Personal Guarantors Now Subject To IBC: A Brief Overview Of The Insolvency Resolution Process

By a notification dated 15th November 2019, the Central Government has from the 1st of December, 2019 brought into effect Part III of the Insolvency and Bankruptcy Code, 2016 (“the Code“) (save and except provisions dealing with the Fresh Start Process mainly set out in Chapter III) 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.

In pursuance to the aforesaid notification the Central Government has also enacted various Rules and Regulations with effect from the 1st of December, 2019 viz.

  1. The Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (“Insolvency Rules“)
  2. The Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (“Bankruptcy Rules“)
  3. The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (“Insolvency Regulations“); and
  4. The Insolvency and Bankruptcy Board of India (Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (“Bankruptcy Regulations“)

This Article focuses mainly on the provisions of the Code that have been brought into effect along with the broad procedure in relation to the Insolvency Resolution Process of a Personal Guarantor to a Corporate Debtor (“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 Insolvency Process

Similar to the process of initiation of insolvency against a Corporate Debtor, in terms of Section 94 and 95 of the Code, the Insolvency Process may be initiated by the Guarantor (i.e., the debtor) or by a creditor, either personally or collectively with other creditors or through a Resolution Professional (“RP“).

Interim Moratorium

The Insolvency Process for Guarantors, in terms of 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 (“AA“), in addition to a moratorium under Section 101 which comes into effect only upon admission. This is a distinction from the CIRP regulations which imposes a single moratorium period in relation to the assets of a Corporate Debtor only once the National Company Law Tribunal (“NCLT“) passes an order imposing such moratorium on the admission of an application filed before it. In cases of personal guarantors however, regardless of whether the application against a Guarantor is admitted by the AA or not, an interim moratorium shall immediately apply preventing the enforcement of any debts of the Guarantor and staying any ongoing legal proceedings in relation thereto.

Resolution Professional

An RP, if the insolvency application is filed personally by the Guarantor or the Creditor, is then appointed by the AA in accordance with Section 97 based on the recommendations or nomination, as the case may be of the Insolvency and Bankruptcy Board of India (“IBBI“). Pursuant to the appointment of the RP, the RP has to examine the application for insolvency and submit a Report (“Report“) to the AA recommending that the insolvency application be either admitted or rejected. In comparison with the insolvency application of a corporate debtor, Section 99(1) of the Code mandates that the preliminary assessment on the validity of the insolvency application be made by the RP, rather than the AA.

On perusal of the Report, and on the recommendation of the RP, the AA may either accept or reject the insolvency application. In terms of Section 100 (4) of the Code, in the event that the insolvency application filed by the Guarantor is rejected on the grounds that such application was filed by the Guarantor with the intent to defraud the creditors or the RP, then such order for rejection shall record that the creditors of the Guarantor shall be entitled to file for a Bankruptcy Order in terms of Chapter IV of the Code.


In the event that an order admitting the application for insolvency is admitted by the AA, a moratorium in relation to the Guarantor automatically comes into effect in terms of Section 101, unlike under Section 14 wherein the NCLT needs to specifically pass an order declaring moratorium. Section 101 of the Code explicitly provides for a timeline of 180 days, on the expiry of which the moratorium shall cease to have effect unless the AA has passed an order on the repayment plan earlier in which case the moratorium shall end on such date.

Repayment Plan

Tantamount to a Resolution Plan, the Code requires that the Guarantor in consultation with the RP, shall prepare a Repayment Plan (“Plan“) which shall inter alia 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 shall 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 meeting of the creditors (“MoC“) shall take place within a period of 28 days from the date of the recommendation by the RP.

In terms of Section 106 of the Code, there is significant difference from the CIRP in relation to the involvement of the creditors to be party to or have a say in the formulation of the Plan. Unlike the CIRP, no person other than the guarantor can prepare a Repayment Plan. Further, in terms of this section, the RP may recommend that an MoC is not required to be constituted at all. Unlike the resolution plan for corporate debtors, there is no mandate to require that the Plan be fair, equitable and just, to all the creditors of the Guarantor and if the RP decides that an MoC is not required , the creditors have no say in the repayment of the debts owed to them however in the event any creditor makes a request to constitute a MoC and such creditor has more than 33% of voting share among the other creditors, then in that event the RP has to call for an MoC. The other creditors being creditors having less than 33% of the voting share, are however permitted to object to the Plan which shall be discussed further on.

Meeting of the Creditors

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 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.

The most significant deviation from the CIRP of a Corporate Debtor in terms of the Code is that in the event at the MoC, the creditors require that the Plan be modified, in order to absolute such modification the consent of the Guarantor is required to be taken. This is a significant deviation and asset in the hands of the Guarantor, as no modification of the Plan would be effective, without his sole approval, thus in effect guaranteeing the Guarantor the right to veto any modification of the Plan.

In terms of Section 110 of the Code, 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. This view is in tandem with the general principal that secured creditors are generally not represented on a committee or meeting of creditors if they are fully secured or over-secured. This is so, because, their interests are significantly different from those of unsecured creditors and their ability to participate in and potentially alter the outcome of decisions by creditors may not be in the best interests of all creditors.

Recognizing this divergence of interests, insolvency laws of some countries require secured creditors to surrender their security interest before they can participate in the proceedings and vote on any matter. Where they are under-secured, however, their interests are more likely to align with those of unsecured creditors and their participation in the committee or in voting by creditors may be appropriate, at least to the extent that they are under-secured. The Code seems to recognise this, given the intent to keep secured creditors separate from the proceedings of the MoC. Given this, the legislative intent in relation to secured creditors of a Guarantor undergoing the insolvency process is in stark contrast to the process of a Corporate Debtor undergoing CIRP, where the committee of creditors is formed solely of financial creditors, regardless of whether or not such creditors may be secured.

Approval of Adjudicating Authority

Subsequent to the MoC, the RP has to submit a report of the MoC and the decision of the MoC to either approve, modify, or reject the proposed Plan to the Adjudicating Authority. 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 modifications to be made, the AA may send the Plan back to the MoC for reconsideration. Thereafter the AA shall by order, either approve or reject the Plan and such order shall be final and binding on the creditors as well as the Guarantor. In the event that the AA rejects the Plan, the creditors and/or the debtor may file an application for bankruptcy of the Guarantor in terms of Chapter IV of Part III of the Code.

Implementation of the Plan

Unlike under CIRP, the RP is be 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 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 such remedy is not accomplished, the RP may approach the AA for directions. Further, in the event of failure of the successful implementation of the Plan the creditors so affected have the right to initiate bankruptcy proceedings against the Guarantor in a similar manner as liquidation proceedings are initiated against a corporate debtor in the event that a resolution plan fails.

Discharge Order

The Plan, in terms of Section 119 of the Code, may provide for an early discharge or a discharge upon the completion of the repayment of 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. Such discharge order shall only be applicable to debts that have been successfully discharged in terms of the Plan and shall not discharge any other person from any liability in respect of his debt.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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