Industrialists like Anil Ambani, Kapil Wadhawan, Sanjay Singhal, Venugopal Dhoot and 42 others have taken the central government and the insolvency regulator to court. Their gripe? That the manner in which personal insolvency provisions for guarantors were notified in 2019 was unconstitutional.
Personal insolvency provisions constitute Part III of the Insolvency and Bankruptcy Code. While it applies to partnerships and individuals, the government had operationalised the provisions in November 2019 only for personal guarantors. This made way for creditors to go after individual promoters and others who stood as guarantors for loans granted to the companies undergoing insolvency proceedings.
For instance, in June last year, State Bank of India took to the National Company Law Tribunal, Mumbai to recover more than Rs 1,200 crore from Anil Ambani as he had given a personal guarantee for loans extended to Reliance Communications Ltd. and Reliance Infratel Ltd. The proceedings against Ambani have been stayed for now.
Soon after, several promoters approached various high courts challenging the government’s notification. This prompted the insolvency regulator to approach the Supreme Court, which transferred all the cases to itself in October 2020.
Last week, the parties concluded their arguments and the apex court has reserved its judgment in the case.
Personal Guarantors Can’t Be Singled Out, Promoters Say
At the heart of the case is interpretation of Section 1(3) of IBC. This provision allows the central government to notify different provisions of the IBC at different dates.
The promoters have argued that the power under Section 1(3) does not allow the central government to make Part III applicable selectively to personal guarantors of corporate debtors. The personal insolvency provisions apply to individuals and partnership firms as a whole. But the notification split up this category by enforcing the provisions to only personal guarantors of corporate debtors, they’ve said.
The government was within its rights to bring in force sections, chapters or parts of IBC. But, it cannot operationalise portions of a part of the code or make them applicable only to a select class, they’ve stated.
This singling out of personal guarantors of corporate debtors violates Article 14—Right to Equality—of the Constitution. Reason being there is no rational basis that can justify the singling out of personal guarantors from others.
The second key argument of the promoters is vis-à-vis the rights of the creditors. Here, they’ve raised two main concerns:
- First, that the debt of a personal guarantor co-exists with the corporate debtor and once the insolvency process is complete for either of the two, the creditor’s claim will cease to extinguish.
- Second, granting the opportunity to creditors to pursue two remedies for the same debt may give rise to a possibility of unjust enrichment.
There Was A Valid Exercise Of Powers, Government Argues
The Solicitor General for India Tushar Mehta argued on behalf of the central government.
First, he called the petitioners’ interpretation of Section 1(3) as ‘hypertechnical’. The text of the section says the government may notify different provisions at different dates—it doesn’t read ‘parts’, ‘sections’, or ‘chapters’. The use of the word ‘provision’ gave the section a wide ambit and allowed the central government to operationalise provisions of the Code in the manner it did for personal guarantors.
Second, the larger power to enforce provisions of the code subsumes within itself the power to extend it to certain categories with the only limitation that it should not alter the character of the law. This, Mehta argued, has not happened here. If the court were to accept the argument of the petitioners, it would result in reading down of the section as well as the IBC, he submitted.
A similar constitutional challenge to the Employee State Insurance Act being implemented at different points in time for different parts of the state of Bihar was dismissed by the apex court, Mehta pointed out.
Third, on the argument of violation of Article 14, the SG defended the notification saying it made a reasonable classification. It is well settled, he pointed out, that merely because a legislative policy is being implemented in phases, does not render it violative of Article 14. Similar classification of creditors as financial, secured, unsecured, operational etc. under IBC has been upheld by the apex court, Mehta added.
Finally, the petitioners’ apprehensions of unjust enrichment by the creditors through two different proceedings is unfounded, he pointed out. The principle of ‘‘double dip’’ which allows a creditor to recover debt from two different proceedings is well recognised internationally. The safeguards provided under the IBC, the SG said, ensure that in the second claim the amount received is proportionately reduced to the value which the creditor has already received in the first.
The outcome of the case can affect debt recovery for a number of pending as well as settled cases going as far back as the first insolvency list of the RBI, says Kumar Saurabh, partner at Khaitan & Co., who had advised several clients involved in the matter.
There is also a risk of the stigma of insolvency as some of them may be staring at a possibility of being declared insolvent within months, Saurabh added.
The arguments in this case were heard by a two-judge bench of Justices L Nageswara Rao and S Ravindra Bhat. The date of the judgment is not known yet.