The Supreme Court on May 21 dismissed pleas by various promoter guarantors against lenders launching insolvency proceedings against them. The Supreme Court bench of Justices L Nageswara Rao and and Ravindra Bhat upheld the November 15, 2019 notification issued under the Insolvency and Bankruptcy Code (IBC), 2016. 

The notification had permitted lenders to invoke personal insolvency proceedings against promoter guarantors of companies facing Corporate Insolvency Resolution Process (CIRP). The judgment decided on 75 petitions that challenged the notification. The move is a setback for promoter guarantors, such as Anil Ambani, Sanjay Singhal and Venugopal Dhoot, among others. 

Petitions challenging the notification were transferred from high courts to the apex court in October 2020. The Supreme Court had reserved its judgment in the matter in March 2021. 

A personal guarantee enables banks to claim even the personal assets of the guarantor promoter, if the company fails to pay back the money. This is essentially the purpose of the personal guarantee. The Supreme Court’s dismissal of the petition is significant since banks in many cases have struggled to invoke personal guarantees in the event of a loan default. 

The Supreme Court’s move will make promoters more accountable for the loans drawn by their companies. In December 2019, the government had let banks move an application for IBC against personal guarantors to corporate debtors to help banks take on powerful promoters who furnish their guarantees to banks. 

Big promoters typically convince lenders to sanction high-value loans, citing their personal guarantee. But ultimately, when the loan is defaulted, the same promoters drag the lenders to court rooms when banks try to invoke the personal guarantee.