A batch of 75 petitions had challenged the validity of notification dated November 15, 2019, which allowed financial institutions to proceed against individual corporate guarantors for recovery of loans of a company under Insolvency and Bankruptcy Code (IBC) proceedings., which brought into force provisions of the Part III of the IBC, extending insolvency and bankruptcy for individuals and partnership firms to the promoters too.
The writ petitions challenged the constitutional validity of Part III of the IBC, which deals with insolvency resolution for individuals and partnership firms.
The top court, while transferring all the petitions to itself in October last year, had noted previously in its order, “Considering the importance of the issues raised in the Writ Petitions which need finality of judicial determination at the earliest, it is just and proper that the Writ Petitions are transferred from the High Courts to this Court”.
The division bench of Justices L Nageswara Rao and Ravindra Bhat held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.
Therefore, the Court held that the impugned notification is legal and valid. It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors).