Personal Guarantor

Genesis Of IRP of Personal Guarantors

Prior to the introduction of the Code, insolvency resolution of individuals was governed by Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 which stands repealed with effect from 19.08.2016 by virtue of Section 243 of the Code. The Amending Act 8 of 2018 amended Section 2(e) of the Code and made the provisions of the Code applicable to personal guarantors of corporate debtors. The unamended Section 2(e) of the Code which made provisions of the Code applicable to only 'partnership firms and individuals' was trifurcated with effect from 23.11.2017 into three sub categories namely: -

  • Personal guarantors to corporate debtors;
  • Partnership firms and proprietorship firms ; and
  • Individuals other than those referred to in Section 2(e) of the Code [Section 2(g)]

In exercise of the powers conferred under Section 1(3) of the Code, vide notification dated 15.11.2019 issued by the Ministry of Corporate Affairs, Part III of the Code relating to insolvency and bankruptcy of individuals and partnership firms insofar as applicable to personal guarantors to corporate debtors including the impugned provisions were notified.

Liability of a Personal Guarantor

In terms of Section 128 of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor. The Supreme Court in the case of Industrial Investment Bank of India Ltd. v. Biswanath Jhunjhunwala[4] while examining the ambit of the term 'co extensive liability' has categorially held that the liability of a surety is not in alternative to the principal debtor. Thus, unless there is a contract to the contrary, it is not necessary for a creditor to first proceed against the principal debtor before initiating recovery proceedings against the surety.

Under the Code, Section 5(22) defines personal guarantor as an individual who is the surety in a contract of guarantee to a corporate debtor. A personal guarantor being an individual, provides guarantee in their personal capacity against the loans availed by the corporate debtor and as such, their liability is co-extensive with that of the corporate debtor.

Subsequently, in the case of the State Bank of India, Stressed Asset Management Branch Vs. Mahendra Kumar Jajodia,[6] the National Company Law Appellate Tribunal (“NCLAT”) has held that proceedings against a personal guarantor under Part III of the Code can be initiated by a creditor without any pending CIRP or liquidation proceedings against the corporate debtor. The said judgment was challenged before the Supreme Court and the judgment of the NCLAT was reaffirmed.[7]Thus, as on date, it is not pre-requisite for a creditor to initiate the CIRP proceedings of a corporate debtor before initiating the insolvency of its personal guarantors.

IRP of Personal Guarantors

In terms of the provisions envisaged under Section 95 of the Code, creditor(s) may either through themselves or through the Resolution Professional, file an application before the National Company Law Tribunal (“NCLT”) for initiating IRP proceedings of a personal guarantor. The said application is accompanied by such documents evidencing existence of the debt and other details as prescribed therein. An interim moratorium under Section 96 of the Code is imposed upon the personal guarantor upon filing of the said application under Section 95 of the Code. Pursuant thereto, the NCLT is required to appoint a Resolution Professional under Section 97 of the Code.

According to Section 99 of Code, the Resolution Professional is mandated to examine the application filed under Section 95 of the Code within a period of ten days from the date of their appointment, and submit a report to the NCLT recommending for approval or rejection of the said application.

Thereafter, within a period of fourteen days from the date of submission of report by the Resolution Professional under Section 99 of Code, the NCLT shall as per the provisions of Section 100 of the Code pass appropriate orders either admitting or rejecting the said application.

In the event that the application under Section 95 of the Code is admitted by the NCLT, a moratorium under Section 101 of the Code is imposed. The aim and object of the moratorium under Section 101 of Part III and that of Section 14 under Part II of the Code which is applicable to CIRP of corporate debtors is similar. Pursuant to imposition of moratorium under Section 101 of the Code, no legal proceedings can continue or be initiated against the personal guarantor in respect of any debt; and the personal guarantor is barred from transferring, alienating, encumbering or disposing of any of his assets or his legal rights or beneficial interest therein.