On September 17, 2020, the Supreme Court refused to vacate the stay granted by the Delhi High Court on proceedings against Mr. Anil Ambani in the corporate insolvency resolution process of Reliance Communications and Reliance Infratel.
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Background
In August 2016, Mr. Anil Ambani has personally guaranteed the repayment of loans to the tune of approximately 1200 crores availed by Reliance Communications and Reliance Infratel, two companies of which he was a former director. The creditor in the instant case, State Bank of India proceeded against Mr. Ambani in a personal capacity as a guarantor. This is permissible because as per Section 128 of the Indian Contract Act, 1872 the liability of the guarantor/surety is co-extensive with that of the principal debtor.
In August 2020, the Mumbai Bench of the National Company Law Tribunal (NCLT) admitted the plea of SBI under Section 97 of the Insolvency and Bankruptcy Code (the Code) for appointment of a resolution professional for insolvency proceedings against the personal guarantor, Mr. Anil Ambani. However, the Delhi HC had imposed a stay on the proceedings. When SBI approached the Supreme Court against the said order, the Apex Court refused to lift the stay.
Law Relating to Guarantee
Section 126 of the Indian Contract Act, 1872 defines a contract of guarantee as “a contract to perform the promise, or discharge the liability, of a third person in case of his default”.
Under the Insolvency and Bankruptcy Code, 2016, Part III deals with insolvency proceedings against personal guarantors. Additionally, in November 2019, the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 were notified.
Issues Involved
State Bank of India (SBI) is the financial creditor to the two corporate debtors Reliance Communications and Reliance Infratel. The latter two companies owe the lender amount of 49,000 crore. SBI and the Committee of Creditor approved a resolution plan which allowed for repayment of 23,000 crores.
Unlike the moratorium imposed under Section 14 for corporate debtors, the moratorium under Section 101 for personal guarantors only protects the assets of the guarantor and not the guarantor. Therefore, the guarantor can be personally proceeded against. However, these proceedings cannot be initiated at the time when simultaneous proceedings are ongoing against the corporate debtor. The Supreme Court laid this ratio in State Bank of India v. V. Ramakrishnan to prevent multiplicity of proceedings.
Conclusion
As of now, the matter has been remanded to the Delhi High Court and the next hearing is scheduled to be on October 6. The decision of the Court will be landmark as it will be the first ruling in which the Court shall deliberate upon the issue whether after proceedings against the debtor, the creditor may seek to recover the residue of the debt from the personal guarantor.