Under the Insolvency and Bankruptcy Code
(IBC), one of the most contentious issues was of simultaneous claims against the principal debtor and the guarantor. In what is famously known as the Piramal judgment, the National Company Law Appellate Tribunal (NCLAT) held for the same resolution process, a creditor cannot initiate proceedings against the borrower and the guarantor at the same time. Earlier, creditors had to resort to extensive litigation before the debt recovery
tribunal or in the form of suits for recovery, etc, against personal guarantors. The apex court overruled the order in the Essar Steel case, saying it was against the IBC.
How does the notification change the existing framework?
The notification puts this issue to rest by allowing a creditor to initiate proceedings against both the surety and the debtor, without having to extinguish one means to access the other. “An application for initiation of insolvency proceedings against a personal guarantor can be made not only by a creditor but also by the personal guarantor. It may be filed directly by such parties or through a resolution professional,” says Rajeev Vidhani, partner, Khaitan & Co.
He adds: “On the filing of an application against a personal guarantor, a person would be appointed by the adjudicating authority. The resolution professional appointed for the insolvency process is required to file a report on the application with a recommendation for approval or rejection. After considering such report, the NCLT would admit/reject the application.”
If the application is admitted by the NCLT, it shall issue a public notice to invite claims from all creditors of the personal guarantor.
What is the procedure for the debt to be resolved?
The debt of a personal guarantor has the potential to be resolved under a repayment plan, approved by a three-fourth majority of creditors by value. In case an application for insolvency resolution is rejected or the repayment plan is not approved by the NCLT, an application for initiation for bankruptcy may be filed by a creditor or a personal guarantor himself.
How will this affect businesses and promoters?
The notification of the provision can expedite the process for businesses in the matters of insolvency cases.
As most banks demand guarantees from promoters, these norms will be extremely pivotal. “With this notification, personal guarantors are exposed to the risk of being insolvent which, so far, was a risk only for corporate guarantors and corporate debtors. Even though Section 2 (g) of the IBC has not been notified, an individual personal guarantor faces the risk of paying the debt of other creditors as well who has no nexus with the ‘guarantee’ in dispute. If all such debts are not settled, the personal guarantor stands the risk of being declared bankrupt. The consequences of a breach of a personal guarantee, after December 1, are quite severe,” says Dhruv Suri, partner, PSA Legal.
If looked at from a business perspective, the law can keep a check on instances where loans are given not on the basis of corporate debtor’s creditworthiness, but because of a personal guarantor. This can reduce bad debts of financial institutions. Moreover, even a single instance of default by a personal guarantor can expose it to claims from all other creditors.
What remains unclear?
Experts want clarity on some provisions. “The extent to which amounts can be recovered from personal guarantors after they have taken a haircut in the resolution plan of the corporate debtor and have discharged the borrower in its insolvency against the entire debt, is what remains to be seen,” says Padmaja Kaul, partner at IndusLaw.