Challenge to Section 10A of IBC: Centre's response sought by Delhi High Court

Challenge to Section 10A of IBC: Centre's response sought by Delhi High Court

A Division Bench of Chief Justice DN Patel and Justice Jyoti Singh sought response from Central Government and the Insolvency & Bankruptcy Board of India (IBBI) after a petition was filed challenging Section 10A of the Insolvency and Bankruptcy Code, 2016 (IBC) as it allows insolvency proceedings against persons and personal guarantors.

The petition was filed by Getamber Anand – the CMD of a leading real estate group ATS Infrastructure after he received a notice from Xander Finance Pvt. Ltd. seeking to initiate Insolvency Resolution Process against the former as he was the personal guarantor to a loan provided by Xander Finance to ATS Infrastructure.

The notice was sent to the petitioner by Xander Finance under Rule 7 (1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019.

The petitioner contended that the demand is incorrect and untenable, and challenged the constitutional validity of Insolvency and Bankruptcy (Second Amendment) Act 2020 which introduced Section 10A.

According to the plea, "The Amendment is wholly ultravires and unconstitutional insofar as it violates Article 14, 21 of the Constitution by discriminating between the corporate debtors and the personal guarantors without any reasonable justification and intelligible differentia."

The petitioner contended that although the intention behind the Amendment was to provide relief to entities affected by the COVID-19, Section 10A failed to consider that individuals persons/personal guarantors have also been equally affected by the pandemic. He further asserted that Section 10A leads to an absurd consequence that while the corporate creditors remain free, personal guarantors are made liable for the same alleged debt/defaults.

According to the petitioner, a personal guarantor cannot be held liable for any debt/default in the absence of the principal liability and therefore proceedings cannot be initiated against a personal guarantor under the IBC if the principal debtor i.e. the corporate debtor is protected against the insolvency proceedings for any default.

The Delhi High Court has sought response from the Centre and the IBBI on the same.

The matter will be heard next on February 18.