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SC upholds key provisions of IBC, says no manifest arbitrariness

Saloni Kothari, Corporate General CounselĀ 

15 November 2023

On Thursday, the Supreme Court upheld the constitutional validity of key provisions of the Insolvency and Bankruptcy Code (IBC), 2016 which allowed lenders to initiate insolvency proceedings against personal guarantors without allowing them to present their stand.
The court held "IBC cannot be held to be operating in a retro active manner in order to hold it violative of the constitution. Thus we hold that the statute does not suffer from the vices of manifest arbitrariness."

Furthermore, the court has also ruled that there are enough guardrails in IBC to ensure that a resolution professional's suggestions are recommendatory to the NCLT and not final.

"In a welcome move, Supreme Court has passed long pending decisions on key aspects of the IBC personal guarantor process. This finality has strengthened the enforcement of a personal guarantee and will propel the law ahead and allow adoption of these processes to achieve the intent of the IB Code. Now promotors will be compelled to exercise diligence when issuing guarantees and will be an added deterrent with regard to defaults." said Saloni Kothari, Group General Counsel, BDO India

The petition was filed by the former promoters of bankrupt companies, including Anil Ambani, Venugopal Dhoot, Sanjay Singhal and others, challenged personal insolvency proceedings initiated against them along with legal validity of various provisions - Sections 95(1), 96(1), 97(5), 99(1), 99(2), 99(4), 99(5), 99(6), and 100 of the IBC - on various grounds including alleged absence of due process and a violation of natural justice principles.

In November 2019, the central government had tweaked the bankruptcy law to allow personal insolvency cases against guarantors of corporate entities that fail to honour their debt.

"With this pronouncement of the Apex court, The promoters and directors now, who have stood as guarantors at the time of availing the facilities, would not be able to hide behind the veil. The legislative intent behind incorporating such specific provisions for Insolvency Resolution process for Individuals has found favour with the Court and the path is now clear for the creditors to pursue the process of Insolvency." said Ateev Mathur, Partner, SNG & Partners, Advocates & Solicitors.

The Supreme Court had in October 2020 today transferred all the personal insolvency cases from various high courts to itself and restrained them from entertaining fresh cases.

Source: Legal World