Personal Guarantors – Liability beyond Death and Borders
An analysis of the legal position of a guarantor upon death and change of citizenship
Authored by:
K M Thomas, 3rd Year, NUALS
Ananya Arun, 2nd Year, NUALS
This is a world of transactions. Every second, millions of lakhs of transactions take place across the globe. Each transaction is intricate in its own way. To the common man, it may seem as though a simple transaction might not have an impact on non-parties, but every transaction plays a significant role in the overall financial framework.
In such a world, where every unit of money matters, people are increasingly concerned about the security of their money. The risk of bad debts discourages people from lending money. Over time various concepts have evolved to secure the interests of a creditor. One such important mechanism is that of a personal guarantee.
A Guarantor plays a crucial role in debt transactions and debt-related suits. The Guarantor acts as an addition to the credibility of the debtor. He stands as a protective shield for the creditor. A Guarantor legally promises to step in to pay the debt when the debtor is not in a position to do so. The Guarantor assumes responsibility on behalf of the debtor.
Such a guarantor is crucial in increasing the security of debt and also to provide assurance to the creditors. A guarantor need not always necessarily stand for a person. The debtor can also be a corporate debtor. In these cases, the guarantor will be responsible for repayment on behalf of a firm or business, when said business fails to repay.
Personal Guarantors are particularly helpful to young businesses. Such businesses do not possess a strong name in the market, nor do they wield enough establishment to attract investments. When Personal Guarantors step in, then the business gets credit and more people step in to invest, knowing that their money is secure. Personal Guarantors also help companies or individuals with a poor credit history. When a guarantor backs the debtor, despite the debtor having a tainted past regarding non-repayment, the creditors agree to lend money, laying their trust on the Personal Guarantor. This guarantor is also often referred to as a surety. Various acts define the term personal guarantor.
A Guarantor has been defined under the Insolvency and Bankruptcy Code 2016, Section 5(22),[1] A personal guarantor is defined as an individual who is the surety in a contract of guarantee to a corporate debtor.
Section 126 of The Indian Contract Act, 1872[2] defines a contract of guarantee and a surety as follows- “ A ‘contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the ‘surety’ .” [3]
Further, Section 60(2).[4] provides that if a CIRP against a corporate debtor is pending before an NCLT, then any proceeding relating to the insolvency resolution, liquidation, or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, would also lie before such NCLT.[5]
Further section 235 of the Insolvency and Bankruptcy Code[6] states that the resolution professional, liquidator, or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding.
Thus arises many questions regarding the position of a personal guarantor in certain situations. This article attempts to shed light on two such circumstances. The article will talk about the position of a personal guarantor when he attains citizenship in another country. Further, the article addresses whether the legal heirs of a Personal Guarantor can be held liable on the death of the Personal Guarantor
POSITION OF THE PERSONAL GUARANTOR ON ACQUIRING CITIZENSHIP IN ANOTHER COUNTRY
The law does not accord much importance to the citizenship of a Personal Guarantor. For the initiation of proceedings, the resolution process is to be initiated before the Adjudicating Authority which has territorial jurisdiction over the location of the corporate debtor/person.
Guarantors often resort to loopholes to escape liability. They flee the country with the view of getting citizenship elsewhere, for the purposes of dodging their liabilities. However, the law ensures that such loopholes are addressed.
The National Company Law Appellate Tribunal, recently held that acquiring citizenship in a foreign country in no way discharges a personal guarantor from his liabilities. This was held in the case of Sudip Dutta V. State Bank of India[7]. The tribunal in this case observed that a personal guarantor cannot escape liabilities merely by acquiring citizenship elsewhere. This can be seen as reflecting one of the basic principles of statutory interpretation, that being, that the interpretation of a statute must facilitate its proper functioning keeping in mind the purpose of that statute. The IBC does not provide any indication towards such escaping of liability and therefore, the interpretation is done in such a way so as to prevent the misuse of the provisions and to seal any arbitrary loopholes that the guarantors might resort to .
While addressing this issue, it is also necessary to shed light on the other side of this issue, that is, foreign creditors. Often Indian Companies stand as guarantors, and their creditors are situated outside India. This is usually seen in a multinational corporate framework. It is to be noted that the IBC treats foreign and Indian Creditors alike. No legal distinction is made between the same.
Sections 235[8] and 234[9] of the IBC deal with the issue of a personal guarantor or corporate debtor being outside of India. To ascertain and address these issues it is crucial to look into the scheme and the main intent of the act. The tribunal observed this in the Sudip Dutta case. Originally, the scheme of the IBC always intended to consider that the foreign assets of the Personal Guarantor would be handled in an identical manner, on par with his/her assets in India. A personal Guarantor regardless of his citizenship shall be bound by the Deed of Guarantee when he signs it. The Deed will be held against him in case of the inability of the debtor to pay.
Amidst these discussions, It is worthy to mention that there lies a proposal for a new section to be integrated into the IBC. This section has been labelled ‘part Z. The aforementioned section once notified will also allow creditors from other countries to knock on the doors of local courts to acknowledge overseas proceedings when the personal guarantor’s primary interests are in that particular foreign country.
Trans-National transactions are ever-increasing in this globalised world. It is important that new loopholes, and modern issues pertaining to the same, be addressed. With multinational firms on the rise, such transactions are unavoidable. The IBC envisions facilitating such international oriented proceedings, through a mechanism of cooperation between the concerned nations. This cooperation can be brought about through agreements between the nations.
THE LIABILITY OF THE LEGAL HEIRS OF PERSONAL GUARANTOR AFTER HIS DEATH
One of the pressing issues that need to be addressed is with respect to whether the legal heirs of the personal guarantors are liable for the Guarantee given by the Personal Guarantor upon the death of the personal guarantor under the Insolvency and Bankruptcy Code.
It is to be noted that when an application under Section 95 of the Insolvency and Bankruptcy Code[10] is filed and if the legal heirs of the Personal Guarantor are made liable upon the death of the Personal Guarantor, it would cause grave injustice to the legal heirs, since the personal assets of the personal guarantor would be hit by the moratorium.
In the recent case titled “Bank of Baroda Vs Divya Jalan[11]”, the petitioners had filed a petition under section 95(1) of the Insolvency and bankruptcy code[12] read along with reading with rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution process for Personal Guarantors to Corporate Debtor) Rules, 2019 (‘Personal Guarantors Rules’)[13] and regulation 4(2) of IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019.[14]
In this case, the petitioner submitted that as per the Personal Guarantee Agreement, the Personal Guarantor has provided an exhaustive list of the legal heirs, and further the petitioner submitted that it has been explicitly stated in the Personal Guarantee Agreement that in the case of demise of the Personal Guarantor the petitioner can recover the amount due from the legal heirs of the Corporate Debtor.
The tribunal in this case firstly analyzed regulation 3(1)(a)(e) of the Application of Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor Regulation, 2019,[15] this regulation states that a Personal Guarantor is a person against whom the Corporate Debtor has invoked guarantee for any outstanding dues left by the Corporate Debtor. The tribunal after analyzing this judgement, observed that nowhere in this regulation it has been mentioned that a Personal Guarantor also includes the Legal Heirs of the Personal Guarantor. The tribunal also looked into section 5 (22) of the Insolvency and Bankruptcy code[16] and observed that as per section this section a “Personal Guarantor” is a person or an individual who acts as a surety as per the contract of guarantee for the Corporate Debtor.
When both the regulation and Section 5(22) of the Insolvency and Bankruptcy code[17] is observed , there is an apparent contradiction, as per Section 5(22) of the Code the guarantee is regulated by the contract of guarantee and in the current contract of guarantee that exists between the corporate debtor and the Personal Guarantor, there is a clause which states that the Personal Guarantors will also be liable. However, as per the aforementioned regulation, the term Legal Heirs is not even mentioned.
The tribunal rectified this conundrum by placing reliance on Section 238 of the Insolvency and Bankruptcy Code[18] and placing reliance on various judgments of the Honourable Supreme Court of the Country with respect to this section and has held that section 238 of the Insolvency and Bankruptcy Code has an overriding effect on laws which are inconsistent with code or any instruments created by such laws. Hence based on this the Tribunal has held that 5(22) of the Insolvency and Bankruptcy Code[19] will have prevalence over the Contract of agreement that exists between the parties and hence the Legal Heirs of the Personal Guarantors cannot be held liable.
These are thus, two of the circumstances under which the role and position of the personal guarantor come into question.
Reference:
[1] The Insolvency and Bankruptcy Code, 2016, § 5 (22).
[2] The Indian Contract Act, 1872,§ 126
[3] ibid.
[4] The Insolvency and Bankruptcy Code, 2016, § 60(2)
[5] ibid.
[6] The Insolvency and Bankruptcy Code, 2016, § 235.
[8] The Insolvency and Bankruptcy Code, 2016, § 235
[9] The Insolvency and Bankruptcy Code, 2016, § 234
[10] The Insolvency and Bankruptcy Code, 2016, § 95.
[11] (2022) ibclaw.in 180 NCLT.
[12] The Insolvency and Bankruptcy Code, 2016, § 95(1).
[13] The Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution process for Personal Guarantors to Corporate Debtor) Rules, 2019, § 7(2)
[14] The IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019, § 4 (2)
[15] The Application of Application to Adjudicating Authority for Ibid.Insolvency Resolution Process for Personal Guarantors to Corporate Debtor Regulation, 2019,§3(1)(a)(e)
[16] Id @ 1.
[17] Ibid.
[18] The Insolvency and Bankruptcy Code, 2016, § 238
[19] Id @ 1.
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