challenged, it will be interesting to see how these matters pan out, since the outcome would have far-reaching implications on the treatment of personal guarantors hereafter.

    About the Authors

    Vasanth Rajasekaran is a partner at Phoenix Legal, a full-service law firm having its offices at New Delhi and Mumbai. Vasanth is based out of New Delhi and his practice areas include Dispute Resolution (Litigation & Arbitration) & Projects.

    Reshma Ravipati is an associate at Phoenix Legal, a full-service law firm having its offices at New Delhi and Mumbai. Reshma is based out of New Delhi and her practice area is Dispute Resolution (Litigation & Arbitration).

    [1] Anil Dhirajlal Ambani v. State Bank of India, W.P. (C) 5712/2020, dated 27 August 2020.

    [2] Lalit Kumar Jain v. Union of India Ministry of Law and Justice & Ors., W.P. (C) 4849/2020, dated 8 August 2020.

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