Lenders can go after personal guarantors to corporates

The Supreme Court recently upheld a government move to allow lenders to initiate insolvency proceedings against personal guarantors, who are usually promoters of big business houses, along with the stressed corporate entities for whom they gave guarantee.

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It held that the November 15, 2019, government notification allowing creditors, usually financial institutions and banks, to move against personal guarantors under the Indian Bankruptcy and Insolvency Code (IBC) was “legal and valid”.

The court said there was an “intrinsic connection” between personal guarantors and their corporate debtors. It was this “intimate” connection that made the government recognise personal guarantors as a “separate species” under the IBC.

It was again this intimacy that made the government decide that corporate debtors and their personal guarantors should be dealt with by a common forum — National Company Law Tribunal (NCLT) — through the same adjudicatory process.

Section 60(2) of the Code had required the bankruptcy proceedings of corporate debtors and their personal guarantors to be held before a common forum — the NCLT.