Insolvency and Bankruptcy Forum updated its guidelines in November 2019 for initiating an insolvency proceeding against a corporate debtor’s personal guarantor. The Indian Contract Act, 1872, controls the legislation about the guarantee agreement that a guarantor (or surety) and the principal debtor (or other debtor) enter into with the creditor. A guarantor is a legal individual who agrees to fulfil obligations or keep commitments on behalf of a principal debtor to creditors. The guarantee given may be either verbally or in writing.
This article will go over the provisions of the code that apply to initiating an insolvency proceeding against a personal guarantor under IBC as well as the guidelines established by the Ministry of Corporate Affairs.
Who is a Personal Guarantor?
In addition to other provisions, the Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019, which were published with the aforementioned notification, give a detailed definition of a guarantor.
The requirement that a guarantor should be an individual and not a corporation or other entity against whom the creditor has invoked the guarantee is implied by rule 3(f) of the notification, which specifies that a guarantor is a personal guarantor to a corporate debtor and, by extension, a debtor. Only when the amount owed to the creditor is either fully unpaid or only partially paid, can the creditor use a guarantee against the personal guarantor.
Filing Application before the Adjudicating Authority
The corporate debtor is effectively given the go-ahead under section 94 to file an application to start an insolvency proceeding in front of the adjudicating authority, and section 122 categorises the inventory that must be supplied with the application. For personal guarantors to submit an application for insolvency, the aforementioned provisions must now be applicable to them.
The same is true of Rule 7 of the aforementioned notification, which enables creditors of corporate debtors to start the insolvency process under Sections 95 and 123 of The Code. Under Rule 7, a personal guarantor under IBC can be the target of an application for insolvency by creditors.
The Interim Moratorium
The meaning of a moratorium under the corporate insolvency resolution process and the meaning of an interim moratorium are different from one another. According to The Code, an interim moratorium is imposed after the Adjudicating Authority accepts the corporate debtor’s insolvency application. The Adjudicating Authority issues a single order for a moratorium during CIRP in which both an interim moratorium and a moratorium are included.
However, when a proceeding is initiated against a person who personally guaranteed a corporate debtor, an interim moratorium period begins as soon as the Adjudicating Authority receives the application. A temporary injunction is put in place to shield the personal guarantor from any further legal action.
The Role Resolution Professional & Moratorium
After receiving an application from either the personal guarantor or creditor, the Adjudicating Authority assigns a Resolution Professional. The method of appointment by the Adjudicating Authority is described in Rule 8 of the aforementioned announcement. The process outlined in Section 97 of The Code will be applicable in this situation, whereby the Resolution Professional will be forwarded to the Insolvency and Bankruptcy Board of India(IBBI) for their recommendation after being nominated by the Adjudicating Authority.
After approving or replacing the application for insolvency, the Resolution Professional looks over, evaluates, and assesses it. They then compile a report that they then submit to the Adjudicating Authority. The application for insolvency is accepted or rejected by the adjudicating authority after reviewing the report provided by the resolution professional. If approved, the moratorium period is immediately put into effect.
The Repayment Plan
According to Section 105 of The Code, the personal guarantor or debtor in the current situation must submit a repayment plan after the Adjudicating Authority receives the application and the moratorium period begins.
Basically, the clause specifies that the debtor (in this case, the personal guarantor), on the advice and after careful consideration of the Resolution Professional, would create a plan to restructure and provide debts owed to the creditors. Personal guarantors may use this procedure in place of the Resolution Plan under CIRP.
The finalised plan is delivered to the creditors after being finalised. The creditors can then propose changes to the proposal or ratify it with a 3/4th majority. The plan is presented to the adjudicating authority for consideration after being approved by the creditors.
Conclusion
The laws governing insolvency and bankruptcy against a personal guarantor are relatively new, given the age of “the Code” as a whole. With further judgement and study by the judiciary, the laws and regulations relevant to this sector of business would become more clear. Until then, the notification published governs how the insolvency process is being implemented against a personal guarantor under IBC.
Ancoraa Resolution is a name that stands out when people are looking for productive yet efficient debt and insolvency settlement options. If you are a personal guarantor and want to get the necessary legal advice, contact Ancoraa professionals and start an insolvency proceeding to deal with your creditors right away.