POSITION OF PERSONAL GUARANTOR UNDER IBC

By Palak Dheer, 4th year student, Institute of Law, Nirma University

 As per the notification of central government dated 15^th November 2019, from 1^st December 2019 creditors can now initiate insolvency proceedings against a personal guarantor of the corporate debtor, effectively bringing in force the part III of IBC dealing with the insolvency and bankruptcy of individuals and partnership firms in so far as it is applicable to personal guarantors of a corporate debtor. Pursuant to this notification, various rules and regulations have been brought into effect. The Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (hereafter insolvency rules) and The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (hereafter insolvency regulations), govern their resolution process along with part III of IBC. IBC is only applicable to those guarantors where the guarantee has been invoked by the creditor and remains unpaid in full or in part. 

 RESOLUTION PROCESS FOR PERSONAL GUARANTORS 

 

Now, simultaneous applications can be brought before the tribunal for both; the corporate debtor and the personal guarantor to the corporate debtor.

1. INITIATION APPLICATION: Similar to the process of initiation of insolvency against a corporate debtor, in terms of section 94 and 95 of the IBC r/w insolvency rules, the insolvency process may be initiated by the guarantor (the debtor) or by a creditor, either personally or collectively with other creditors or through a resolution professional. Prior to this application, creditors must serve a demand notice and an initiation application can only be filled if debt is not repaid within 10 days of service of demand notice (insolvency rules 7(1)).

2. MORATORIUM: Section 96(a) provides for an interim moratorium in relation to any debts of the Guarantor as soon as the application is made under section 94 or Section 95 before the Adjudicating Authority (AA), which ceases upon admission of the application. Thereafter under section 101, upon admission moratorium commences in relation to all the debts and is applicable till end of period of 180 days or till the date AA passes an order on the repayment plan under section 114, whichever is earlier.

3. RESOLUTION PROFESSIONAL (RP): When an initiation application is filed through an RP, then the board has to, within 7 days, either confirm or reject its appointment. If rejected, they have to nominate another RP. On the other hand, if the guarantor or the creditor makes the initiation application, then AA appoints an RP on nomination or recommendation of the board.

4. REPORT BY RP: Pursuant to the appointment of the RP, the RP has to examine the application for insolvency and submit a report to the AA, within 10 days of its appointment, recommending that the insolvency application be either admitted or rejected.

5. ADMISSION OR REJECTION OF APPLICATION: On perusal of the report, and on the recommendation of the RP, the AA may either accept or reject the insolvency application as per section 100 of IBC, within 14 days of submission of report. When an application under this section is admitted, the AA on request of the RP can issue instructions for conducting the negotiations between the debtor and creditors and for arriving at a repayment plan.

6. PUBLIC NOTICE AND CLAIMS: Within 7 days of order of admission, the AA is responsible under section 102 to issue a public notice inviting claims of all the creditors within 21 days of the issue. Within 30 days of this notice, the RP is supposed to make a list of creditors (Section 104).

7. REPAYMENT PLAN: According to section 105, the guarantor in consultation with the RP has to prepare a repayment plan, which should provide for a restructuring mechanism for the debts owed by the guarantor, justification for preparation of such plan and reasons on the basis of which the creditors may agree upon the plan. Upon the finalization of the plan, the RP has to, within 21 days of receipt of the last claim of any creditor, submit the plan to the AA along with a report requesting whether or not a meeting of the creditors is required. In the event that a meeting is required, the same shall take place within a period of 28 days from the date of the recommendation by the RP.

8. MEETING OF CREDITORS (MoC): In the event that the RP requires that an MoC be constituted and held, the RP is required to send a notice to all the creditors along with a copy of the repayment plan. The creditors may, at the MoC; approve, reject or modify the plan and their voting share shall be in proportion to the debt owed to them (Regulation 11). It is essential to note here that as per section 108, consent of the debtor is necessary for any modification suggested by creditors in the plan.  As per section 110, any secured creditor of the guarantor is entitled to participate and vote at the MoC, however, such secured creditor is required to forfeit his right to enforce his security during the period of the plan and in accordance with the plan. The repayment plan or any modification to it has to be approved by a majority of more than three-fourth in value of the creditors present.

9. APPROVAL/REJECTION BY AA: Subsequent to the MoC, the RP has to submit a report and the decision of the MoC to the AA for the approval, modification, or rejection of the proposed plan. On submission of the plan, the AA shall either accept or reject the plan on the basis of the report submitted by the RP. In the event that the AA requires any modification, the AA has to send the plan back to the MoC for reconsideration. Thereafter, the AA will either approve or reject the plan. In the event that the AA rejects the plan, the creditors and/or the debtor may file an application for bankruptcy of the guarantor.

10. IMPLEMENTATION OF THE PLAN: The RP is responsible for supervising the execution of the plan, and upon successful implementation, notice of the same must be sent to the AA. In the event that the guarantor fails to implement the plan, the RP shall issue a notice to the guarantor asking the guarantor to remedy the same. In the event that such a remedy is not accomplished, the RP may approach the AA for directions (Section 116- IBC).

11. DISCHARGE ORDER: Section 119 of the Code may provide for an early discharge or a discharge upon the completion of the repayment of the debts in terms of the plan. On the basis of the plan, the RP may apply to the AA for passing an order in relation to the same and upon the successful implementation of the plan, the AA shall pass a discharge order.

     

COMPARISON OF RESOLUTION PROCESS OF PERSONAL GUARANTOR VIS-À-VIS THAT OF CORPORATE DEBTOR

 

Sr. No.	Component of Resolution process	Personal guarantor	Corporate debtor
1.	Moratorium	Dual Moratoriums- Interim moratorium at the filing of the application and then final moratorium on admission of application by tribunal.    On admission of application, there is automatic application of moratorium as per section 101.	Single Moratorium period- starts once the tribunal passes an order on the admission of the application. Under section 14, the tribunal has to specifically pass an order of moratorium on admittance of the application.
2.	Resolution Professional	RP has to examine the application for insolvency and submit a report to the AA recommending that the insolvency application be either admitted or rejected. So, here, the preliminary assessment of the application is made by RP rather than the AA (Section 99).	Here, the preliminary assessment is done by the AA, which either rejects or accepts the application on the basis of its own assessment after ascertaining if there is a default by the debtor or not.
3.	Repayment plan/ Resolution Plan	No person other than the guarantor can prepare a repayment plan. Here,  the RP may recommend that no MoC is required to be constituted. There is no mandate to require that the plan should be fair, equitable and just, to all the creditors of the guarantor.	In Corporate Insolvency Resolution Process (CIRP), all the members of Committee of Creditors (CoC) are a part of and have a say in the coming up of the resolution plan.
4.	MoC	Consent of the guarantor is required for any modification suggested by the creditors. Guarantors here essentially have the veto power upon any modification.    Secured and unsecured creditors can be a part of the MoC. Secured creditors can only be a part of the MoC, when they forfeit their right to enforce their security during the period of the plan and in accordance with the plan	No such consent of the debtor is required here.  Financial creditors form part of the CoC, regardless of whether such creditors are secured or not.
5.	Implementation of Repayment Plan/ Resolution Plan	Here, the RP is responsible for supervising the execution of the plan, and upon the successful implementation of the same, is required to give notice to the AA.	Resolution applicant whose resolution plan is approved, looks after the implementation of the same as he is responsible to take necessary permissions/ approvals as per section 31(4). RP is not responsible.