Rights of Personal Guarantors in Insolvency Proceedings
Anil Dhirajlal Ambani v Union of India
Citation: 2023 INSC 1018
The Supreme Court will decide the constitutionality of Sections 95, 96, 97, 99, and 100 of the Insolvency and Bankruptcy Code, 2016 which lays down certain rights to for the guarantor to initiate insolvency proceedings against a debtor
Decided
Parties
Petitioner: Anil Dhirajlal Ambani
Lawyers: E.C. Agrawala
Respondent: Union of India through Secretary Ministry of Law and Justice, Union of India through Secretary Ministry of Corporate Affairs, State Bank of India, Jitender Kothari Resolution Professional
Lawyers: Sanjay Kapur
Case Details
Case Number: WP(c) 519/22
Next Hearing: November 9, 2023
Last Updated: November 24, 2023
TAGS: IBC, Insolvency, Personal Guarantor
Key Issues
Do the debtor and personal guarantor have a right to know the grounds for accepting or rejecting an insolvency application under S.95?
Does an order of interim moratorium by the resolution professional (under S.96) amount to an arbitrary exercise of power?
Does the submission of the RP’s report under S.99, without providing a copy to the debtor and PG, violate principles of natural justice?
Case Description
On July 11th, 2022, Reliance ADA Group Chairman Anil Ambani challenged several provisions of the Insolvency and Bankruptcy Code, 2016 (the Code) pertaining to the Personal Guarantors of a Corporate Debtor.
In 2016, Mr. Ambani gave personal guarantees for two loans taken by Reliance Communications Ltd ((RCom) and Reliance Infratel Ltd (RITL) amounting to Rs. 1,200 crores from the State Bank of India (SBI). A personal guarantee is a promise to repay a debt on behalf of a debtor (borrower) to the creditor (lender) if the borrower fails to repay the debt.
On August 26th, 2016, the loan accounts were classified as Non-Performing Assets (NPAs). An NPA is a loan for which payments on the principal amount or interest have been missed for a prolonged period of time.
When a corporate debtor is unable to pay back a loan, the creditor can initiate a ‘Corporate Insolvency Resolution Process’ (CIRP) to recover the debt amount (Section 95). When a CIRP is initiated, the assets of the debtor and personal guarantor are placed under an interim moratorium (Section 96).
A debtor and/or personal guarantor loses control of the assets attached to the loan when a moratorium is imposed. They cannot transfer or dispose of any assets. All other debtors are prohibited from pursuing legal proceedings against them with respect to loans and associated assets as well. A Resolution Professional is appointed under Section 97 of the Code to come up with a Resolution Plan to pay back the debtors.
SBI, Reliances’ creditor, filed an insolvency application under Section 95 of the Insolvency and Bankruptcy Code against Mr. Ambani in early 2020.
On August 20th, 2020, the National Company Law Tribunal (NCLT) in Mumbai allowed the appointment of an interim Resolution Professional (RP) to recover the debts. The NCLT further stated that action could be taken against the personal guarantor, Mr. Ambani, even before a Resolution Plan was accepted. This involved placing Mr. Ambani’s assets under an interim moratorium.
On July 11th, 2022, Mr. Ambani challenged the following provisions of the Code:
- Application for the initiation of the insolvency process under Section 95
- Interim moratorium under Section 96
- Appointment of a Resolution Profession under Section 97
- Submission of the Resolution Professional’s report under Section 99
- Admission or rejection of an application under Section 100
Mr. Ambani argues that these provisions are arbitrary, unconstitutional and violative of fundamental rights. Section 96 places an interim moratorium in relation to all the debts against the personal guarantor as soon as an insolvency application is filed by the creditor under Section 95, without giving them a chance to be heard.
Under Section 99 of the Code, a copy of the Resolution Professional’s report is not provided to the debtor and personal guarantor—depriving them of the right to know why an insolvency application has been accepted or rejected. The challenge further argues that the Code vests unfettered powers in the resolution professional to be a judge in his own cause—the resolution professional is not answerable to anyone when placing the debtor or personal guarantor’s assets under a moratorium.