IBC Overview on Personal Guarantor as per IBC Code

Overview on Personal Guarantor as per IBC Code

Overview on Personal Guarantor as per IBC Code

Overview on Personal Guarantor as per IBC Code

 The Govt Of India, through the MCA, issued a notification dated on15.11.2019, came into force Part III of the IBC Code (with the exception of the fresh start process) which deal with the insolvency and bankruptcy of partnership firms and individual in so far as it is applicable to corporate guarantors and personal guarantors of corporate debtors. This notification comes to enforce with effect from 1 December 2019.

This notification applies to the personal guarantors of the corporate debtor's. Thereafter It has been proposed that a separate set of rules and regulations for 3 various classes of non-corporate persons and its apocopate enforcement can be ensured,

Therefore, In this Notification, Govt of India releases two sets of regulations which are mentioned below:

  • The Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Guarantors) Rules, 2019
  • The Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019

What is the meaning of a Personal guarantor?

Under Section 5(22) of the IBC 2016, "personal guarantor" means an individual who is the surety in a contract of guarantee to a corporate debtor.

“Guarantor means a debtor who is a personal guarantor to a corporate debtor & in respect of whom the guarantee has been invoked by the creditor and remains unpaid in whole or in part” –Stated in the Section 3(e) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Settlement Procedure for Personal Guarantors to Corporate Debtors) Rules, 2019.

A 'guarantee contract' is a contract to satisfy the obligation, or waiver of the responsibility, of a third party in the event of his failure, as per section 126 of the Contracts Act 1870. The person who gives the guarantee is called the ' surety'; the person in respect of whose default the guarantee is given is called the 'principal debtor' and the 'creditor' is called the person to whom the guarantee is given.

For Start of Insolvency Process

An application in pursuant to Section 94 of the Insolvency and Bankruptcy Code may be submitted by the debtor either directly or by a Resolution Professional to the NCLT i.e Adjudicating Authority (under the Form -A) or by a Creditor in pursuant to Section 95 of the Insolvency and Bankruptcy Code, by himself or jointly with other creditors, or by a Resolution Professional with the NCLT i.e Adjudicating Authority (under the Form C).

As per Rule 7(1) under the Insolvency and Bankruptcy Code Before the filling of this application, Creditors must serve a notice of demand in Form B. The application may be submitted only if the debt indicated in the notice of demand is not repaid by the debtor within ten days of service of demand notice.

Moratorium

The interim Moratorium

  • Where an application is filed in pursuance of Section 94 or section 95 of the Insolvency and Bankruptcy Code
  • Form date of filing of an application till admission - not specified.
  • Moratorium Commencement: on the date of the application in relation to all the debts.
  • End of Moratorium: on the date of approval of this application.
  • Applicable also on debtors.

Final Moratorium

  • When an application under Section 100 of the Insolvency and Bankruptcy Code is accepted/ admitted.
  • Moratorium Commencement: When the application is admitted under Section 100 of the Insolvency and Bankruptcy Code.
  • End of Moratorium: 180 Days from the date on which the application is an admission or the date on which the Adjudicating Authority passed an order pursuant to Section 114 of the Insolvency and Bankruptcy Code., whichever is earlier.
  • The debtor shall not transfer any of the properties or civil rights, alienate or encumber them.

What is the Repayment Plan?

"According  to section 105 of the Insolvency and Bankruptcy Code," In consultation with the professional resolution, the debtor shall draught/prepare a Repayment Plan which includes a proposal of the creditors for restructuring of his debts or related affairs

Characteristics of the Repayment Plan

  • This Repayment Plan prepared by the debtor in consultation with Resolution Professional.
  • Continue the business or trade of the debtor on his behalf.
  • Make the Complete effectors and steps to Realise the debtor's assets.
  • Administer or dispose of the debtor’s funds.

Approval of the Repayment Plan  

Pursuant to Section 111 of the Insolvency and Bankruptcy Code, 'A repayment plan or any alteration to the repayment plan shall be accepted by a vote of more than ¾ of the value of the creditors present in person or by proxy at the meeting of the COC and voting on the resolution.'

Completion of Plan of Repayment

  • Full Completion: According to Section 117 of the Insolvency and Bankruptcy Code: the Professional Resolution shall be informed within 14 days & all persons shall be bound by the repayment plan referred to in Section 115 of the Code and by the NCLT i.e Adjudicating Authority.
  • Premature termination: Resolution Professional shall submit a formal report forth the grounds for the early termination of the recovery plan along with information of the creditors whose demands have not been fully satisfied with the adjudicating authority.
  • Discharge Order: As per Section 119 of the Insolvency and Bankruptcy Code specifies that “A Resolution Professional shall apply to the NCLT, on the grounds of the Repayment plan, for a discharge order in the relation of the debts stated in the repayment plan, and the NCLT may grant such a discharge order.”

Withdrawal of Application

An Application request for withdrawal (THE FORM-D) of the Insolvency Resolution Process under Rule 11(2) of the Insolvency and Bankruptcy (Application for Adjudicating Authority for Personal Guarantors' Insolvency Resolution Process) Rule 2019.

The NCLT may approve the withdrawal of application submitted under this rule in the following below cases:

  1. Before its admission, on request of the application
  2. After admission, an application request submitted by 90% of the creditor's consent on such withdrawal.

Conclusions of the Case Study

In the case of AmritLai GoverdhanLalan v. State Bank of Travancore, the court claimed that the principle of subrogation is not only subject to the contract of guarantee but also the principle of natural justice. Instead, the court found out that the language of Section 141 of the Indian Contracts Act specifies that the guarantees invested with all rights of the creditor against the debtor. In this case, there is a need for a transfer.

In the matter of Ashok Mahajan V State of U.P Appeal (civil), the Hon'ble Supreme Court held that No action can be taken against a personal guarantor until the principal debtor's property is completely sale off.

It was held in Industrial Investment Bank v. Bishwanath Jhunjhunwala that principal debtor 's and a guarantor's Liabilities is co-extensive and not an alternative.

In the matter of Karnataka State Finance Corporation V. N. Narasimahiah Appeal (civil), held that In addition to the defense available under Indian Contract Law, guarantor or a surety may take in addition to defenses to the extent applicable. This right to protection can be taken by the guarantor against the company as well as against the principal debtor. It is proved that in a given case that the contract of guarantee has come to naught. Normally, however, where a guarantee is required to be executed, the guarantee Contract must be done via a court which has of suitable jurisdiction.

Few Questions still coming in our mind for clearty on CIRP againt the Principal Borrower 

Pre-initiation of CIRP against Principal Borrower

  • Pre insolvency right of the creditor does not undergo any metamorphosis on the principle
  • Whether the application u/s 7 of the Code is maintainable against the Corporate Guarantor without initiation of CIRP against the principal borrower (principal debtor)
  • Is it possible for a financial creditor to launch an insolvency petition against a company that has issued debt?
  • Corporate guarantee in connection with a loan made accessible to an individual or sole proprietorship by a financial creditor?
  • Can a Guarantor (third party) be recognised as a Financial Creditor of the principle debtor when it repays a loan that was provided to the principal debtor by a financial creditor?

During ongoing CIRP of Principal Borrower

  • A separate application for the initiation of the resolution procedure against the Guarantor must be filed before the same Bench of the AA hearing the CIRP or liquidation proceeding against the primary Corporate Debtor.
  • Is it able to begin a CIRP against two Corporate Guarantors at the same time for the same debt and default? The issue can be viewed from a different perspective. Whether or not the
  • Can a Financial Creditor seek the same amount from the Resolution Professional appointed under the CIRP against Corporate Guarantor No.1 and the Resolution Professional appointed under the CIRP against CIRP initiated Corporate Guarantor No.2?
  • Invoking the Adjudicating Authority's jurisdiction at the Financial Creditor's request for triggering a new CIRP against the Corporate Guarantor would amount to duplicity of claims being pressed once the Financial Creditor's claim has been compiled and admitted by the IRP in its entirety.

During ongoing CIRP of Corporate Guarantor

  • Can a creditor in whose favour an entity has issued a corporate guarantee file a claim with a resolution professional if the creditor has not triggered the company guarantee prior to the corporate guarantor's CIRP starting?

After Approval of Resolution Plan of Principal Borrower

  • Is a guarantor's liability for a debt owed by a corporate debtor reduced or eliminated when the corporate debtor's Insolvency Resolution Plan is authorised under the Insolvency and Bankruptcy Code, 2016?

https://youtu.be/4L6D70Zv-bg

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