Supreme Court judgment on Insolvency Bankruptcy Code

Supreme Court judgment on Insolvency Bankruptcy Code

Section 29A(h) specifies the categories of persons who are not eligible to be resolution applicants

The Supreme Court has delivered an important judgment interpreting the scope of Section 29A(h) of the Insolvency and Bankruptcy Code (IBC). It maintained that the section specified the categories of persons who were not eligible to be resolution applicants.

The court said that it referred to persons whose guarantees stood invoked by the creditors of the corporate debtor. "A guarantor who has executed a guarantee in favor of a creditor in respect of a corporate debtor against which an application for insolvency resolution has been admitted under IBCs remains unpaid in full or part."

The court was dealing with the issue of whether the words 'such creditor' in the provision would include all creditors of the corporate debtor or just the creditor who had invoked the insolvency process.

Adopting a 'purposive interpretation' of the provision, a bench comprising Justice Sanjay Kishan Kaul and Justice M M Sundresh held that the disqualification under the Section of the IBC stood attracted on mere invocation of a personal guarantee by a creditor. It worked, notwithstanding the fact that another creditor initiated the insolvency process.

The court further held, "Ineligibility has to be seen from the point of view of the resolution process. It can never be said that there can be ineligibility qua one creditor as against the others. Rather, the ineligibility is to the participation in the resolution process of the corporate debtor. Exclusion is meant to facilitate a fair and transparent process."

The court also noted that the word 'person' under IBC was inclusive and illustrative in nature and was of wide import. "Once a person executes a guarantee in favor of a creditor with respect to the credit facilities availed by a corporate debtor, and in the case where an application for insolvency resolution has been admitted, with the further fact of the said guarantee having been invoked, the bar qua eligibility would certainly come into play," it stated.

"What the provision requires is a guarantee in favor of 'a creditor'. Once an application for insolvency resolution is admitted on behalf of 'a creditor' then the process would be one of rem, and therefore, all creditors of the same class would have their respective rights at par with each other," the court added

"The provision, after the amendment, speaks of invocation by a creditor. The manner of invocation can never be a factor for the adjudicating authority to adjudge, as against its existence. Adequate importance will have to be given to the latter part of the provision which also disqualifies a person whose liability under the personal guarantee, remains unpaid in full or in part for the amount due from him, upon invocation," the Supreme Court bench ruled.

It noted that Section 29A had a laudable object of protecting and balancing the interest of the committee of creditors and the corporate debtor while shutting the doors to canvas the interests of others.

"That is the reason why it consciously excludes certain categories of persons. We may add that the Section foresees the creditors who are otherwise either already under the insolvency resolution process or are entitled to go under it," the judgment stated.

Solicitor General of India Tushar Mehta appeared on behalf of the appellant.