Supreme Court rules no moratorium for personal guarantors

Under a new ruling, the Supreme Court has made clear that statutory moratorium period for corporate debtors will not be applicable on personal guarantors. The decision comes after much anticipation and is another step forward in streamlining the Insolvency and Bankruptcy Code and in turn tackling the bad loan problem in India.

Earlier, there were contradicting views in respect to the scope of moratorium for guarantors. It was debatable whether the properties not owned by the corporate debtor would come under moratorium or would be entirely separate.

A personal guarantor is one who is the surety in a contract of guarantee to a corporate debtor. In an earlier instance, it was claimed that the moratorium would be applied to them as well as their assets which would stall the process of bad loans and break the cycle of bad loans and collections.

The plea was upheld in the case of V Ramakrishnan, Managing Director of Veesons Energy Systems by the National Company Law Tribunal on September 18, 2017. The National Company Law Appellate Tribunal endorsed the order on February 28, 2018 was challenged by State Bank of India in the Supreme Court.

Sanjay Kapur, the council of SBI presented his points and argued that the personal guarantor can’t escape liquidation of personal assets owing to the very nature of the term ‘guarantor’. The implicit condition of the term implies responsibility should there be failure to fulfil terms at the debtor’s end. The court ruled in the favour of the bank and has stated that as the law stands, it does not refer to the personal guarantor but only to the corporate debtor. Once the resolution plan is approved, the committee of creditors will come into effect, it will be binding on the corporate debtor as well as the guarantor. The primary object of the code is not to enable such guarantors to escape from co-extensive liability to pay the outstanding debt.

As there is no separate statutory scheme to deal with bankrupt individuals, the responsibility to proceed will lie with the tribunal. In light of recent rulings and the changes made in the IBC, it has become clear that every step is towards the holistic progress of the bankruptcy laws in India.