Insolvency And Bankruptcy Of Personal Guarantors – Key Nuances and Legal Aspects

As per IBC, from the ‘bankruptcy commencement date’, the debtor is inter-alia disqualified from acting as trustee of any trust, from acting as a public servant, from being elected to public office, from acting as director of any company or from travelling overseas without the formal approval of NCLT.

Introduction

The provisions pertaining to insolvency and bankruptcy of personal guarantors to corporate debtors under the Insolvency and Bankruptcy Code, 2016 (“IBC”) came into effect only on December 01, 2019, while provisions pertaining to corporate insolvency resolution process had been notified on December 01, 2016.

In the early stages of implementation of provisions pertaining to insolvency and bankruptcy of personal guarantors to corporate debtors, several roadblocks in the form of legal challenges and stay on such proceedings were observed. Such issues finally got addressed under the order dated November 09, 2023 of the Supreme Court of India in the matter of Dilip B Jiwrajka v. Union of India (Writ Petition (Civil) No 1281 of 2021). Presently, as a result of lifting of such roadblocks, as per data compiled by the regulator, 2467 insolvency applications have been filed as of December, 2023 against personal guarantors involving debt exceeding ` 1.71 lakh crores.

In this background, it is our endeavour to highlight some key nuances and legal aspects that come to the forefront with respect to insolvency and bankruptcy processes of personal guarantors.

Filing and Admission of Insolvency Resolution Process of Personal Guarantors

A personal insolvency can be commenced either by filing made by any of the creditors or by the debtor itself. In case of a filing by creditors, a demand notice calling for repayment within 14 days should be sent to the debtor and upon failure of such repayment, a filing for commencement of insolvency process may being made before the National Company Law Tribunal (“NCLT”) and upon such filing, an ‘interim moratorium’ commences from such filing till admission, during which no legal action or proceeding with respect to any debt can be pursued against the debtor. Post such filing, a resolution professional (“RP”) is appointed by the NCLT and the RP is required to submit a report to the NCLT recommending for approval or rejection of such application. Basis the report of the RP and the application filed, the NCLT may admit or reject the application against the debtor.

On an application for insolvency against the debtor being admitted, a moratorium shall commence in relation to all debts of the debtor which shall cease to have effect upon expiry of a period of 180 days therefrom. During such moratorium period, no legal action or proceeding can be continued or initiated against the debtor and the debtor shall not be able to transfer or dispose any of its assets or interest in such assets. The RP shall then call for claims from creditors and register the claims, basis which the RP shall prepare the list of creditors.

Repayment Plan and its Implementation

The focus during the insolvency process is for the RP to work with the debtor for preparing a repayment plan containing a proposal to the creditors for restructuring, repayment and/or reschedulement of the debt, and the underlying basis for such proposed treatment. The repayment plan is put up to the creditors. A creditor shall not be entitled to vote: (a) in respect of a debt for an unliquidated amount; or (b) if the creditor is an associate of the debtor. Secured creditors participating in such meetings and voting in relation to the repayment plan are required to forfeit their right to enforce security during the period of the repayment plan in accordance with its terms and in case any secured creditor does not forfeit such right their right to vote shall be confined to the unsecured portion of the debt.

The repayment plan is required to be approved by more than 75% in value of the creditors present in person and voting, and the outcome of the voting is required to be filed with the NCLT. The NCLT then either approves or rejects the repayment plan. In case of approval, the implementation of the repayment plan is supervised by the RP and the RP may approach the NCLT for appropriate directions from time to time. Upon successful implementation, the RP shall apply to the NCLT for a discharge order in relation to the debts mentioned under the repayment plan.

Filing and Admission of Bankruptcy Process of Personal Guarantors

In case: (a) the application for admission of personal insolvency is rejected by NCLT on the basis of report submitted by the RP that the application was made with the intention to defraud the creditors or the RP; (b) the repayment plan filed is rejected by the NCLT; or (c) the implementation of the repayment plan is declared failed by the NCLT basis the report of the RP, then within a period of 3 months therefrom, an application for commencement of bankruptcy may be filed by the creditors or the debtor before the NCLT. A direct commencement of such bankruptcy proceeding upon the occurrence of such aforesaid scenarios is however not envisaged and upon admission of the application by the NCLT, the NCLT issues an order and the bankruptcy process of the debtor commences from such date of the order i.e. the ‘bankruptcy commencement date’.

‘Clawback’ provisions: Interestingly, clawback provisions enabling clawback of assets in case of undervalued transactions or preference transactions (during a look-back period of 2 years prior to the bankruptcy commencement date) or extortionate transactions (during a look-back period of 2 years prior to the date of filing of application for commencement of bankruptcy process), basis order of the adjudicating authority is available for bankruptcy process (and not insolvency resolution process), unlike corporate insolvency resolution process under IBC.

Disqualifications and Restrictions on Personal Guarantors: From the ‘bankruptcy commencement date’, the debtor faces certain disqualifications and restrictions under IBC in addition to any disqualification arising out of bankruptcy under any other law. As per IBC, from the ‘bankruptcy commencement date’, the debtor is inter-alia disqualified from acting as trustee of any trust, from acting as a public servant, from being elected to public office, from acting as director of any company or from travelling overseas without the formal approval of NCLT. Such statutory fetters or restrictions however fall away on a formal discharge or recall of the bankruptcy order.

Disclaimer – This article is general in nature and is not intended to be a substitute for specific legal advice. Please contact the author(s) for specific legal advice in this regard.