Opening of insolvency proceedings against the personal guarantor of the debtor company – Insolvency/bankruptcy

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A personal guarantor is a natural person who stands surety under a contract of guarantee towards a corporate debtor. Until 2016, in the event of default by a debtor company, creditors had the option of recovering their claims from personal guarantors, by (i) going to the civil courts under the Insolvency Act 1909 presidential cities or the Provincial Insolvency Act of 1920; (ii) by bringing a civil action to enforce their contractual remedies (iii) by taking action in court for the recovery of debits under the Securitization and Reconstruction of Financial Assets and the Application of Interest on securities.

In 2016 Parliament enacted the Insolvency and Bankruptcy Code, 2016 (IBC) as a comprehensive insolvency resolution, winding up and bankruptcy code governing both corporate bodies as well as individuals and partnerships.1.

Parliament, however, did not enforce the provisions when enacted and instead gave central government the power under Article 1(3) to enforce the provisions of the IBC through of a notification in the Official Journal, which enabled it to introduce various provisions. of the IBC in force on different dates2. Accordingly, the central government has issued different notifications implementing different provisions of the IBC from time to time and on different dates.

Initially, it applied the provisions of Part II of the IBC relating to the resolution of insolvency and the liquidation of businesses. It also applied certain related provisions contained in Parts IV and V of the IBC relating to expedited business insolvency resolution and voluntary corporate winding-up, respectively.

However, the provisions of Part III of the IBC relating to the resolution of insolvency and bankruptcy of individuals and partnerships have not been applied at the same time. Part III also covered “natural persons” who had given a personal guarantee to creditors. As a result, corporate debtors’ personal guarantors have remained barred from any resolution process against a corporate debtor before the National Company Law Tribunal (NCLT), a quasi-judicial body that adjudicates corporate matters in the country.

On 15.11.2019 the Union Government notified the Insolvency and Bankruptcy Rules 2019 (Application to Arbitration Authority for Insolvency Resolution Process for Debtor Companies Personal Guarantee) . (Rules 2019). Under the 2019 Rules, Part III of the IBC (Rule 79-187) was made applicable to personal guarantors. Under the 2019 rules, creditors were allowed to bring 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.

In addition, under amended Section 60 of BAC3in the event CIRP (Corporate Insolvency Resolution Process) has been commenced against a corporate debtor before the NCLT, any collection proceedings commenced against the personal guarantor would be transferred to the Hon’ble NCLT where proceedings against the business debtor is pending.

The insolvency resolution process is initiated against personal guarantors under IBC Part III through an application filed under IBC Sections 94, 95 in the following scenarios:

  1. A defaulting debtor may, personally or through a resolution professional, request the adjudicating authority to initiate the insolvency resolution process, by submitting a request4.

  2. A creditor may request, either by itself or jointly with other creditors, or through a resolution professional, the adjudicating authority to initiate insolvency resolution proceedings under this section by submitting a request5.

A provisional moratorium begins with respect to all debts and ceases to have effect as soon as the application has been filed under Article 94 or Article 95 of the IPC.
6. This automatic commencement of the provisional moratorium from the filing date is radically different from Section 14 of the IBC, in which the moratorium begins after the application is admitted after detailed assessment by the NCLT.

It is only after a resolution professional, appointed under Article 97, has filed his report in accordance with Article 99 that the contracting authority has the power to admit the request filed under of section 94 or 95. Thereafter, the provisional moratorium ceases to apply and the moratorium under section 101 must begin. It is only during the moratorium, under Article 101, that the debtor cannot transfer, alienate, encumber or dispose of any of his property or his legal rights or beneficial interests therein.

The moratorium provided for in Article 100 ceases to have effect after one hundred and eighty days from the date of admission of the application or from the date on which the contracting authority issues an order on the repayment plan under section 114, whichever comes first.seven

These provisions were, however, challenged in the Supreme Court recently on the grounds that the contested provisions are manifestly arbitrary, unconstitutional and violate the fundamental rights guaranteed by Articles 14, 19 and 21 of the Constitution. The case is awaiting judgment at the Supreme Court in “Anil Dhirajlal Ambani v Union of India-WP(c)519/22”.

Footnotes

1 BC received the assent of the President of India and was published in the India Gazette on 28-5-2016.

2 Article 1, paragraph 3, provides that it shall enter into force on the date on which the central government may, by notification in the Official Gazette, designate:

3 Insolvency and Bankruptcy Code (Amendment) Act 2018 (2018 Amendment Act), effective November 23, 2017.

4 Section 94. (1) of the IPC

5 Section 95. (1) of the IPC

6 Section 96. (1) of the IPC.

7 Section 101. (1)

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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