Last updated: May 13th, 2020 2:53 AM

Insolvency & Bankruptcy against Personal Guarantor of Corporate Debtors

Insolvency and Bankruptcy forum introduced fresh rules in November 2019 for initiating a proceeding for insolvency against the Personal Guarantor of Corporate Debtor. The Indian Contract Act, 1872, governs laws relating to the contract of guarantee signed between a guarantor (or surety) and the principal debtor with the creditor. A guarantor is a legal person who enters into a contract to discharge liabilities or perform promises on behalf of a principal debtor towards its creditors [1]. The guarantee provided could be in either written or oral form. Under the Insolvency and Bankruptcy Code 2016 (referred to as “The Code”), a personal guarantor is defined u/s 5 (22), which states that a personal guarantor is a surety to the corporate debtor in a contract of guarantee. The surety for the purposes of the present context is required to be an individual. Prior to the publication of a notification by the Ministry of Corporate Affairs in November 2019, an application for insolvency could not be brought against a personal guarantor to a corporate debtor before the Adjudicating Authority. Neither could a personal guarantor bring forward an application before the Adjudicating Authority to file an application for insolvency. The Code entitled three entities to initiate the insolvency process against the corporate debtor [2]; a. Financial Creditor(s) b. Operational Creditor(s) c. Corporate Debtor The Ministry of Corporate Affairs then published a notification on 15.11.2019 declaring that effective from 01.12.2019, specific provisions of The Code would come into force and relate to the personal guarantors to corporate debtors [3]. This essentially denoted that, by virtue of the said notification, an insolvency proceeding can now launch against personal guarantors of the corporate debtors by the personal guarantors themselves as well as the creditors. This article will discuss the provisions of The Code applicable to initiate an insolvency proceeding against a personal guarantor of a corporate debtor and the rules laid down by the Ministry of Corporate Affairs with respect to the same.

Guarantor

The Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019 [4], published alongside the abovementioned notification provides a precise definition of a guarantor among other rules. Rule 3 (f) of the notification states that a guarantor is a personal guarantor to a corporate debtor, and by extension, a debtor, which implies that it is required to be an individual and not a corporate or other entity against whom the creditor has invoked guarantee. The creditor can invoke a guarantee against the personal guarantor only under the circumstances where the payment to the creditor is either unpaid or only partially paid.

Application before the Adjudicating Authority

Rule 6 of the said notification corresponds to Section 94 and 122 of The Code [5]. Section 94 essentially commissions the corporate debtor to initiate an insolvency proceeding before the Adjudicating Authority by filing an application, and section 122 classifies the inventory that has to be submitted along with the application. The abovementioned provisions are now applicable to personal guarantors of corporate debtors allowing them to file an application for insolvency. Similarly, Rule 7 of the said notification corresponds to Section 95 and 123 of The Code pertaining to Creditors of the corporate debtors allowing them to initiate the insolvency process. Rule 7 sanctions the creditors to initiate an application for insolvency against the personal guarantor of a corporate debtor.

Interim Moratorium

An interim moratorium is separate from moratorium as understood from the Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP” [6]). Interim moratorium, as per The Code, is imposed once the application for insolvency against the corporate debtor is admitted by the Adjudicating Authority (Section 96). In the course of CIRP, the Adjudicating Authority orders a combination of interim moratorium and moratorium, hence there is a singular order passed for a moratorium. However, in case of a proceeding against a personal guarantor of a corporate debtor, a period of interim moratorium commences as soon as an application to the Adjudicating Authority is filed. Interim moratorium is imposed to protect the personal guarantor from any supplemental legal action.

Resolution Professional & Moratorium

Once the application is filed before the Adjudicating Authority, either by personal guarantor or creditor, the Adjudicating Authority appoints a Resolution Professional [7]. Rule 8 of the said notification defines the mode of appointment by the Adjudicating Authority. The procedure as established u/s 97 of The Code will be applicable here wherein, once nominated by the Adjudicating Authority, the Resolution Professional will be referred to the Insolvency and Bankruptcy Board of India (hereinafter referred to as IBBI) for their recommendation. Once approved or replaced, the Resolution Professional examines, analyses and assesses the application for insolvency filed and consequently compiled a report which is submitted to the Adjudicating Authority. The Adjudicating Authority studies the report compiled by the Resolution Professional and either accepts or rejects the application for insolvency. If accepted, the moratorium period automatically comes into effect.

Repayment Plan

Once the Adjudicating Authority receives the application and the moratorium period commences, the personal guarantor or debtor in the present scenario is required to submit a repayment plan by virtue of Section 105 of The Code. The provision essentially states that the debtor (in this case personal guarantor), with the recommendation and deliberation of the Resolution Professional, would formulate a plan to restructure and furnish debts owed to the creditors. This process appertains to personal guarantors in lieu of the Resolution Plan in CIRP. After finalizing the plan, it is presented before the creditors (if the Resolution Professional reckons to call a meeting of creditors). The creditors then suggest amendments in the plan or approve the same with three-fourth majority. Once the plan is approved by the creditors, the same is submitted before the Adjudicating Authority for a final decision.

Decision of Adjudicating Authority

On receiving the repayment plan, the Adjudicating Authority takes a decision of either accepting or rejecting the plan. The Adjudicating Authority may suggest amendments in the repayment plan and resend it to the creditors for their consideration. If changes are suggested, the same shall be then incorporated in the plan. The Adjudicating Authority may accept or reject the repayment plan. If rejected, the creditors can move an application against the guarantor for bankruptcy. However, if accepted, then the repayment plan is brought to action with the supervision of the Resolution Professional. The regulations pertaining to insolvency and bankruptcy against the personal guarantor of a corporate debtor are fairly recent, considering that 'the Code' itself is contemporary. The rules and regulations pertaining to this field of operation would become more distinct with judgments and analysis by the judiciary in the future. Until then, the implementation of the insolvency process against the personal guarantor of a corporate debtor remains as per the notification published.