The Supreme Court dismissed a plea filed by State Bank of India challenging the Delhi High Court (HC) order that stayed insolvency proceedings against businessman Anil Ambani. The three-judge bench of Justices L. Nageswara Rao, Hemant Gupta and S. Ravindra Bhat directed the high court to decide the issue on October 6, and allowed SBI the liberty to seek a modification of the stay order.
The August 28 high court order came on a plea filed by Ambani challenging the constitutional validity of Part III of the Insolvency & Bankruptcy Code (IBC) which brought a corporate debtor's personal guarantor under the purview of insolvency proceedings.
The high court, while allowing insolvency proceedings against the corporate entities, ruled Ambani's liabilities "may also be examined by the IRP (Insolvency Resolution Professional)" but stayed insolvency proceedings initiated against him.
"We restrain the petitioner from transferring, alienating, encumbering, or dealing with, or disposing of any of his assets, or his rights, or beneficial interest therein till the next date (October 6)," the high court order read.
Ambani challenged the provisions of the IBC days after the Mumbai bench of the National Company Law Tribunal (NCLT) appointed an IRP to assess his assets as a personal guarantor.
In its plea, SBI told the top court that the HC order granting an interim stay on the insolvency proceedings was "contrary" to a 2018 Supreme Court verdict which "clearly held that the object of IBC was not to let the personal guarantors escape an independent and co-extensive liability to pay off the debt."
A person who enters into a contract cannot be allowed to "wriggle out" of it by seeking relief from the high court, the bank said. The bank stressed that insolvency proceedings against Ambani were in the initial stages wherein the IRP was simply required to assess his assets under the law.
What is the case about?
In August 2016, SBI granted Ambani credit facilities amounting to Rs. 1200 crores for two of his companies—Reliance Communications (RCom) and Reliance Infratel Limited (RITL) against a Deed of Personal Guarantee dated September 23, 2016. This means Ambani pledged to personally guarantee that the loans taken by his company would be repaid.
On February 24, 2020, SBI issued a demand notice against Ambani following which he filed for bankruptcy. In March, when SBI initiated insolvency proceedings against Ambani, the banks were owed dues amounting to Rs. 1707 crores. In August, the NCLT appointed a Resolution Professional Jitender Kothari to assess Ambani liabilities under the provisions of the bankruptcy code.
What is the Insolvency and Bankruptcy Code (IBC)?
The IBC, enacted in 2016, aimed to consolidate all the insolvency laws under one umbrella to streamline the entire process in a time-bound manner. The IBC applies to companies and individual persons.
In 2019, the Centre issued a notification bringing personal guarantors under the purview of the IBC. This would allow the lenders to go after the personal guarantors in the event the company they represented defaulted on their dues.
Personal Guarantors made liable
On November 15, 2019, the Centre published the IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 with effect from December 1, which essentially allowed lenders to simultaneously haul companies and personal guarantors before the NCLT. This means, if an individual who has executed a deed as a personal guarantor to avail a loan for a company, the lender can now recover dues from both parties.
Till November 2019, the IBC only covered corporate debtors i.e. companies. These rules are applicable against those personal guarantors who have defaulted on a loan amounting to at least Rs. 1000 crores.
The new IBC rules gain significance because, after 2013, the Reserve Bank of India (RBI) tightened its regulatory framework mandating banks to obtain personal guarantees from promoters involved in restructuring cases.
Far-reaching implications for the corporate world
The rules pertaining to the personal guarantors will have a ripple effect for those promoters who executed deeds of personal guarantee to borrow money. Jet Airways promoted by Naresh Goyal, who gave a personal guarantee on some of the loans, owes creditors more than Rs 11,000 crore. If Jet Airways defaults on the repayment of loans, the lenders can recover the dues from Goyal.
In 2019, when some of the banks went after Prashant Ruia of Essar Steel, the National Company Law Appellate Tribunal (NCLAT) came to his rescue. However, the Supreme Court overruled this order and clarified that creditors could recover money from borrowers. Amtek Auto's Arvind Dham, Venugopal and Saurabh Dhoot from Videocon Group, Kapil and Dheeraj Wadhwan of DHFL, Moser Baer promoter Deepak Puri and Sanjay Singal, former chairman of Bhushan Power & Steel Limited are in similarly troubled waters.
On August 31, the SBI sent Singal a demand notice to recover dues amounting to Rs.12,276 crores. However, Singal's company Bhushan Power and Steel as a whole has an outstanding debt to the tune of Rs. 48,000 crores. The recovery notice came days within a circular issued by the Finance Ministry directing banks to invoke the personal guarantor clause. The ministry was prompted into action after the SC on July 22 rebuked the lenders and asked why Public Sector Undertakings despite clear directions were not invoking the "personal guarantees issued by promoters/managerial personnel…resulting in huge loss not only to the public exchequer but also to the common man."