Personal Guarantor Insolvency

Personal Guarantor Insolvency

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The government on 12 November notified rules for the initiation of insolvency proceedings against personal guarantors to corporate debtors, to be applicable from December 1. Under these rules, if insolvency proceedings against a corporate debtor under the Insolvency and Bankruptcy Code are already in process, the same bench of the bankruptcy court would also deal with the proceedings against the personal guarantor.

Experts said the introduction of these rules would likely bring about a faster resolution to insolvency cases of corporate debtors as well. The insolvency of personal guarantor to a corporate debtor being dealt with at the same bench which is hearing the insolvency of the corporate debtor will improve potential recovery for lenders and make the recovery process more holistic and easier procedurally.

On November 15, the corporate affairs ministry said provisions related to personal guarantors to corporate debtors would be effective from December 1.

Regarding the new rules, the ministry said these “provide for the process and forms of making applications for initiating insolvency resolution and bankruptcy proceedings against personal guarantors to corporate debtors, withdrawal of such applications, forms for public notice for inviting claims from the creditors, etc”.

According to the Code, where an application for insolvency resolution or liquidation proceeding of a corporate debtor is pending before the National Company Law Tribunal (NCLT), an application related to insolvency resolution or liquidation or bankruptcy of a corporate guarantor or a personal guarantor can also be filed before the tribunal.

Insolvency resolution, liquidation or bankruptcy proceeding of a corporate guarantor or a personal guarantor of the corporate debtor pending in any court or tribunal shall stand transferred to the NCLT dealing with insolvency resolution or liquidation proceeding of such corporate debtor,” the ministry said in a release.

According to the Supreme Court’s recent ruling in the Essar Steel case, overturning an order of the National Company Law Appellate Tribunal, claims against a personal guarantor would not extinguish once a resolution plan for the corporate debtor was approved.

The new framework will allow creditors to continue the recovery process with personal guarantors after the completion of the corporate insolvency resolution process. The move is the first phase of operationalising personal insolvency via IBC. In October, corporate affairs secretary Injeti Srinivas had said the government was planning to fully operationalise the personal insolvency regime under the IBC in one year.

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