A personal guarantor is an individual who provides surety under a contract of guarantee to a corporate debtor. Till, 2016, in case of default by a corporate debtor, creditors had the option of recovering their dues from personal guarantors, by (i) approaching the civil courts under the Presidency Towns Insolvency Act, 1909 or the Provincial Insolvency Act, 1920; (ii) instituting a civil suit enforcing their contractual remedies (iii) approaching the Debit Recovery Tribunal under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.
In 2016, the parliament enacted the Insolvency and Bankruptcy Code, 2016 (IBC) as a comprehensive code of insolvency resolution, liquidation, and bankruptcy governing both corporate persons as well as individuals and partnership firms1.
The parliament, however, did not enforce the provisions at the time of enactment, and instead gave the Central government the power under Section 1(3) to enforce the provisions of IBC through a notification in the official Gazette, allowing it to bring different provisions of IBC into force on different dates2. Accordingly the Central Government issued different notifications enforcing different provisions of the IBC, from time to time, and on different dates.
Initially, it enforced the provisions of part II of the IBC pertaining to corporate insolvency resolution and liquidation. It also enforced certain related provisions contained in part IV and V of IBC pertaining to fast track corporate insolvency resolution process and voluntary liquidation of corporate persons, respectively.
However, the provisions in part III of the IBC relating to insolvency resolution and bankruptcy for individuals and partnership firms were not enforced at the same time. Part III also covered ‘individuals' who had given personal guarantee to creditors. As a result, personal guarantors to corporate debtors remained excluded from any resolution process on going against a corporate debtor before the National Company Law Tribunal (NCLT), a quasi-judicial body adjudicating issues concerning companies in the country.
On 15.11.2019, the Union Government notified the Insolvency and Bankruptcy (Application to Adjudicatory Authority for Insolvency Resolution Process for Personal Guarantee to Corporate Debtors) Rules, 2019. (2019 Rules). Vide 2019 rules, part III of the IBC (Section 79-187) was made applicable to personal guarantors. Pursuant to the 2019 rules, creditors were permitted to file claims against personal guarantors before the NCLT under part II of the IBC and before the DRT (Debt Recovery Tribunal), under Part III of the IBC.
Further, in terms of the amended section 60 of IBC3 in case the CIRP (corporate insolvency resolution process) has been initiated against a corporate debtor before the NCLT, any recovery proceeding initiated against the personal guarantor would stand transferred to the Hon'ble NCLT where the proceedings against corporate debtor are pending.
The insolvency resolution process is initiated against personal guarantors under part III of the IBC by way of an application filed under section 94, 95 of the IBC in the following scenarios:
- A debtor who commits a default may apply, either personally or through a resolution professional, to the adjudicating authority for initiating the insolvency resolution process, by submitting an application4.
- A creditor may apply either by himself, or jointly with other creditors, or through a resolution professional to the adjudicating authority for initiating an insolvency resolution process under this section by submitting an application5.
An interim-moratorium shall commence in relation to all the debts and shall cease to have effect as soon as the application has been filed under section 94 or section 95 of the IBC 6. Such automatic commencement of interim moratorium from the date of filing is starkly different from section 14 of the IBC, wherein the moratorium commences after admission of the application after detailed assessment by the NCLT.
It is only after a resolution professional, appointed in terms of section 97, files its report in accordance with section 99 that the adjudicating authority has power to admit the application filed under section 94 or 95. Thereafter, the interim moratorium ceases to operate and the moratorium under section 101 shall commence. It is only during the moratorium, under section 101 that the debtor shall not transfer, alienate, encumber or dispose of any of his assets or his legal rights or beneficial interest therein.
The moratorium under section 100 shall cease to have effect at the end of one hundred and eighty days beginning with the date of admission of the application or on the date the adjudicating authority passes an order on the repayment plan under section 114, whichever is earlier.7
The said provisions, however, has been challenged before the Supreme Court, recently, on the ground that the impugned provisions are manifestly arbitrary, unconstitutional and violates the fundamental rights under section 14, 19 and 21 of the constitution. The matter is pending adjudication before the apex court in the “Anil Dhirajlal Ambani vs Union of India-WP(c) 519/22” case.
1 BC received the assent of the President of India and was published in the Gazette of India on 28-5-2016.
2 Section 1(3) states that-It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint:
3 The Insolvency and Bankruptcy Code (Amendment) Act, 2018 (2018 Amendment Act), effective from 23 November 2017.
4 Section 94. (1) of IBC
5 Section 95. (1) of IBC
6 Section 96. (1) of the IBC.
7 Section 101. (1)
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