IBC provisions challenged in court; HC seeks reply from Centre

The Finance Ministry had recently directed the Public Sector Banks in India to put out a mechanism for monitoring such cases that require the initiation of insolvency proceedings against personal guarantors of corporate debtors. The Department of Financial Sevices stated, "Banks may also consider setting up IT system to collate data regarding personal guarantors to corporate debtors in all such cases for the requisite follow up and consequential action". The rule came into effect in December 2019 which gave the creditors, the prerogative to file for insolvency against the guarantors of corporate debtors. It is important to note that the IBC divides individuals into three categories namely- personal guarantors to corporate debtors, partnership firms to proprietorship firms, and others.

In the wake of this, Mr. Sanjay Singhal recently received a demand notice of Rs.12,275 crore as a guarantor of loans that were availed by his company. The State Bank of India thus invoked the personal guarantees of Mr. Singhal. The former Bhushan Power and Steel Chairman thus challenged the provision relating to the personal insolvency proceedings issued against guarantors of corporate debtors.

Mr Singhal approached the Delhi High Court seeking relief in the matter and proceed for recovery under the Insolvency and Bankruptcy Code(IBC).  In this respect, the court issued notices to the Centre, Insolvency and Bankruptcy Board of India and the State Bank of India.