Author: Pranav Karwa
College and Year: National Law University, Jodhpur; 4th year B.B.A.L.L.B(Hons.)
The Central Government (Hereinafter “CG” vide notification dated 15th November 2019 has notified third part of the IBC, 2016 (Hereinafter “Code”) from the 1st of December, 2019.
The effect of notifying this part is that once Corporate Insolvency Resolution Process (CIRP) is initiated against the corporate debtor, the proceedings against personal guarantor would take place simultaneously before the same bench. This will allow creditors complete resolution against the company along with its personal guarantors thus saving time and money by preventing multiple suits in different tribunals.
The Code till now covered only resolution of insolvency against corporate debtors. The provisions relating to insolvency resolution of personal guarantors to corporate debtors were not notified. The SC previously in the case of State Bank of India v Ramakrishnan observed that personal guarantors are not within the scope of the code. Hence, a need was felt for a complete insolvency resolution process, and hence the CG recently notified among other things Section 78, 79, 94 to 187 of the Code along with related rules and regulations viz:
Implication of the notification –
Until now, the proceedings against the personal guarantors could only be initiated in the Debt Recovery Forum (Hereinafter “DRT”). However according to the recently notified rules, proceedings against the personal guarantors can now be initiated simultaneously along with the corporate debtor. Thus now a quick recourse against personal guarantor is provided compared to the earlier regime whereby creditors could initiate recovery proceedings only under agreement of guarantee and thereby getting caught in prolonged litigation. Because of the time bound process of the code mentioned in Section 12, there will be considerable reduction in delays in recovering dues of creditors from the personal guarantors.
As per the decision of the SC in the Essar Steel case, the claims against a personal guarantor still subsists even when the resolution plan is passed as the code will permits the creditors to continue the process of recovery with against the personal guarantors after CIRP has ended. It was also noticed by the SC that right of the lender to enforce personal guarantee can be kept outside the scope of resolution of corporate debtor.
Further as the Ministry of Corporate Affairs (Hereinafter “MCA”) has given the guidelines and hence a combination of SC judgment and Government guidelines will expedite the entire process.
The result is that personal guarantors and corporate guarantors are now pari passu and are now on the same level playing field.
Important provisions now applicable to personal guarantors:
Meaning of guarantor: Now provisions of part III of the Code are applicable with respect to a personal guarantor.
According to Section 3(1) (e) of the Insolvency Rules (hereinafter “the rules), the code applies on those guarantors where guarantee is invoked by the creditor and remains unpaid.
The term in “Adjudicating authority” in Section 60 (Hereinafter “AA”) under Section 3(1) (a) of the rules, includes NCLT.
Further as Section 79(1) of the Code, DRT has been named as the AA for insolvency resolution and bankruptcy of individuals.
However, Section 60 of the Code provides in the event of initiation of CIRP against a corporate debtor then insolvency proceedings against a personal guarantors of such corporate debtor are mandatorily required to be filed before same NCLT.
Further, if there is an ongoing insolvency resolution proceedings against a personal guarantor before DRT, the same is required to be transferred to the relevant NCLT.
Filing of Application :
As per Section 7 of the Insolvency Rules, 2019, the creditor shall serve demand notice for payment of the amount of default to the guarantor and the corporate debtor for whom the guarantor is a personal guarantor.
The CIRP against Corporate Debtor may be filed by the personal guarantor on his own or by a creditor or by a resolution professional.
Interim Moratorium and Appointment of Resolution Professional:
With respect to personal guarantors, irrespective of the fact that whether the application against a Guarantor is accepted by the AA or not, an interim moratorium applies with immediate effect thereby preventing the enforcement of any debts against the Guarantor.
Section 96(a) of the Code unequivocally provides for an “interim moratorium” with respect to debts of the Guarantor when application for insolvency under Section 94 or Section 95 is filed before the AA”, this is enforced apart from moratorium under Section 101 which applies only when application is admitted.
This is stark departure against the CIRP regulations which provide only for one moratorium period which comes into effect when NCLT passes an order upon admission of an application filed before it.
In contrast to the case of corporate debtor, Section 99(1) provides that the preliminary assessment on the validity of the insolvency application must be done by Resolution Professional, rather than the Adjudicating Authority.
Overall, it is a welcome move and in light of the principles of the contract of guarantee under Indian Contract Act. The legislature has rightly notified the sections in the code in light of coextensive liabiltiy of the surety While the ambit of IBC has been expanded because of the recent amendments, furthers amendments might still be needed to resolve certain existing issues such as lack of clarity as to the manner in which the proceedings against a corporate debtor and personal guarantor will happen.
This also begs to the question as to whether a common resolution professional will be appointed by the NCLT in such situations? Thus all these issues are still required to be resolved.