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The Rights of Creditors vis-à-vis Personal Guarantors under Insolvency and Bankruptcy Code, 2016

Courtesy/By: Sandra Anil Varkey | 2020-06-27 11:56     Views : 559

The Rights of Creditors vis-à-vis Personal Guarantors under Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, (further, “Code”), introduced regulations and procedures to cater to corporate insolvency matters for both individual and corporate bodies. The Code is, however, continuously amended, rectified, and interpreted through both Judicial and Legislative bodies to address various realities and technical difficulties in the insolvency procedure. One such concern is the uncertainty surrounding the rights of creditors vis-à-vis personal guarantors after the initiation of Corporate Insolvency Resolution Proceedings (further, “CIRP”). 

The Code was recently amended to include the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (further, PG Rules, 2019) and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (further, PG Regulations, 2019). These innovations, along with certain alterations to provisions in the matter of insolvency of personal guarantors, were implemented from December 01, 2019. Accordingly, a new framework was initiated as an efficient alternative for creditors to raise claims based on a contract of personal guarantee. 

Under the Code, there exists a distinction between the legal position of a personal guarantor and a corporate guarantor concerning their obligations to the creditor. A Personal Guarantor is defined under Section 5(22) of the Code as “an individual who is a surety in a contract of guarantee to a corporate debtor.” Under the Code, Section 14 defines the process of the moratorium in the initiation of insolvency proceedings to mean inter alia, “the commencement proceedings against the corporate debtor which includes the execution of any judgment, or the like in any court of law, or adjudicatory authority.”8 Essentially, this section pauses all proceedings of insolvency against the company in debt, which is initiated without the consent of the Court or administration during the CIRP proceedings. As per Section 13(1)(a) of the Code, a moratorium is invoked by the adjudicating authority for matters which are listed in Section 14. As such, the primary purpose of this section is to enable the corporate debtor to keep their assets stagnant during the insolvency proceedings to ensure the efficient completion of the procedure and prevent individual creditors from undertaking alternative recourses for debt recovery. Owing to such restrictions, the remedies available to the creditors to claim their debts are still unclear and jurisprudence on the matter has delivered various conclusions on whether the moratorium under Section 14 extends to personal guarantors as well. 

Recently in the case of State Bank of India v. V. Ramakrishnan, the Supreme Court clarified the position by stating that the moratorium under Section 14 does not extend to the personal guarantors as well. By stating that the assets of the debtor are separate from that of the personal guarantor, the court attempted to uphold the validity of the contract of guarantee between the creditor, debtor and personal guarantor. Following this, in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, the court reaffirmed the Ramakrishna judgement by stating that the statutory right of creditors under contract law ought to be protected by enabling them to retain their right to seek remedy upon it. As such, during the insolvency procedure, the creditors continued to retain the rights to claim reimbursement from the personal guarantor. Interestingly, the position is different concerning corporate guarantors. In the case of Dr Vishnu Kumar Agarwal v. Piramal Enterprises Ltd, the NCLAT has taken a contrary approach by stating that once the financial creditor's application is admitted against either the corporate debtor or corporate guarantor, it cannot move similar claims against the other. Though this was restricted to the matter of corporate guarantors and not per se personal guarantors, the intention behind the court was to prevent the occurrence of double-dipping. An appeal on the same is pending before the Supreme court 

The recently introduced PG rules and regulations attempt to deliver some clarity on the rights of creditors vis-à-vis personal guarantors, to uphold the sanctity of a contract of guarantee even after the insolvency procedures commence. Following the rules, personal guarantors are now placed at the same level as the corporate debtors concerning the rights of creditors to demand repayment of debt. Essentially, the creditors can now start proceeding against either of the parties in an application of insolvency. Rule 7, under the PG Rules, specifies that the creditor can send a demand notice following Section 75 to the personal guarantor to demand repayment of debt. When such an application is filed by the creditor, both the corporate debtor and the personal guarantor are made notified of the application file. Therefore, the corporate debtor and the personal guarantor are aware of the claims and can coordinate with each other to reduce the possibility of overlapping demands, since the proceedings are happening under the same forum. Further, instead of constituting a Committee of Creditors, a list of creditors will be made available to the guarantor. The secured creditor has to, therefore, give up his security for that part of the debt, as per Section 11025 to join the meeting. This is built on the premise that a fully secured creditor cannot be represented in the meeting of the creditors. The presence of such a provision, therefore, enables equality among the creditors, which may otherwise be impaired if the secured creditors supersede the interests of the unsecured creditors. Moreover, the repayment plan, which is made by the guarantor along with the Resolution Professional must now be approved by the meeting of the creditors through voting as per Regulation 15 of the PG Regulations, thereby keeping the creditors in the loop of insolvency procedures. 

What remains a conundrum is whether the Courts will apply the same principles undertaken for corporate guarantors as in Piramal case to the cases against the personal guarantor. The Supreme Court’s position in the case of Essar may be construed as a direct contradiction to the Piramal judgement by the NCLAT, as the former had allowed for the simultaneous proceedings against both debtor and the guarantor while the latter ruled against simultaneous proceedings. As such, if the Court extends the reasoning behind the Piramal judgement to all guarantors including personal guarantors, the new rules and regulations, as well as the recent precedents on the rights of creditors to initiate proceedings against personal guarantors, may become redundant. 

 

Courtesy/By: Sandra Anil Varkey | 2020-06-27 11:56