On November 15, 2019, the Indian government notified the commencement of Part III of the Insolvency and Bankruptcy Code, 2016 (IBC), which provides for the insolvency resolution process for individuals and partnership firms. The relevant provisions in so far as they relate to personal guarantors of corporate debtors came into force on December 1, 2019. Pursuant to this notification, creditors are now permitted to initiate insolvency proceedings against a personal guarantor of a corporate debtor if the guarantor fails to honour its obligations despite a demand being raised.
These IBC provisions have come into focus recently as the State Bank of India (SBI) sought to enforce the personal guarantees (Guarantees) issued by Anil Ambani (Guarantor) to secure the debts of Reliance Communications Limited (RCOM) and Reliance Infratel Limited (RITL). This update analyzes the order passed by the National Company Law Tribunal (NCLT) in this dispute and the subsequent appellate proceedings initiated before the Delhi High Court.
In 2016, RCOM and RITL availed credit facilities aggregating to INR12,000,000,000 (Indian Rupees Twelve Billion) from SBI (Facilities). Along with other securities, the Guarantor issued the Guarantees to secure the repayment of the Facilities. During this period, the Guarantor also provided personal guarantees in favour of certain Chinese banks to secure the repayment of other credit facilities availed by the group companies of RCOM and RITL, but without obtaining SBI’s consent, which was required under the Facilities’ documentation.
In 2017, RCOM and RITL defaulted on their repayment obligations, and consequently, in May 2018, their creditors initiated insolvency proceedings against them. Simultaneously, SBI invoked the Guarantees and sought the repayment of the Facilities. However, the Guarantor failed to honour his obligations. At the same time, the Chinese banks initiated recovery proceedings against the Guarantor and obtained directions for repayment from the High Court of England and Wales. Apprehending that the Chinese banks might initiate enforcement proceedings in India and restrain the alienation of the Guarantor’s assets, SBI filed an insolvency application against the Guarantor on March 12, 2020.
Proceedings before the NCLT
SBI filed the insolvency application to protect its interests as Section 96 of the IBC provides for the imposition of an interim moratorium immediately upon the filing of an application. Further, given the delay caused by the Covid-19 pandemic and the consequent lockdown imposed in India, SBI prayed for the urgent appointment of a resolution professional.
In response, the Guarantor argued that SBI’s urgency was ill-founded as an interim moratorium was already in force. Given this, SBI’s interests were protected and the Chinese banks could not restrain the Guarantor’s assets. Moreover, the Guarantor argued that the process of finalizing the insolvency resolution plans for RCOM and RITL was already underway and post-implementation thereof, the companies would be able to repay the Facilities. Given this, the Guarantor’s obligations would stand discharged, and therefore, there was no urgency in the matter.
Order of the NCLT
Relying on a previous ruling of the Supreme Court, the NCLT observed that Section 60(2) of the IBC permits the simultaneous initiation of insolvency proceedings against, both, the corporate debtor and the personal guarantor. Given this, the NCLT held that it would be fallacious to assume that no action could be taken against the personal guarantor while the resolution plans submitted in respect of the corporate debtor were being considered. Further, the NCLT also relied on established judicial precedents in respect of the law of guarantees to hold that a creditor’s right of action against a guarantor is preserved even if the principal debtor is discharged from his liability unless such discharge is through an act of the creditor which takes place without the consent of the guarantor.
The NCLT also observed that once an insolvency application is filed against a personal guarantor, Section 97 of the IBC requires the NCLT to issue a direction within seven (7) days to the Insolvency and Bankruptcy Board of India for the nomination of the resolution professional. Thereafter, the NCLT is required to appoint the resolution professional. The NCLT held that it must mandatorily comply with the timeline prescribed in Section 97, and on August 21, 2020, the NCLT passed a direction for the appointment of the resolution professional.
Appeal before the Delhi High Court
The Guarantor immediately filed an appeal against the NCLT’s order before the Delhi High Court. On August 27, 2020, the Delhi High Court admitted the appeal and temporarily stayed the insolvency proceedings initiated against the Guarantor. Moreover, the Delhi High Court also restrained the Guarantor from transferring, alienating, encumbering, dealing with or disposing off any assets, rights, or beneficial interest until the next date of hearing.
Since the introduction of the IBC in 2016, Indian courts have consistently enforced its provisions and upheld its objectives with respect to the insolvency of corporate debtors. This uniform approach has boosted investor and creditor confidence in India’s insolvency regime.
However, Part III of the IBC, which has been notified recently, has not yet been extensively examined by Indian courts. While the NCLT relied on established principles of contract and insolvency law in order to come to its decision, the Delhi High Court’s interim stay provides wriggle room to personal guarantors. One hopes that the Delhi High Court’s final order does away with this stay so that the NCLT and lower courts can continue to follow their uniform approach in enforcing the provisions of the IBC.
About the author
Neerav Merchant has over 22 years of experience in dispute resolution, arbitration, litigation, enforcement of foreign judgments and awards, asset recovery, technology and telecommunication, intellectual property, employment, anti-corruption, and real property matters. Read more about him here.