RESOLUTION PROCESS AGAINST PERSONAL GUARANTORS

INTRODUCTION

The Corporate Insolvency Resolution Process (“CIRP”) can now be triggered against the personal guarantors of the corporate debtor including the promoters of a company by the financial or operational creditors with the enforcement of ‘Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (“Rules")[1] and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations, 2019("Regulations")[2]. The entire set of rules flooded the gates of adjudicating authorities against the validity and constitutionality of the new provisions. This article seeks to analyze the core content of such rules and the striking issues thereunder.

PROVISIONAL ANALYSIS

The logic for inclusion or extensiveness of the personal guarantors in the CIRP relates to Section 126 of the Indian Contract Act, 1872 wherein the concept of co-extensive liability of surety has been epitomized but the incorporation of this concept in the insolvency regime has invoked a legal quagmire. The above said notification having the effect of including personal guarantors as subject to CIRP proceedings has been challenged by almost 20 promoters including the billionaire Industrialists like Arvind Dham, Anil Ambani or Sanjay Sehgal etc. The double jeopardy has been alleged by these promoters as the same set of creditors after availing their remedies in Insolvency Code now couch themselves with the “Contract” sword and therefore the apex court has transferred the cases to itself.

TRANSITIONAL TRAIL OF THE FORUM

Insolvency and Bankruptcy Code (“Code”)had no provision with regard to enforcement proceedings against the personal guarantors. The National Company Law Tribunal (“NCLT”) has now been vested with competent jurisdiction over proceedings against personal guarantors falling within the ambit of Section 60(2) and 60(3) of the Code, which includes cases in which



[1] Insolvency and Bankruptcy (Application to Adjudicating Authority for Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

[2]Insolvency and Bankruptcy Board of India (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019.


proceedings against a corporate debtor are either already pending or have come to be filed during pending pendency of proceeding against personal guarantor. In all other cases of individuals and firms including personal guarantors, the forum having jurisdiction shall be the DRT. Hence, both NCLT and DRT have jurisdiction over proceedings against personal guarantors but in different scenarios under the Code.

This Forum transition for insolvency against the personal guarantors has been done to avoid overlapping of claims and easing the process of recovery as the same creditor would not thereby approach different forums which might culminate into separate or conflicting rights and findings.

PROCESS AND THE WAY FORWARD

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 itself (i.e., the debtor) or by a creditor, either personally or collectively with other creditors or through a Resolution Professional ("RP"). The creditor serves a demand notice to the Guarantor demanding the payment of amount in default. Within 14 (fourteen) days from the date of receipt of such demand notice, the Guarantor shall pay the debt amount, failing which the creditor reserves the right to file an insolvency application before the NCLT.

The insolvency resolution process for Guarantors, in terms of Section 96(a) provides for an "interim moratorium" which become immediately applicable upon filing of application u/s 94 or 95 for preventing the enforcement of any debts of the Guarantor and staying any ongoing legal proceedings in relation thereto. The Resolution professional is appointed by AA who then examine the application and submit a Report to the AA stating that the insolvency application be either admitted or rejected. Unlike in case of corporate debtor, Section 99(1) of the Code mandates that the preliminary assessment of the insolvency application by the RP, rather than the AA. Upon recommendation of the RP, the AA may either accept or reject the insolvency application.

Synonymous to a Resolution Plan, the Guarantor in consultation with the RP, prepare a Repayment Plan which provides for restructuring mechanism for the debts owed by the Guarantor. Upon finalization of the Plan, RP shall within 21 days of receipt of the last claim of any creditor, submit the Plan to the AA along with a report as to whether or not a meeting of the creditors is required.

Subsequent to the meeting of creditors (if any required), the RP has to submit a report of the meeting and the decision of creditors to the AA to either approve, modify, or reject the proposed Plan. 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 or the plan does not get effectively implemented, the creditors may file an application for bankruptcy of the Guarantor in terms of Chapter IV of Part III of the Code. Unlike under CIRP, the RP is responsible for the execution of the Plan, and upon successful implementation, notice of the same must be sent to the AA.

EXPLAINED LEGAL EMBARGO WITH RELEVANT JUDGMENTS

The invocation of insolvency proceedings against the personal guarantor is based on the contract of guarantee but the legal entitlements has been swayed when it comes to the protection of personal guarantors in the contract of guarantee. For instance, In Essar Steel case, the creditors of the corporate debtor invoked the guarantee for the remaining amount after receiving the haircut amount. In the said case, the Supreme Court relied upon SBI v. V. Ramakrishnan and held that the guarantor’s liability remains intact even after the approval of the resolution plan and that the guarantors cannot file their claims as creditor after the resolution plan is approved. The said judgement rests the guarantors devoid of their right of subrogation without any reasoning being given. Supreme Court clearly deviated from the settled principles under the Contract Act and held that the guarantors are not entitled to the right of subrogation, if the resolution plan does not state so. Thus, in effect, a guarantor's remedy against the borrower, i.e. a statutory right which is the substratum of a contract of guarantee, has been eroded.

The judiciary has been denying the rights of the guarantors leaving them in a situation with no remedy. Furthermore, the NCLAT in SBI Vs Athena Energy Ventures allowed simultaneous insolvency proceedings against the principal borrower and the corporate guarantor on the pretext that the liability of the Principal Borrower and the Guarantor is co-extensive as per Section 128 of the Indian Contract Act. Though some deviation has been taken up from the present argument in Vishnu Kumar Agarwal Vs Piramal Enterprise but the legal principle settled till date is that simultaneous remedy being central to a contract of guarantee and where the principal borrower and guarantor are undergoing the CIRP, the creditor should be able to file claims against both of them, and the IBC cannot prohibit the same.

THE CACOPHONIES OF RIGHTS

The creditors rely upon the idea of non-subrogation of the rights against the guarantors to the new resolution applicant while approving a resolution plan under the IBC and since they undergo huge haircuts and waivers, the same are tend to be recoverable at the stance of guarantee agreements under the contract act. The judiciary has held the simultaneous existence of remedies to the creditors but few issues need to be considered while such creditor enforces rights against the guarantors. The bifurcation of the amount which are to be received from the corporate debtor and the personal guarantor is not yet guided by certain pedestals. Also, the stage of invocation of rights against the guarantors remains to be explored as once the resolution plan is approved the lenders are assumed to have subsumed their legal rights to the new avatar of the corporate debtor and then  deviation from the IBC regime and relying upon the Contract Law would bring out some inconsistencies in such scenario. In the looming threat of personal insolvency, even the guarantors try to siphon off the funds which ultimately will make the insolvency proceedings against the personal guarantors less attractive. The IBC is constantly used as a recovery mechanism which is definitely taking the spirits off roads. These rules being a part to the phased introduction of individual insolvency laws have proved to be incongruent to the existing regime and the continued inefficiency of the same is going to do more harm than the good as continuous deterioration of the assets is akin to the insolvency proceedings.

ENDNOTES

1.      1 Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta &Ors., CIVIL APPEAL NO. 8766-67 OF 2019

2.      2 State Bank of India v. V. Ramakrishnan, (2018) 9 SCALE 597

3.      3 State Bank of India v. Athena Energy Ventures Private Limited [CA (AT) (Ins) No. 633 of 2020]

4.      4 Dr. Vishnu Kumar Agarwal v. Piramal Enterprises Ltd., [2019] 151 SCL 555 (NCLAT)

Leave a Comment