[Harshit is a student at Vivekananda Institute of Professional Studies.]
The Supreme Court of India (SC) clarified the extent of a personal guarantor's ineligibility as a resolution applicant (RA) under Section 29A(h) of the Insolvency and Bankruptcy Code 2016 (Code), in its landmark decision in Bank of Baroda and Another v. MBL Infrastructures Limited (MBL Infrastructures) on 18 January 2022. The SC held that a creditor's claim of a guarantee will be applied in rem to all other creditors who are in a similar position.
Section 29A of the Code lists the ineligibility requirements that prevent an RA from taking part in the corporate insolvency resolution process (CIRP). A guarantor who has signed a guarantee in favour of a creditor is disqualified under Section 29A(h). In terms of its scope, the provision requires further clarification. This article will critically evaluate the ruling in MBL Infrastructures and the legal precedents surrounding Section 29A of the Code. The article will further explain how the verdict affects a guarantor's legal responsibility under the Code.
FACTS
Invoking the personal guarantor's assurance, RBL Bank (RBL) and a few other financial creditors issued a notice in accordance with Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act 2002. RBL then submitted a petition to initiate CIRP against MBL Infrastructures Limited in accordance with Section 7 of the Code. Two resolution plans were then delivered to the resolution professional, one of which was submitted by the personal guarantor before Section 29A was inserted into the Code. However, Section 29A of the Code was introduced before the committee of creditors (CoC) could decide on the resolution plan given by the personal guarantor.
Considering this development, the personal guarantor submitted a request to the National Company Law Tribunal (NCLT) asking for an order stating its exemption from disqualification under subparagraphs (c) and (h) of Section 29A of the Code. In accordance with Section 29A(h) of the Code, the NCLT further ruled that an RA will not be disqualified for merely extending a personal guarantee if that guarantee has not yet been triggered. Additionally, it noted that even if some creditors have used the assurance provided by an RA, such disqualification will not be attracted.
As a result, the CoC decided to vote on the RA's resolution plan. However, the necessary votes were not cast in favour of the plan. Thereafter, the RA submitted a request for a directive to the dissident creditors to support the resolution plan under Section 60 of the Code. As a result, the CoC adopted the resolution plan. Another amendment to Section 29A(h) of the Code came into effect in 2018, looming RA's disqualification. The NCLT ruled that the matter pertaining to Section 29A(h) of the Code had been previously resolved. As a result, it gave the order for the CoC-approved resolution plan to take effect. The said order then went on to appeal before the SC.
JURISPRUDENCE OF SECTION 29A
The committee reports and court decisions are essential for advancing our understanding of the Code, in view of its dynamic nature. When addressing Section 29A(h) of the Code in the Insolvency Law Committee Report in 2018 (IL Committee), it was questioned if the provision's intent was to disqualify a guarantor only in situations when the guarantee had been invoked or whether the disqualification applied on non-invocation, as well.
Therefore, it was necessary to foresee and clarify the ambiguities that may arise on interpretation. It was noted that the clause could not be meant to disqualify a guarantor merely for issuing an "enforceable" guarantee. The IL Committee recommended that the word 'enforceable' ought to be removed from clause (h) and the phrase 'and such guarantee has been invoked by the creditor and remains unpaid in full or part by the guarantor' should be added to the said clause. The IL Committee correctly recognized that subsection (h) was discriminatory. Consequently, an amendment was passed in 2018 that carried out the above recommendations.
The courts have emphasized the importance of giving the Code a purposeful construction. The interpretation of the terms 'control' and 'management' was taken into consideration by the SC in ArcelorMittal India Private Limited v. Satish Kumar Gupta in order to determine the scope of Section 29A. Accordingly, the court decided that Section 29A of the Code was included to prohibit a backdoor entry of individuals in power or management who initially pushed the corporate debtor toward insolvency. In Arun Kumar Jagatramka v. Jindal Steel and Power Limited, it was determined that a person who was ineligible to be an RA under the Code was also disqualified from making a compromise under the terms of the Companies Act 2013. As a result, it was determined that Section 29A of the Code was essential in ensuring that the objectives of the Code were not compromised by allowing 'ineligible persons' to return in a new form of the RA, including but not limited to members of the company’s management.
The meaning and importance of sub-section (h) of Section 29A of the Code were specifically examined by the two-member NCLT bench in RBL Bank Limited v. MBL Infrastructures Limited. The NCLT held that only those guarantors with antecedents that may have jeopardized the validity of the procedures under the Code may be regarded as being excluded from Section 29A (h) of the Code. Therefore, the sub-section does not exclude all guarantors. In addition, the NCLT noted that the term 'enforceable' in the provision must be in conformity with the overall objectives of the Code. The meaning of the term must not be taken literally. Since guarantors were not given a chance to pay back the debt by utilizing their guarantee, the law could not be allowed to function in a vacuum and punish them. Further, in Punjab National Bank v. Concord Hospitality (Private) Limited, the NCLT stated that an RA would not lose his eligibility merely because he provided a guarantee in support of a corporate debtor when the guarantee is not exercised.
SCOPE OF SECTION 29A(h)
In MBL Infrastructures, the SC used a purposive interpretation approach to assess the scope of Section 29A(h) of the Code. It was noted that the provision simply specifies that 'a creditor' must avail the guarantee. The insolvency procedure is regarded to be in rem, once initiated, as was stated in the case of Swiss Ribbon v. Union of India. As a consequence, all similarly placed creditors would have equal rights. The SC decided that in the present case, a similar approach would apply.
The SC also addressed the issue of whether the same creditor should file an application and invoke the guarantee extended by a personal guarantor. It was noted that there would be a bar to eligibility under Section 29A(h) of the Code even if the guarantee had been exercised by one creditor but the application had been lodged by another.
The SC also pointed out that 'similarly placed creditors' should be the correct interpretation of the word 'such creditor' as it appears in Section 29A(h) of the Code. Other creditors can now utilize their rights to safeguard their interests as a result. The SC took note of the same, keeping in mind that the judiciary's position must be in conformity with the Code's objectives.
Furthermore, it was clarified that the RA's simple submission of the resolution plan does not: (a) provide them any new rights; or (b) revoke any existing rights. As a result, a resolution plan or RA may be subject to a bar on a later amendment until the date of the authority's adjudication or the CoC's approval. The SC decided that the resolution plan is, nevertheless, in the interest of the corporate debtor’s revival, and the resulting interests of employees and other stakeholders.
CONCLUSION
Numerous concerns involving the obligation of personal guarantors under the Code have been addressed by the courts in the recent past. Another important ruling on the above aspects by the SC was Lalit Kumar Jain v. Union of India. The SC's decision was concerned with the personal guarantor's liability to a corporate debtor. With the judgment now in force, the creditors can file for insolvency against individuals who act as personal guarantors for services rendered to the corporate debtors, such as promoters or managers. As a result of this ruling, the personal guarantors now have a stricter obligation under the Code.
In conclusion, by ruling that a guarantee invoked by one would be operative as against all, it may be argued that the SC in MBL Infrastructures took a tough stance against the personal guarantors of a corporate debtor. Therefore, the personal guarantors must exercise caution before providing the guarantee to a creditor because doing so might cause the debt due to all creditors to crystallize, infringing on the guarantee's conditions. However, this judgment is a welcome step toward strengthening the guarantors' legal obligations under the Code. In doing so, the SC prevented the stakeholders from hiding behind the technicality of the provisions and abusing the Code’s procedures, so as to defeat the Code’s core objectives.