Regulations for Insolvency Proceedings of Personal Guarantors to Corporate Debtors

The Insolvency and Bankruptcy Code, 2016 foresees Insolvency Proceedings, restructuring, and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner. The main purpose of Insolvency and Bankruptcy Code is to maximize the value of assets of such persons, to promote entrepreneurship, to increase the availability of credit and stabilizing the interests of all stakeholders.

Few regulations for proceedings are notified as under:

1. There are occurrences when a corporate debtor takes a loan guaranteed by another corporate person or an individual. The lender may pursue a remedy against the guarantor or the corporate debtor, being the principal borrower, when there is a default in repayment of the loan. The insolvency resolution of corporate guarantors to the corporate debtor and of personal guarantors to the corporate debtor complement insolvency resolution of the corporate debtor. The Code offers that where an application for insolvency resolution or liquidation proceeding of a Corporate Debtor is pending before a National Company Law Tribunal, an application relating to insolvency resolution or liquidation or the bankruptcy of a corporate guarantor or a personal guarantor shall be filed before the National Company Law Tribunal. It further provides that 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 National Company Law Tribunal dealing with insolvency resolution or liquidation proceeding of such Corporate Debtor.
2. The Code categorizes individuals into three categories, namely, personal guarantors to Corporate Debtors, partnership firms and proprietorship firms, and other individuals, to allow the implementation of individual insolvency in a phased manner. On 15th November 2019 through notification Central Government appointed 1st December 2019 as the date for commencement of the provisions of the Code relating to personal guarantors to Corporate Debtors. It also notified as under:
3. The Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019; and ii. The Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

These rules describe the process and forms of making applications for initiating insolvency resolution and bankruptcy proceedings against personal guarantors to Corporate Debtors, withdrawal of such applications, inviting claims from the creditors, etc.

3. The Insolvency and Bankruptcy Board of India further notified:

(i) The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019, specifying the particulars of the insolvency resolution process for personal guarantors to Corporate Debtors, including: (a) Eligibility to act as a resolution professional for an insolvency resolution process (b) Manner of receipt and verification of claims of creditors (c) Manner of preparation of the list of creditors, holding the meetings of the creditors and voting in the meeting; (d) Contents of the repayment plan (e) The procedure of filing of an application for issuance of the discharge order, etc. (ii) The Insolvency and Bankruptcy Board of India (Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 specifying the particulars of the bankruptcy procedure for personal guarantors to corporate debtors, including:

(a) Eligibility to act as a bankruptcy trustee for the bankruptcy process; (b) Manner of preparation of reports and timeline for submission by the bankruptcy trustee; (c) Manner of collating claims and formation of a committee of creditors, holding meetings of the committee and voting in the meeting; and (d) Manner of realization of assets of the bankrupt and its distribution, etc. Thus, on the failure of the insolvency process, the creditors have the right to start bankruptcy proceedings against the Guarantor just as liquidation is ordered in the case of corporate debtors where the resolution process fails.

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