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LIABILITY OF PERSONAL GUARANTOR UNDER IBC

Another leg of corporate insolvency reforms has been added in India as the Ministry of Corporate Affairs has recently notified Insolvency and Bankruptcy (Application to Adjudicating authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019 which will be effective from 1st December, 2019.

Till now, the creditors were able to initiate the insolvency proceedings against corporate debtor only under Chapter II (Corporate Insolvency Resolution Process) of Insolvency and Bankruptcy Code, but now creditors can initiate proceedings against personal guarantor (to the Corporate Debtor) as well and that too at the same time while initiating action against the Corporate Debtor. Here mention of our basic law of guarantee (as contained in Section 128 of Indian Contract Act, 1872) is also relevant which states that the liability of surety to be co-extensive with that of personal debtor. Though the basic law is clear on the point that liability is co-extensive and creditor can go against the surety at the same time while initiating proceedings against the principal debtor however due to lack of rules/regulations under IBC, this principle could not be applied till date as the norms for bankruptcy process for personal guarantors to corporate debtors were not notified.

However, with the framing and notification of these two legal documents i.e. Insolvency and Bankruptcy (Application to Adjudicating authority for Bankruptcy Process for personal guarantors to corporate debtors) Rules, 2019 and Insolvency and Bankruptcy Board of India (Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations, 2019, the Government has set the process in motion and provided now a comprehensive solution for the CIRP of the Corporate Debtor and as well the person who has given guarantee for that particular Corporate Debtor. Therefore now the gap or limitation of IBC which has restricted, till now, the adjudication of cases of corporate guarantors only has been removed and from now on creditors will be able to demand their money back from either of them i.e. Corporate Debtor or Personal Guarantor of Corporate Debtor. Though legally the liabilities were always co-extensive in line with settled principles of law, but with this step MCA has put Corporate Debtor and Personal Guarantor on same platform from operational point of view as well. From thereon, such personal guarantors can also approach NCLT to claim their own insolvency.

Though reforms point of view and from the creditors (especially banking/financial creditors) point of view, this will be big booster because now bankers will be able to chase their money from the promoters/personal guarantors (to the Corporate Debtors) in case the amount collected from the Corporate Debtor is not sufficient (in case they have already started IBC proceedings against the Corporate Debtors) and in cases (where the bankers are going to start IBC proceedings) they might have to analyze the entire ground situations again keeping in mind the overall health of the Corporate Debtor and Personal Guarantors (to the Corporate Debtors) and decide their next course of action for the revival of the Corporate Debtor.

Though, the development is exactly on the expected lines, but at the same time, this may create some panic among the promoters especially those who are either facing proceedings under IBC (or are expecting to face IBC due to defaults) etc. This may also force promoters to think and strategize on the quantum of leveraging of their person assets while procuring loans of their corporate entity.

Similarly tasks of advisers may not be so easy in spite of such notification reasons being the open questions like how to handle multiplicity of legal actions, to what extent can creditor recover the money from the personal guarantor (especially in those cases where they have already taken a haircut and discharged the principal debtor) and the practical issues chasing both for recovery etc so these questions may soon be raised in the court of law and respective honorable courts will look into these aspects keeping in mind the law and equity principles. Though the time will tell that how such thing take shapes and how honorable courts deliver justice, however Government seems to be on right direction of achieving its vision i.e. inculcating financial discipline among the borrowers especially corporate. 

Harsh Tayal

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