Corporate Insolvency Resolution Process against the Personal Guarantor Under Insolvency and Bankruptcy Code, 2016.

Introduction

Under the code, the personal guarantor defined u/s 5(22) of the Insolvency and Bankruptcy Code, 2016 (“IBC“).  A personal guarantor is a person who acts as the surety in a contract of guarantee to a corporate debtor. Section 60(1) of the IBC 2016 deals with the provision related to the initiation of the insolvency resolution and liquidation process against the corporate persons which include corporate debtor and personal guarantor.  The adjudicating authority shall have jurisdiction to entertain or dispose of any application or proceeding by or against the corporate person or any claim made by or against the corporate person which also includes any claim made by its subsidiaries situated in India. The government also issued a notice that the creditor will initiate the insolvency resolution process against the corporate debtor’s personal guarantor.

Section 60(1) also deals with the territorial jurisdiction regards to adjudication of the corporate person including corporate debtor and personal guarantor. NCLT must have jurisdiction over the place where the registered office of the corporate person is located. In the case of M/S. Fortune Plastech Vs. M/S. Avni energy solutions Pvt. Ltd.  The NCLT had dismissed the application filed u/s 9 of the IBC 2016 against the respondent stating that the application which had been filed shall not have jurisdiction before the tribunal because the registered office area of the corporate person is in Andhra Pradesh and the jurisdiction of initiation of insolvency proceeding comes under the NCLT Hyderabad, but the application had been filed under the wrong bench.

Section 60(3) under the code deals with the proviso stating that an insolvency resolution process or liquidation or bankruptcy proceeding against the corporate guarantor or personal guarantor as the case may be, of the corporate debtor pending in any court or tribunal shall stand transferred to the adjudicating authority dealing with insolvency resolution process or liquidation proceeding of such corporate debtor. Section 14 of the IBC describes the provision for the declaration of the moratorium by the adjudicating authority during the prohibition of the institution of suit or continuation of pending suit or proceeding against the corporate debtor, transferring, encumbering alienating or disposing of by the corporate debtor any of its assets or any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property.[1] 

But in the case of State Bank of India Vs. V Ramakrishnan and Anr. The court held that the moratorium was only applicable to the corporate debtor not on the personal guarantor. It also held regards to the appropriate forum for the adjudicating authority to initiate the insolvency proceeding against the personal guarantor in the same adjudicating authority that is NCLT in which the insolvency proceeding is filed against the corporate debtor. No different proceeding shall be taken before any court or tribunal against the personal guarantor.  The NCLT further observed that section 60(4) under the code describes that the National Company Law Tribunal shall be vested with all powers of the debt recovery tribunal as contemplated under Part III of this code. I & B code shall not only apply to the corporate debtor against whom insolvency proceeding has been initiated but also to the personal guarantor within the virtue of section 60(4) of the IBC 2016.

In the case of Sanjeeva Shriya and Ors. VS. State Bank of India and Ors. NCLT held to provide a moratorium declared to the corporate debtor in the insolvency resolution process as per the IBC 2016, then it is also extended to the initiation or continuation of insolvency resolution process against the personal guarantor of the corporate debtor. There shall be no insolvency proceeding against the personal guarantor until the moratorium period declared against the corporate debtor has ended.[2]

The Ministry of Corporate Affairs (MCA) issued a notification on 15 November 2019 regarding the provision related to IBC that shall be applicable to the corporate debtor’s personal guarantor to initiate an insolvency petition against the corporate debtor’s personal guarantor. This came into effect on December 1, 2019. Lalit Kumar Jain vs. Union of India 2021. The Supreme Court upheld the validity of the MCA’s notification regarding the initiation of CIRP against the corporate debtor’s personal guarantor. In this case, the petitioner had challenged the validity of the MCA’s notification. The supreme court ruled that this exercise of the power to issue notification is valid under section 1(3) of the IBC 2016 and that approval of the resolution plan relating to the corporate debtor does not discharge the personal guarantor’s liability to the corporate debtor in this matter.[3]

Section 126 of the Indian Contract Act 1872 describes the provision related to the contract of guarantee between the parties that is surety, principal debtor, and creditor. This contract of guarantee is a contract to perform the promise or to discharge the liability of a third person in case of the occurrence of default.

The person in the contract who gives the guarantee is called a surety, the person in respect of whose default the guarantee is given is called the principal debtor, and the person to whom the guarantee is given is called the creditor. A guarantee may be either oral or written.[4]

Conclusion

In the case that the corporate debtor fails to repay financial or operational debts for which the personal guarantor has provided a guarantee, the creditors must seek redress against the personal guarantor by initiating an insolvency resolution process as prescribed by Section 60 of the Insolvency and Bankruptcy Code 2016. Section 127 of the Indian Contract Act 1872, specifies the consideration for guarantee. Any promise made or anything done by the surety for the benefit of the principal debtor may be sufficient consideration for providing the guarantee.


[1] Insolvency and Bankruptcy Code 2016. Bare act

[2] indiankanoon.org

[3] https://ibclaw.in/liability-of-personal-guarantors-under-ibc-clearing-the-smokescreen-by-mr-vikas-dutta-ms-mansi-sachdeva/

[4] Indian Contract Act 1872, Bare act.

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