Status as on- 25/12/2019
Financial Creditors now onward will be in a stronger position to initiate CIRP proceedings against both Corporate Debtors and Personal Guarantor started from December 2019. The article below summarizes the additional rights and remedies provided under the IBC.
PERSONAL GUARANTOR UNDER IBC
Insolvency and Bankruptcy Board of India notified Regulations for “Insolvency Resolution and Bankruptcy Proceedings of Personal Guarantors to Corporate Debtors” which has now came into effect from 1 December 2019 ensuring insolvency proceedings against both the Corporate Debtor and the Personal Guarantors can be heard concurrently where previously Creditors would have to undertake lengthy litigation proceedings against the Guarantor through recovery suits or DRT.
The NCLAT had in a previous judgment held that a creditor could not initiate proceedings against the Corporate Debtor and Guarantor at the same time;
“once for same set of claim application under Section 7 filed by the ‘Financial Creditor’ is admitted against one of the ‘Corporate Debtor’ (‘Principal Borrower’ or ‘Corporate Guarantor(s)’), second application by the same ‘Financial Creditor’ for same set of claim and default cannot be admitted against the other ‘Corporate Debtor’ (the ‘Corporate Guarantor(s)’ or the ‘Principal Borrower’).”
However, such orders has been overruled by the Supreme Court in the Essar Steel Case and further ensures that claims against a Personal Guarantor would not extinguish once a resolution plan for the Corporate Debtor was approved. The new framework allows Creditors to continue recovery process with Personal Guarantor after completion of the Corporate Insolvency Resolution Process (CIRP).
ADVANTAGES OF NOTIFICATION TO FINANCIAL CREDITOR
- The Ministry of Corporate Affairs shall enforce the provisions for Personal Guarantor under the IBC thereby enabling Creditors to initiate proceedings against both the Guarantor and the Corporate Debtor without extinguishing one mean to access the other.
- The Notifications states that if insolvency proceedings against a Corporate Debtor under the NCLT are already under process the same bench shall also deal with proceedings against the Personal Guarantor thereby improving personal recovery for lenders.
- A single instance of default by Personal Guarantor can expose it to claims from all other Creditors. Thus, additional claims by all Creditors of the Personal Guarantor will be initiated if insolvency proceedings are admitted by the NCLT.
- The consequences of a breach by Personal Guarantor shall be quite severe, as instances where loans were given on the creditworthiness of Personal Guarantor to the Corporate Debtor bear the risk or the Personal Guarantor being involved to pay the debts of Creditors which has “no nexus with the guarantee in dispute ”
Thus, the Notification will enable Creditors to recover dues even from the Personal Guarantors after the completion of the CIRP Process and marks the first phase to fully operationalize the personal insolvency regime of corporate persons, partnership firms and individuals under the IBC in one year.
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