The Ministry of Corporate Affairs ("MCA") issued a notification dated 15 November 2019 ("Notification") that give effect to provisions for conducting the insolvency resolution process against personal guarantors under the Insolvency and Bankruptcy Code, 2016 ("IB Code") w.e.f. 01 December 2019 ("Commencement Date").[1] The Notification was challenged, however, the same obtained sanctity from the Hon’ble Supreme Court in the case of Lalit Kumar Jain[2] vide order dated 21 May 2021.    

The Insolvency and Bankruptcy Board of India ("IBBI") has also issued procedural rules and procedures, namely the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 ("Rules") and the Insolvency and Bankruptcy (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 ("Regulations"), with effect from the Commencement Date.

That the Rules provide for the procedure for initiating Insolvency Resolution Process against the Personal Guarantors, the Regulations provide the procedure to be followed pursuant to its initiation.

CONTRACT OF GUARANTEE

Under the Section 126 of the Indian Contract Act, 1972, a 'contract of guarantee is an agreement to fulfil a third party's commitment or relieve his responsibility if he fails to do so. The person who provides the guarantee is known as the ‘surety,' while the person whose default the guarantee is provided to, is known as the 'primary debtor,'. The person who receives the guarantee is known as the 'creditor.'

A guarantee contract is a tripartite transaction between the creditor, the corporate debtor, and the surety. As a result, if the corporate debtor fails to fulfil his obligations, the creditor may turn to the guarantor for contract performance. However, the scope of the surety's obligation and the method of enforcing that duty remain a point of contention.

The legal issue often addressed by the Courts and Tribunals is whether a surety's duty arises only after the creditor has exhausted all his remedies against the debtor, or if the creditor may demand for surety as soon as the debtor commits a default.

In terms of Section 5(22) of the IB Code, 'personal guarantor' is an individual who is a surety in a contract of guarantee to the corporate debtor.

HISTORY OF PROVISIONS GOVERNING INSOLVENCY AGAINST PERSONAL GUARANTORS PRIOR TO PART III OF THE IB CODE COMING INTO EFFECT

The insolvency regime prior to the notification bringing into effect the Part III of the IB Code for conducting insolvency proceedings were under the Presidency Towns Insolvency Act, 1920 (for individuals in the erstwhile presidency towns of Chennai, Kolkata, and Mumbai). The Provincial Insolvency Act, 1920 (for individuals in areas other than the erstwhile presidency towns) provided for insolvency proceedings against all individuals including personal guarantors. However, the said legislations could not meet the growing need to secure the interest of the stakeholders and were debtor centric. Further the same were unable to meet the need to conduct the process within strict timelines, due to the absence of timelines and time bound procedure. Substantial delays were caused which were unable to protect the interests of all the stakeholders.

The IB Code was enacted with an aim to provide uniformity and to bring a consolidated framework for conducting insolvency and bankruptcy proceedings against individuals and companies under one umbrella. However, it is important to note that at present the Notification only covers the insolvency resolution process for personal guarantors and not for other individuals and partnership firms which continue to be governed under the old acts mentioned above.

PROCEDURE TO INITIATE INSOLVENCY RESOLUTION PROCESS AGAINST PERSONAL GUARANTORS UNDER THE IB CODE

Jurisdiction

An ordinance was enacted in June 2018 to bring more clarity on this issue. In addition, Section 60(1) [3] of the IB Code was amended to bring the jurisdiction of National Company Law Tribunal/Adjudicating Authority ("NCLT") in relation to Insolvency Proceedings for Personal Guarantors where registered office of the Personal Guarantor is located. The IB Code was amended in 2017 to include personal guarantors, which replaced Section 2(e) of the IB Code[4]. The Court ruled that Section 2(e) applies exclusively to the limited objectives set out in Sections 60(2) [5] and (3), where the personal guarantor's insolvency case might be moved to the adjudicating body handling the corporate debtor's issue under the IB Code.[6]

Application According to Section 94 of the IB Code, a debtor who defaults, may make an application to  begin the insolvency procedure either by himself or through a Resolution Professional. Section 95 of the IB Code, on the other hand, states that a creditor, acting alone or in concert with other creditors, or through a Resolution Professional, may initiate the insolvency procedure against the debtor using the notification form. An application filed under Section 94 or 95 read with Rules in requisite form must be accompanied by information, documentation and such fees as given under the Rules pertaining to the debtor's indebtedness.

Interim Moratorium

When a Section 94 or 95 application is filed, an interim moratorium is imposed from the date the application is filed. This interim moratorium will apply to all debts and will end on the date that the application is accepted. During the interim-moratorium period, any pending legal actions in relation to the debtor's debts will be stayed, and creditors will be prohibited from bringing any legal action or proceeding in relation to the debtor's debts[7].

If a Resolution Professional files an application under Section 94 or 95, the NCLT must direct the IBBI to affirm that there are no disciplinary procedures pending against the Resolution Professional within seven days of receiving the application. Within seven days of receiving direction from the NCLT, the IBBI shall notify the NCLT in writing, either confirming or rejecting the proposed Resolution Professional's appointment[8].

However, if the application is not made through a Resolution Professional, the NCLT requires the IBBI to designate a Resolution Professional within seven days of receiving the application[9]. Within 10 days of receiving the stated direction from the NCLT, the IBBI shall designate a Resolution Professional, who will be appointed by the NCLT by order.

Report submitted by Resolution Professional

Within ten days following the Resolution Professional's appointment, he must analyse the application filed under Section 94 or 95 and based on his findings, provide a report to the NCLT recommending approval or rejection of the application[10]. During the examination, the Resolution Professional may demand the debtor to establish payback of a debt claimed by the creditor as unpaid to the creditor by presenting documentation of such repayment[11]. It is also stated that if a debt for which a creditor has submitted an application is registered with the information utility, the debtor will not be able to contest the debt's validity [12].

During his investigation of the application, the Resolution Professional may also seek additional information or explanation from the debtor, creditor, or any other person. Within seven days of receiving the request from Resolution Professional, the debtor, or any other person from whom such information or explanation is sought must provide it[13]. The Resolution Professional must also ensure that the applicant is not disqualified from making such an application, that the application filed before the NCLT is in the correct form and with the prescribed accompanying documents, and finally that the applicant has provided the information and/or explanation sought by the Resolution Professional with the application's prescribed fees to be paid[14].

After Resolution Professional has completed the aforesaid examination, he will be obliged to submit a report with reasons recommending either approval or rejection of the application. The debtor or creditor will also receive a copy of the report[15].

Application- accepted/rejected

Within fourteen days from the date of submission of the report by the resolution professional the NCLT passes an order either accepting or rejecting the application.[16]n

Upon approval, the NCLT will provide directions to the resolution professional for discussions and the creation of a repayment plan. Within seven days of the order, the NCLT must provide a copy of the order, together with the resolution professional's report and the creditor's application to the creditor. In case NCLT rejects the application based on the resolution professional's report, the creditor has the right to file for bankruptcy.[17]

Moratorium upon admission

Once the application is accepted, moratorium of a period of 180 days shall commence on the debtor's assets which will end once the NCLT issues an order on the repayment plan.[18]

Claims from creditors

The NCLT shall issue a public notice within 7 (seven) days inviting claims from the creditors. All creditors' claims should be submitted within 21 days from the date of publication of the public notice. The notice to include the order of admission, the name and contact information for the resolution professional before whom the claims are to be submitted, and the deadline for submitting such claims.

The notice shall be published in English and in a local vernacular newspaper in the region where the guarantor lives. The notice shall also be posted on the NCLT's website and affixed in the NCLT's premises. The creditors shall submit their claims, as well as their personal details, to the resolution professional. [19]

List of creditors

A list of creditors shall be prepared by the resolution professional within 30 days.[20]

Repayment Plan

In consultation with the Resolution Professional, the debtor must draught a repayment plan that includes a request to the debtor's creditors to restructure the debtor's debts[21]. The repayment plan must include rationale for the formation of the repayment plan, as well as reasons on which the creditors may consent to the plan. Provisions for the payment of the Resolution Professional's fee and any other issues may also be included[22]. The repayment plan may also include provisions for the debtor's cash to be administered or disposed of, as well as the satisfaction or adjustment of any security interest[23].

Report on the repayment plan

Once a repayment plan has been determined, the Resolution Professional must submit the repayment plan, along with his report, to the NCLT within 21 days of receiving the last claim from the creditors. The repayment plan must comply with current law, have a reasonable chance of being approved and implemented. The payment plan should also include a schedule of  meetings of creditors, if necessary, as well as the date, time, and location of such meetings, which must be within 14 days and not more than 28 days of the date of submission of his report[24].

When determining the date and place of the creditors' meeting, the Resolution Professional to take into consideration the creditors' convenience. If the Resolution Professional states that such a meeting is not necessary, it must justify its decision[25]. If a conference of creditors is not held, the NCLT will decide about the repayment plan based on the report submitted by the Resolution Professional[26].

Meeting of creditors

The resolution professional must send a notice to the list of creditors asking for the creditors' meeting at least 14 days before the meeting's scheduled date. The creditors may determine whether the repayment plan should be accepted, changed, or rejected during the meeting. If any changes are advised, the resolution specialist will include them into the repayment plan. At each creditors meeting, creditors will have the ability to vote on the repayment plan based on the voting share allotted to each creditor, which will be decided by the resolution expert for each creditor. A meeting of creditors will be called by the resolution professional if creditors with 33% of the voting share request it.[27] The voting percentage should be proportional to the creditor's debt. Any decision made by the creditors must receive the approval of more than half of the creditors who voted. If creditors representing 33 percent of the voting share are present in person, via proxy, or by video conferencing, a meeting of the creditors is quorate, unless the quorum has been amended by the creditors at the meeting of the creditors.[28] Secured creditors are entitled to attend the creditors' meeting and voting in the creditors' meeting on the repayment plan forfeits the secured creditor's ability to enforce the security throughout the payback term. If the secured creditor is unwilling to relinquish his security, the secured creditor must submit an affidavit to the resolution professional at a creditors meeting stating that the secured creditor is exercising his right to vote in lieu of the unsecured portion of the debt and the estimated value of the unsecured portion of the debt. The secured and unsecured portions of the obligations will be considered as distinct debts upon the filing of such affidavit.

Approval of Repayment Plan

The repayment plan or such modification to the repayment plan shall be approved by the majority of 3/4th in value of the creditors in person or through proxy at the vote on the meeting of the creditors.[29]

Meeting of creditors report

The resolution professional is responsible for preparing a report on the creditors' meeting. The report must provide whether the repayment plan was accepted or rejected, and if authorised, the list of alterations made to the repayment plan. The resolutions recommended at the meeting, the decision on the resolutions, a list of creditors who were present and their voting history, and any other details that the resolution professional deems necessary may be included in the report.[30]

Filing of repayment plan and order of the NCLT

The resolution professional must file the repayment plan with the NCLT, and the NCLT may issue an order accepting or rejecting the repayment plan based on the resolution professional's draft report of the creditors' meetings filed. If the resolution professional fails to call a meeting of creditors, the NCLT may issue an order based on the resolution professional's report. The creditors and the debtor will be bound by the repayment plan after it has been approved by the NCLT. The creditors will be able to launch a bankruptcy petition if the proposal is rejected. The IBBI will get a copy of the order issued by the NCLT for the purpose of documenting the entry.

Completion of the repayment plan

Upon completion of the repayment plan, the resolution professional shall send a notice that the repayment plan has been fully implemented, as well as a copy of a report showcasing all receipts and payments made pursuant to the repayment plan. The resolution professional shall also share details of the extent of implementation of such plan as compared to the repayment plan approved at the creditor's meeting, to the persons bound by the repayment plan within fourteen days. The resolution professional may reject a time extension from the NCLT of no more than seven days in this respect.[31]

Premature end of repayment plan

A repayment plan is regarded to have come to an end prematurely if it is not completed with respect to the individuals bound by it within the time specified in it. In this case, the resolution professional must file a report with the NCLT detailing the grounds for the repayment plan’s premature termination, receipts and payments made in accordance with the repayment plan, and creditor information whose claims have not been completely met. Creditors who have not had their claims met have the option of filing for bankruptcy.[32]

Discharge order

The resolution professional must apply to the NCLT for a discharge order based on the repayment plan for the debts stated in the repayment plan.The NCLT may grant the discharge order. The repayment plan may offer an early discharge or a discharge upon completion of the repayment plan's execution. The IBBI will convey the order to the NCLT for the purpose of recording entries. The discharge order does not absolve someone of any responsibility for their debt.[33]

CASE LAWS WHEREIN PETITIONS AGAINST PERSONAL GUARANTORS WERE ADMITTED

The first petition that was admitted against a Personal Guarantor was in the matter of Mr. Anil Syal,[34] wherein, the Hon’ble NCLT (New Delhi Bench III) admitted an application under Section 94(1) of the IB Code and appointed Mr. Avneesh Srivastava as Resolution Professional.

NCLT, Cuttack Bench also admitted an application made by State Bank of India against Md. Javed Sultan[35] under Section 95(1) of the IB Code and appointed Mr. Surya Kanta Satapathy as Resolution Professional.

NCLT, New Delhi Bench III admitted an application under Section 94(1) of the IB Code against Mr. Narinder Singh Azad[36] and appointed Mr. Ravinder Singh Kathuria as Resolution Professional.

CONCLUSION

In case a company, commits a default, qua a loan or a debt, of which guarantee of repayment is provided by a personal guarantor, the creditor through the procedure as mentioned above may seek remedy against the personal guarantor, by initiating  insolvency proceedings.