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Personal Guarantors Now Liable Under IBC Regime

Introduction
Insolvency and bankruptcy code 2016 which was introduced by the 1st term of Modi government really played its part by increasing the ranking of India in ease of doing business index from 131 in 2015 to 100 in 2017. Economists believe that IBC was need of the hour to bring uniformity in scattered bankruptcy laws. However, by the midterm of 2019, a stark decline was seen in economic growth to relax the situation Central Government bought a small amendment in IBC which allows the creditor to open its jaws and even engulf personal guarantors along with defaulting principal debtor in insolvency proceedings.
Parallel proceedings against the defaulting personal guarantor
 A notification was issued by central government empowered under sub-section 3 of section 1 on 15th November 2019 stating that Part 3 of the Insolvency and Bankruptcy Code, 2016 shall be applicable to the personal guarantors of the debtor. Provision of the notification came into force from 1st December 2019. Earlier code only encompassed principal debtor but the new rules allow creditors to simultaneously proceed against the principal debtor and the personal guarantor before National Company Law Tribunals (NCLT), in one fell swoop.
Insolvency proceedings can be initiated against any defaulting personal guarantors who have committed default of Rs 1,000 on account of a guarantee. Earlier, the code only covered insolvency resolution and liquidation of corporate debtors.
The move came on the heels of the judgment in the Essar Steel Case, in which the Supreme Court ruled that lenders can also go after guarantors for debt that hasn’t been settled under the resolution plan.
Experts hailed the judgment and the central government’s notification, asserting that this would enable creditors to recover a higher amount in a shorter span of time.
Personal guarantor
Insolvency and bankruptcy code 2016 define ‘personal guarantor as an individual who is the surety in a contract of guarantee to a corporate debtor’.
A guarantor is a person who guarantees to pay a borrower’s debt in the event the borrower defaults on a loan obligation. A guarantor acts as co-signer because they pledge their own assets or services in case the original debtor cannot perform their obligations.
A guarantor is also someone that certifies the true likeness of an individual applying for a product or service. A guarantor is also known as a surety according to The Contract Act 1872.
Reserve Bank of India (RBI) made it compulsory for a bank to gain personal guarantees of promoters in order to acquire a loan for the restructuring of companies.
Roots of enactment in Essar Steel judgement
Along with various issues which were settled by Supreme Court in Essar Steel judgement, one of the matters which it settled was the position of personal guarantor and his right of subrogation. NCLAT found out that when resolution plan is finalized by CoC it shall be imperative on creditors as well as guarantors due to which furthermore amount which could have been extracted from guarantors could not be gained by creditors.
However, Hon’ble Supreme Court reversed the decision by extending the arms of creditors over personal guarantors too. With these lenders can easily go after guarantors for the unsettled amount after a resolution plan.
In order to further strengthen the judgement, central govt further supported it through amendment of November 15, 2019.
Process against the personal guarantor
  • Application against the personal guarantor for insolvency resolution process can be made by the debtor under section 94(1) either personally or through resolution professional, to the adjudicating authority. In the case of creditors, the application has to be made under sec 95(2). If the application is made by a resolution professional, the Adjudicating Authority has to direct the Insolvency and Bankruptcy Board of India (“IBBI”) to confirm within 7 days that no disciplinary proceedings are pending against the Resolution Professional (RP). Accordingly, the application is moved forward.
  • Interim Moratorium under section 96 shall commence against the personal guarantor on the very date of the application in relation to all debts and shall cease to have an effect on the date of admission of such application.
  • Under Section 97 Resolution professional is appointed if the application under section 94 and 95 is filed through a resolution professional. The adjudicating authority shall direct the board within seven days of the date of application to confirm that there are no disciplinary proceedings pending against resolution professional under section 97(2). The board shall within 7 days shall communicate NCLT regarding confirming or rejecting the appointment of the resolution professional.
  • According to Sec 100, Adjudicating Authority (AA) within 14 days shall communicate acceptance or rejection of the application referred in section 94 and 95.
  • According to Sec 105, the guarantor shall prepare, in consultation with the resolution professional, a repayment plan containing a proposal to the creditors for restructuring of debts or affairs. The repayment plan shall include justification for preparation of such repayment plan and reasons on the basis of which the creditors may agree upon the plan.
  • Resolution professional shall submit the repayment plan under section 105 along with his report on such plan within a period of 21 days from the last date of submission of claims under section 102. If there is a necessity of summoning a meeting of the creditors, if required to consider the repayment plan; then the meeting shall be held not less than 14 days and not more than 28 days from date of submission of the report.
Conclusion
It is conspicuous that insolvency cases contra personal guarantors will be heard by the NCLT that is dealing alongside the insolvency cases of corporate debtors.
This further will have a positive impact on creditors as the resolution of debt against both corporate debtor and the personal guarantor will be dealt alongside, thereby multiple legal proceedings under Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) will be ignored.
The corporate insolvency regime has already resulted in several company promoters taking efforts for a settlement or a resolution with the creditors. With the introduction of this regime against personal guarantors, this trend will only surge.
Personal guarantor coming under the ambit of code is undoubtedly an appreciable change from creditors point of view which will not only would strengthen their feeble condition but also can aid them to achieve an effective resolution for debt that is owed by a corporate debtor as well as its personal guarantors thereby avoiding legal proceedings in multiple tribunals. It also aids guarantors to settle with the Creditor through the legal process and get discharged from the Creditors with respect to their liabilities under Guarantee.

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ABOUT THE AUTHOR(S)

 

Gopal Krishna is a student of 4th-year BBA LLB  at K.L.E.Society’s Law College, Bengaluru

 

 

 

 

 

 

 

 

 

Sachin Nayal  is a student of 4th-year BBA LLB  at K.L.E.Society’s Law College, Bengaluru

 

 

 

 

 

 

 

In Content Picture Credit: The Financial Express

 

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