Legal Remedies available from Personal Guarantors to Corporate Debtors under the Individual Insolvency Process: Lawyers Advice

While the Insolvency and Bankruptcy Code, 2016 is just a couple of years old, the IBBI has commenced the individual insolvency process under the IBC as well. The Chairman of the IBBI, Ms Sahoo stated that this process has been categorised into three categories which are –

1. Personal guarantors to corporate debtors,
2. Proprietary and partnership firms,
3. The rest of the individuals.
   By a notification dated 15 November, 2019 as of 1 December, 2019 the Central Government has brought into effect Part III of the IBC, 2016. This article aims to examine the effect of insolvency proceedings of personal guarantors to corporate debtors as under that part.

Who is a Guarantor?
The notification explicitly states that the provisions of Part III of the Code have only been brought into effect in so far as they are applicable to a “Guarantor”.
• Thus, if an individual is not a guarantor to a corporate debtor, then the provisions shall not be applicable to such individual.
• Further in terms of the definition of “Guarantor” under Section 3(e) of the Insolvency Rules, the Code is only applicable to those Guarantors where the guarantee has been invoked by the creditor and remains unpaid in full or in part.

Initiation of the Insolvency Process
• The insolvency process can be initiated by the guarantor itself, or via any creditor in personal capacity or collectively, or via a resolution professional.
• A creditor can only petition for bankruptcy of a Personal Guarantor, if it has invoked a guarantee provided in its favour and the Personal Guarantor has failed to pay the debt within 14 days of such notice.

The Interim Moratorium
• Section 96(a) provides for an “interim moratorium” in relation to any debts of the Guarantor as soon as the application for insolvency under Section 94 or Section 95 is filed before the Adjudicating Authority, in addition to a moratorium under Section 101 which comes into effect only upon admission.
• This is different from the CIRP regulations which impose a single moratorium period. In the case of personal guarantors, irrespective of whether the application against a guarantor is admitted by the adjudicating authority or not, an interim moratorium shall immediately apply.
• Hence, this prevents the enforcement of any debts of the guarantor and staying any ongoing legal proceedings in relation thereto.

Rehabilitation Process/Repayment Plan of Personal Guarantor –
• Once the application has been admitted by the NCLT, the guarantor along with the appointed resolution professional submit a repayment plan in order to restructure his debts.
• This plan then has to be accepted by the committee of creditors, or if the resolution professional feels a meeting with the creditors is not required, he needs to justify the same to the NCLT.
• The NCLT has the power to reject the plan, provide directions for implementation, order another meeting with the creditors to amend/re-structure the plan etc.
• If the plan is not approved, the personal guarantor goes into bankruptcy.

What happens if a Personal Guarantor is Bankrupt?
• An application of bankruptcy can be filed by the guarantor itself or by a creditor. The NCLT can pass a bankruptcy order against the personal guarantor within 14 days of receiving confirmation or nomination of a bankruptcy trustee.
• A bankruptcy trustee is then responsible to investigate the affairs and also discharge the assets of the bankrupt.
• After a period of 1 year, or upon the approval of the committee of creditors, the bankrupt is then discharged This means that from all debt except court fines, damages for negligence, nuisance maintenance liability, student loans and any debt incurred by fraud or breach of trust.

Priority of Payments –
• In the case of priority of payments to creditors in the event of the personal guarantor going into bankruptcy, distribution of final dividend pursuant to the administration and distribution of estate of a Personal Guarantor is similar to that provided in Section 53 of the Code that governs the liquidation of a corporate debtor.
• Hence, as per the waterfall mechanism, (1) Costs incurred during the insolvency process are paid first, (2) payment to secured creditors, (3) workmen dues for a period of 24 months. These are given a priority over all other debts.

Debts of the Personal Guarantor –
The Insolvency and Bankruptcy Code covers all the debts of the personal guarantor –
• Upon passing of an order of admission of a personal guarantor, the NCLT by way of public notice, invites all claims from creditors within a period of 7 days. The creditors than have a period of 21 days to submit their claims.
• With respect to bankruptcy, the NCLT invites all creditors to submit their days within a period of 10 days.

Judicial Pronouncements –

1. The first case of a personal insolvency petition was filed before the NCLT Bench in Amravati, Andhra Pradesh. It was filed by Mr. Omkaram Venkata Ramana who stood personal guarantor to five firms that defaulted on Rs 38.66 crore of bank loans. He filed the petition to initiate personal insolvency resolution process, which would entitle him to an interim moratorium on his liabilities. (Omkaram Venkata Ramana v. Nitin Grains and Mills Pvt. Ltd & Ors., CP (IB) No.2 17/94 of IBC/AMR/2019)
2. In Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta & Ors. [2019] 153 CLA 275 (SC) the Supreme Court overturned the NCLAT Order, while clearing out issues related to the CIRP Process. The Court stated that even once the resolution plan for the corporate debtor was approved, the claims against the personal guarantor would not extinguish.
3. Recently, the State Bank of India also took Anil Ambani to the Mumbai Bench of the NCLT, for a personal guarantee on loans given to Reliance Communications and Reliance Infratel of over 1200 crores. SBI filed applications under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 to nominate a resolution professional for the insolvency resolution process of the personal guarantor. (State Bank of India v. Anil Dhirajlal Ambani, A1009-2020 INCP(IB)-916 MB 2020
4. With respect to certain ambiguity’s present under this mechanism, in the case of Industrial Investment Bank of India Lt. v. Bishwanath Jhunjhunwala (Civil Appeal No. 4613 OF 2000), the Court stated the whole purpose of a guarantee is defeated, if a creditor is asked to postpone his remedies. (During the interim moratorium no proceedings for debt recovery of the corporate debtor or personal guarantor can come into play).

To conclude, the insolvency process with respect to personal guarantors of corporate debtors is the first step towards personal insolvency as under the Insolvency and Bankruptcy Code, 2016. This mechanism has various advantages, from yielding more time bound results to lenders to ensuring creditors do not have to go to multiple forums by extending the scope of the IBC. Since proceedings can be initiated against the corporate debtor and personal guarantor simultaneously, creditors are also provided with an easier and faster recourse. While various petitions have been filed with respect to this provision, one waits eagerly to understand how much the creditor will be avail from this mechanism as well.
Authored By: Adv. Anant Sharma & Madhulika Iyer