Personal Guarantors to Corporate Debtor’s under Insolvency and Bankruptcy Code 2016 by Keshav Mantri 

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Personal Guarantor under Insolvency and Bankruptcy Code

By Keshav Mantri 
Final year student at Faculty of Law, University of Delhi

By a notification dated 15.11.2019, the Central Government via Ministry of Corporate Affairs has brought onto effect Part III of the Insolvency and Bankruptcy Code (except with regard to fresh start process) dealing with Insolvency and Bankruptcy of Individual and Partnership Firms in so far as it is applicable to Personal Guarantors of Corporate Debtors and Corporate Guarantors. This was brought into effect from 1st of December 2019.

This notification shall apply to personal guarantors to Corporate Debtors. Subsequently, it has proposed that separate set of rules and regulations for three different classes of non-corporate persons and its implementation.

Thus, two sets of regulations were released by Central government under this notification, the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Guarantors) Rules, 2019.

Who is a personal guarantor?

According to Section 5(22) of Insolvency and Bankruptcy Code 2016 “personal guarantor” means an individual who is the surety in a contract of guarantee to a corporate debtor.

According to Section 3(e) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 defines as: “guarantor means a debtor who is a personal guarantor to a corporate debtor and in respect of whom the guarantee has been invoked by the creditor and remains unpaid in part or full

According to Section 126 of the Contracts Act 1870: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’; the person in respect of whose default the guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given is called the ‘creditor’.

Initiation of Insolvency Process

An application under Section 94 of the Code can be filed by the debtor, either personally or through a resolution professional, to the Adjudicating Authority (Form -A) or by a creditor under Section 95 of the Code, either by himself or jointly with other creditors, or through a resolution professional to the Adjudicating Authority(Form C).

Rule 7(1)- Prior to filing this Application, creditors must serve a demand notice in Form B. Application can be filed only if debt stated in the demand notice is not repaid by the debtor within 10 days of service of demand notice.

Moratorium

Interim

  • When an application is filed under Section 94 or Section 95 of the Code.
  • Form date of filing an application till its admission- not specified.
  • Commencement: On the date of the application in relation to all debts.
  • End: On the date of admission of such application.
  • Applicable to debtors as well.

Final

  • When an application is admitted under Section 100 of the Code.
  • Commencement: When application is admitted under Section 100.
  • End: One hundred eighty days(180) beginning from date of admission of the application or the date when the Adjudicating Authority passes an order under Section 114, whichever is earlier.
  • The debtor shall not transfer, alienate or encumber, any of the assets or legal right.

Repayment Plan

As per Section 105 of the Code “The debtor shall prepare, in consultation with the resolution professional, a repayment plan containing a proposal to the creditors for restructuring of his debts or affairs.”

Features of Repayment Plan

  • Prepared by the debtor in consultation with Resolution Professional.
  • Carry on debtor’s business or trade on his behalf.
  • Realise the assets of the debtor.
  • Administer or dispose of any funds of the debtor.

Approval of Repayment Plan

As per Section 111 of the Code “The repayment plan or any modification to the repayment plan shall be approved by a majority of more than three-fourth in value of the creditors present in person or by proxy and voting on the resolution in a meeting of the creditors.”

Completion of Repayment Plan

  • Final Completion: As per Section 117 of the Code: It shall be notified by the Resolution Professional within fourteen days and all persons shall be bound by the repayment plan under Section 115 of the Code and Adjudicating Authority.
  • Premature Termination:Resolution Professional shall submit a report to the adjudicating authority stating the reasons for premature end of repayment plan with details of the creditors whose claim has not been fully satisfied.

Discharge Order

Section 119 of the Code states that “On the basis of the repayment plan, the resolution professional shall apply to the Adjudicating Authority for a discharge order in relation to the debts mentioned in the repayment plan and the Adjudicating Authority may pass such discharge order.”

Withdrawal of Application

Under Rule 11(2) of the Insolvency and Bankruptcy (Application for Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors) Rule 2019 an application for withdrawal of Insolvency Resolution Process. (FORM-D)

The Adjudicating Authority may permit withdrawal of the application submitted under this rule as the case may be:

  1. Before its admission, on request of the applicant.
  2. After its admission, on the request made by the Applicant, if 90% of the creditors agree to such withdrawal.

Case laws

Amrit Lai GoverdhanLalan v. State Bank of Travancore in which the court has stated that principle of subrogation is not only subject to the contract of guarantee but also the principle of natural justice. In lieu of the same the court has pointed out that the language of Section 141 of the Contracts Act of India holds that the guarantees invested with all rights of the creditor against the debtor. There exists to need of transfer in this case.

In Ashok Mahajan V St of U.PAppeal (civil) 4257 of 200the Hon’ble Supreme Court held that action against personal guarantor cannot be taken until property of principal debtor is sold off.

In Industrial Investment Bank v. BishwanathJhunjhunwala it was held that liability of a guarantor and principal debtor are co-extensive and not alternative.

In Karnataka State Finance Corporation V. N. Narasimahiah Appeal (civil) 610-612 of 2004 held that Apart from defenses available under Contract Act, a surety or guarantor is entitled to take additional defense. Such defense can be taken by the guarantor not only against the corporation but also against principal debtor. He, in a given situation has to show that the contract of guarantee has come to a naught. Ordinarily therefore when guarantee is sought to be enforced, the same must be done through a court having appropriate jurisdiction.

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1 comment

  1. The individual insolvency through IBC is a different procedure than what was prior to the said notification. The judgments quoted above is prior to notification and not relevant. If any order is passed by any NCLT bench regarding individual insolvency than that will be relevant.

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