INTRODUCTION:
The Insolvency and Bankruptcy Code of 2016 is a recent development in the domain of law with not many precedents set regarding certain aspects of insolvency mechanisms. One such domain in IBC that lacked clarity till recently was regarding the liability of the personal guarantors in cases of insolvency. In India, the Insolvency and Bankruptcy Code, 2016 ("IBC") governs the Corporate Insolvency Resolution Process ("CIRP"). It entails a Resolution Professional soliciting a resolution plan for a corporate debtor facing insolvency. Various Resolution Applicants propose plans, and the Committee of Creditors approves the best plan, which is then sanctioned by the National Company Law Tribunal.
A recent trend however observed among the personal guarantors of the company being declared insolvent is seeking immunity against the liability arising against them. The issue first gained prominence in the case of Anil Dhirajlal Ambani v. Union of India. Following this, various other cases provided solid clarity regarding the liability of the personal guarantors in IBC from the case of Surendra B. Jiwrajka v. Omkara Assets Reconstruction Private Limited to Dilip P. Jiwrajka v. UOI that made an elaborate comparative analysis of Part II and Part III of the IBC. The rulings provided throughout are significant because they give the corporate debtor's creditors more negotiating power to recover any unpaid sum that was not collected during the corporate insolvency resolution process (CIRP) or the personal guarantor's insolvency resolution process (PGIRP). By doing this, the creditors can collect their debts from many sources, so creating a "dual safety net."
In this paper, we aim to analyze the personal guarantors' liability through a detailed and thorough analysis of various precedents set in context to the same. In addition, we shall be analyzing various unresolved conundrums as well on the same topic.
KEYWORDS: Personal guarantors' liability, IBC, CIRP, and Liquidation of assets.
INTRODUCTION:
Several intriguing legal questions have been brought up by the effect of a personal guarantee on a business debtor facing bankruptcy under the Insolvency and Bankruptcy Code, 2016 (the "Code").1 A personal guarantee is an agreement established by an individual (the guarantor) to pay back a debt if the corporate debtor (the borrower) defaults on its debt to a creditor. In Surendra B. Jiwrajika v. Omkara Assets Reconstruction Private Limited2, the Supreme Court recently rendered a decision that resolved any uncertainty regarding personal guarantors' liabilities under the Code. However, certain problems are yet unresolved.
With the passage of the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018, creditors no longer need to first file for bankruptcy against the corporate debtor to subject personal guarantors to the insolvency process. The scope of liability imposed on the personal guarantors by the Act and the validity of these Code sections were recently elucidated by the Supreme Court. The ruling is significant because it gives the corporate debtor's creditors more negotiating power to recover any unpaid sum that was not collected during the corporate insolvency resolution process (CIRP) or the personal guarantor's insolvency resolution process (PGIRP). By doing this, the creditors can collect their debts from many sources, so creating a "dual safety net." The outcome of the recently rendered ruling in Omkara Assets increases the creditors' already considerable negotiation leverage and reduces the amount of protection provided by the Code for personal guarantors.
In this analytical article, we will analyze the liability of personal guarantors in the IBC aftermath of the verdict.
WALKING THROUGH THE PRECEDENTS:
In the case of Vineet Saraf v. Rural Electrification Corporation Ltd,3 the court re-iterated the verdict as mentioned below, It may be taken as settled law that where there is an absolute release of the principal debtor, the remedy against the surety is gone because the debt is extinguished, and where such actual release is given no right can be reserved because the debt is satisfied, and no right of recourse remains when the debt is gone. Language importing an absolute release may be construed as a covenant by the creditor not to sue the principal debtor, when that intention appears, leaving such debtor open to any claims of relief at the instance of his sureties. But a covenant not to sue the principal debtor is a partial discharge only, and, although expressly stipulated, is ineffectual, if the discharge given is absolute.4
In the case of State Bank of India v. V. Ramakrishnan,5 the court held that Section 31 of the Act was also strongly relied upon by the Respondents. This Section only states that once a Resolution Plan, as approved by the Committee of Creditors, takes effect, it shall be binding on the corporate debtor as well as the guarantor. This is because otherwise, Under Section 133 of the Indian Contract Act, 1872, any change made to the debt owed by the corporate debtor, without the surety's consent, would relieve the guarantor from payment. Section 31(1) makes it clear that the guarantor cannot escape payment as the Resolution Plan, which has been approved, may well include provisions as to payments to be made by such guarantor. This is perhaps the reason that Annexure VI(e) to Form 6 contained in the Rules and Regulation 36(2) referred to above, requires information as to personal guarantees that have been given about the debts of the corporate debtor. Far from supporting the stand of the Respondents, it is clear that in fact, Section 31 is one more factor in favor of a personal guarantor having to pay for debts due without any moratorium applying to save him.6
In the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta,7 the court held that it is difficult to accept Shri Rohatgi's argument that part of the resolution plan which states that the claims of the guarantor on account of subrogation shall be extinguished, cannot be applied to the guarantees furnished by the erstwhile directors of the corporate debtor. So far as the present case is concerned, we hasten to add that we are saying nothing that may affect the pending litigation on account of the invocation of these guarantees. However, the NCLAT judgment being contrary to Section 31(1) of the Code and this Court's judgment in State Bank of India (supra), is set aside.8
FUNDAMENTAL ISSUE:
Following the verdict of Lalit Kumar, several applications were filed contesting the constitutionality of the Code's provisions about personal guarantors' liabilities. These petitions argued that the potential for personal guarantors to be singled out during insolvency proceedings was excessive and unwarranted. In the first place, personal guarantors are directly involved in bankruptcy procedures; secondly, they are not afforded a fair chance to contest petitions filed by creditors in front of the resolution specialist. The Supreme Court rejected the petitions, ruling that a resolution expert should only act as a facilitator rather than an arbiter. In resolving the matter, the Court clarified that the adjudicatory authority only appoints the resolution expert upon recommendation from the Insolvency and Bankruptcy Board of India. The resolution professional's only goal is to support the report preparation process in compliance with section 99 of the Code.9
The current decision is a major turning point because it gives certainty that there are enough protections in place to enable resolution specialists to work effectively throughout the insolvency process. Still, the security afforded by the Code to the personal guarantors is insignificant.
How the Code treats personal guarantors has significant implications for those who have given personal guarantees. Personal guarantors may be subject to insolvency procedures, which could lead to the possible loss of their creditworthiness, seizure of their assets, and reduction in the commercial value of their firm. The recent reaffirmation of the Code's rules about personal guarantors is probably going to boost trust among creditors. This might encourage a sense of financial certainty by encouraging creditors to file for bankruptcy against guarantors with more assertiveness. Furthermore, the ruling might make promoters and those making personal guarantees more cautious because of the risks that have been brought to light, even for financially stable businesses. Personal guarantors have difficulties in the current pro-creditor climate that calls for a thorough assessment of their financial commitments. current emphasizes the necessity of legislative and procedural clarity to guarantee an equitable and effective bankruptcy resolution procedure.
Footnotes
1. The Insolvency and Bankruptcy Code, 2016, Act No. 31 of 2016.
2. Omkara Assets Reconstruction Private Limited v. Surendra B Jiwrajka, 2021 SCC OnLine NCLT 58
3. Vineet Saraf vs. Rural Electrification Corporation Ltd. (21.07.2023 - DELHC): MANU/DE/4669/2023
4. Mahant Singh v. U Ba Yi MANU/PR/0103/1939: (1939) AC 601
5. State Bank of India vs. V. Ramakrishnan and Ors. (14.08.2018 - SC): MANU/SC/0849/2018
6. State Bank of India vs. V. Ramakrishnan and Ors. (14.08.2018 - SC): MANU/SC/0849/2018
7. Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Ors. (15.11.2019 - SC): MANU/SC/1577/2019
8. Supra note 7.
9. The Insolvency and Bankruptcy Code, 2016, § 99, Act No. 31 of 2016.
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