Lawyers inside the Supreme Court complex in New Delhi, India. (Source: Supreme Court of India Website)

Banks Can Act Against Personal Guarantors Of Insolvent Companies, Rules Supreme Court

The Supreme Court ruled that creditors can proceed against personal guarantors of a corporate debtor even while insolvency proceedings are on.

The top court said the moratorium envisaged under Section 14 of the Insolvency and Bankruptcy Code will not apply to the personal guarantors. The provision places a moratorium on any suits or proceedings against the company during the insolvency resolution period.

“We have seen that Part III (of the code) has not been brought into force, and neither has Section 243, which repeals the Presidency-Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920,” said a bench of Justice Rohinton Fali Nariman and Justice Indu Malhotra on Aug. 14.

“The net result of this is that so far as individual personal guarantors are concerned, they will continue to be proceeded against under the aforesaid two insolvency acts and not under the (2016 bankruptcy) code.’’

The top court’s ruling came on an appeal filed by the State Bank of India against a judgment of the National Company Law Appellate Tribunal.

The bank had initiated proceedings against the property of the managing director of a company under insolvency resolution. The MD, who is the personal guarantor for loans availed from the bank by the firm, moved the NCLT seeking a stay, arguing that the Section 14 of the insolvency code would apply to him as well.

The NCLT ruled in the favour of the MD and the appellate tribunal upheld the judgment. SBI then challenged it in the apex court, which set aside the verdicts of both the tribunals.