INSOLVENCY OF PERSONAL GUARANTORS OF CORPORATE DEBTOR UNDER IBC

The case of Personal Guarantor can be considered as special case of Insolvency Resolution & Bankruptcy Proceedings for Individuals, as the same provisions (except Fresh Start Process) are also applicable to Personal Guarantors to a Corporate Debtor. The major difference is that the Adjudicating Authority for Personal Guarantor to a Corporate Debtor is National Company Law Tribunal (NCLT) while the Adjudicating Authority for Individual and Partnership Firms is Debt Recovery Tribunal (DRT).

Section 5 (22) defines Personal Guarantor as an individual who is a surety in a contract of guarantee to a Corporate Debtor.

The Ministry of Corporate Affairs issued notification dated 15^th November, 2019 that gave effect to provisions for conducting the Insolvency Resolution Process against Personal Guarantor under the Code. Relevant para of the notification is as under:

S.O. 4126(E) In exercise of the powers conferred by sub-section (3) of section 1 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby appoints the 1st day of December, 2019 as the date on which the following provisions of the said Code only in so far as they relate to Personal Guarantors to Corporate Debtors, shall come into force:

• clause (e) of section 2
• section 78 (except with regard to fresh start process) and section 79;
• sections 94 to 187 [both inclusive] 
• clause (g) to clause (i) of sub-section (2) of section 239;
• clause (m) to clause (zc) of sub-section (2) of section 239;
• clause (zn) to clause (zs) of sub-section (2) of section 240; and
• section 249

The notification brought into force Section 2 (e), Section 78 (except with regard of Fresh Start Process), Section 79, Section 94 to 187, Section 239 (2) (g) to (f), Section 239 (2) (m) to (zc), Sectio 240 (2) (zn) to (zs) in respect of Personal Guarantor to a Corporate Debtor.

Section 2 (e) provides for   applicability of the Code in respect of Personal Guarantor to a Corporate Debtor.

Section 78 provides for applicability of Part III on Fresh Start, Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms. Notification makes applicable Part III (except provisions of Fresh Start Process) on Personal Guarantor to a Corporate Debtor.

Section 79 provides for certain definitions which are relevant for part III and as per the Notification the same are also applicable to Personal Guarantors.

Section 94 to Section 187 provides for provisions related with Insolvency Resolution and Bankruptcy for Individuals and Partnerships and the same have been made applicable in respect of Personal Guarantors.

Section 239 (2) (g) to (i) and Section 239 (2) (m) to (zc) are matters, which are related to Insolvency and Bankruptcy of Individuals and Partnership Firms over which the Central Government can make rules. The Central Government has already made the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019 and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtor) Rules, 2019 to give effect to aforesaid provisions.

Section 240 (2) (zn) to (zs) are matters which are related to Insolvency Resolution and Bankruptcy for Individuals and Partnerships and over which IBBI has been empowered to make regulations. IBBI has already made regulations namely the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 and the Insolvency and Bankruptcy Board of India (Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations, 2019.

Section 249 provides for amendment in the Recovery of Debts due to Banks and Financial Institutions Act, 1993

CHALLENGE BEFORE THE SUPREME COURT

The notification issued by the Ministry of Corporate Affairs for giving effect to provisions for Insolvency and Bankruptcy Proceedings for Personal Guarantors to Corporate Debtors were challenged before the Supreme Court of India in Lalit Kumar Jain¹.

It was contended before the Supreme Court that notification issued by the Central Government as Section 1 (3) could not have only extended the provision in respect of Personal Guarantors to   Corporate Debtor. It was also contended that it is manifestly arbitrary as provisions have been notified for only Personal Guarantors and not for other individuals although same provisions are applicable to both categories. It was also contended that Central Government has failed to bring Section 243 into effect as such this is a case of non-application of mind as two legal regimes are available to Personal Guarantors.

The Supreme Court held the notification constitutionally valid observing as under:

101. In view of the above discussion, it is held that the impugned notification is not an instance of legislative exercise, or amounting to impermissible and selective application of provisions of the Code. There is no compulsion in the Code that it should, at the same time, be made applicable to all individuals, (including Personal Guarantors) or not at all. There is sufficient indication in the Code- by Section 2(e), Section 5(22), Section 60 and Section 179 indicating that Personal Guarantors, though forming part of the larger grouping of individuals, were to be, in view of their intrinsic connection with Corporate Debtors, dealt with differently, through the same adjudicatory process and by the same forum (though not insolvency provisions) as such Corporate Debtors. The notifications under Section 1(3), (issued before the impugned notification was issued) disclose that the Code was brought into force in stages, regard being had to the categories of persons to whom its provisions were to be applied. The impugned notification, similarly inter alia makes the provisions of the Code applicable in respect of Personal Guarantors to Corporate Debtors, as another such category of persons to whom the Code has been extended. It is held that the impugned notification was issued within the power granted by Parliament, and in valid exercise of it. The exercise of power in issuing the impugned notification under Section 1(3) is therefore, not ultra vires; the notification is valid.

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1. Lalit Kumar Jain vs Union of India; Transferred Case (Civil) No. 245/ 2020