SC allows banks to directly initiate insolvency proceedings against personal guarantors

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By TBN Staff

The Supreme Court’s decision was a relief for all the Financial Creditors, especially banks. The SC has allowed banks to approach a new route to make recoveries from debt defaulting companies.

Now banks have the right to directly initiate insolvency proceedings against personal guarantors of corporate loans. The rule is irrespective of any pending proceedings against the corporate debtor under the insolvency and bankruptcy code (IBC).

In the State Bank of India versus Mahendra Kumar Jajodia case, the apex court dismissed the appeal against an NCLAT order. It has also established the right of lenders to decide their actions against borrowers and obligators independently. It does not link the rights in insolvency against the guarantor to initiate bankruptcy against the borrower.

The SC orders say they have heard the Solicitor General and Senior Counsel for the parties and examined their records, but they did not find any firm reason to entertain their appeal; hence the appeals were dismissed, and the judgement had no interference.

In January, NCLAT had a case, the SBI Stressed Asset Management Branch, against Mahendra Kumar Jajodia, a personal guarantor to a corporate debtor. In the above case, there was no prohibition of insolvency and bankruptcy instituted against a personal guarantor in the absence of proceedings against a corporate debtor.

In the above case, Mahendra Kumar Jajodia had appealed against the NCLAT order before the SC but the Apex court in March 2022 stayed at the NCLAT ruling decision.

The Apex court has also ruled out its interference from the NCLAT order, which gives the permission to the banks to initiate insolvency proceedings against personal guarantors. The proceedings stand erect even when IBC proceedings exist against the corporate debtor.

The SC judgment is a result of great history by personal guarantors in India. Few facts reveal that, guarantees of around Rs.1.6 Lakh Crore have been given to the promoters of top companies that are facing huge debts.

After the decision in the case of Lalit Kumar vs Union of India, the lenders invoked Rs.8,347 crore worth of personal guarantees from the defaulting promoters in the first quarter of 2021-22.

The judgement by SC in SBI vs Mahendra Kumar Jajodia case.