Ministry of Corporate Affairs vide its notification G.S.R. 854(E) dated 15th November, 2019 has recently issued Insolvency rules viz. the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 as well as Bankruptcy Rules viz. The Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (“Rules”) and Regulations viz. 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 (“Regulations”), whereby the personal guarantors would fall under the purview of Insolvency and Bankruptcy Code, 2016. This implies that under the said guidelines not only the creditors but they can also simultaneously file a resolution application against the personal guarantors for the claim amount before the NCLTunlike earlier when the proceedings against the personal guarantors were initiated before the Debt Recovery Tribunals of the appropriate jurisdiction. Moreover, the personal guarantors can also initiate insolvency resolution process against themselves personally or through a resolution professional by submitting an application before the adjudicating authority as under Section 96(1) of the Insolvency and Bankruptcy Code, 2016 (“IBC”).
While the general purpose to bring about the said guidelines is in line with the overall objective of the IBC, which is to bring all the constituents of recovery under one umbrella of IBC in a phased manner, including the individuals, the said rules also ensure an easier and quicker mode of recovery of dues thereby also reducing excessive litigation. This is because earlier proceedings against the personal guarantors were initiated as against the separate guarantee agreements entered into between the parties during lending which created a legal quagmire of its own. The said Rules and Regulations will apply prospectively thereby having no legal effect whatsoever on the ongoing proceedings before the Debt Recovery Tribunals against the guarantors.
Subrogation and Personal Guarantee
While the Rules have been introduced to consolidate the debt recovery under one umbrella authority, certain dilemmas arise with respect to the rights of the personal guarantors such as their right to subrogation of their claims once the resolution process of the corporate debtor is completed. Generally, the right to subrogation of personal guarantor has been in dispute and one definite accepted view with respect to the same does not exist. While it can be argued that personal guarantor can file a resolution application against the corporate debtor in the capacity of a financial creditor if the said personal guarantor has made payment towards the claims of such corporate debtor to financial creditors, judgments’ of the Supreme Court including the recent Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v Satish Kumar Gupta & Ors leave the scope of operation of such ‘right to subrogation’ quite ambiguous. Earlier NCLAT in its judgment of Standard Chartered Bank v Satish Kumar Gupta, R.P of Essar Steel Limited & Ors. accepted the argument made on behalf Prashant Ruia stating that the creditors cannot independently pursue the guarantors if the resolution plan approved by the adjudicating authority does not specifically provide for repayment to be done by the personal guarantor on behalf of the corporate debtor because such right does not arise unless the guarantors are put into the shoes of the corporate debtors. Thus, the personal guarantors in that case before the SC argued that the binding nature of the resolution plan, claiming that since they were not the parties to the resolution plan, the resolution plan cannot legally bind them to take away their rights of subrogation. However, the apex court held that Section 31(1) of the IBC makes the resolution plan approved by the adjudicating authority binding on all the stakeholders and with respect to such rights of subrogation, the court expressed difficulty in accepting the argument that right to subrogation with respect to personal guarantees of the erstwhile promoters (guarantors) cannot be extinguished. NCLAT has taken similar view in the case of Lalit Mishra & Ors. v. Sharon Bio Medicine Ltd stating the personal guarantor cannot resort to right to subrogation under the Indian Contract Act, 1872 to reimburse itself for the payment made on behalf of the corporate debtor. This is because such right to subrogation would completely defeat the purpose of IBC Code which is “maximization of value of corporate debtor’s assets” and not to ensure that the credit is available to all stakeholders. Thus with the new laws where in simultaneous proceedings against such guarantors has been allowed, the right to recovery of the amounts (to the extent) of debt paid by the personal guarantors on behalf of the corporate debtors becomes quite murky and operation of claims against the personal guarantors under the newly introduced guidelines would further provide clarity on the issue.
Simultaneous Proceedings “Grouped”
The aim of bringing the personal guarantors under IBC was to ensure that creditors can procure greater portions of their claims under the proceedings before NCLT only rather than engaging in time consuming litigation before the Debt Recovery Tribunals. Also the said Rules clearly provide that the creditors will be able to file a claim for one debt against the personal guarantor and the corporate debtor simultaneously. While it may be argued that this creates a situation of conflict depending upon which claim is approved by the adjudicating authority firstly and whether a creditor whose claim fails to be completely satisfied under the resolution application finalized by the Committee of Creditors in case of , say, a corporate debtor would then have a right to file his remaining claim against the corporate resolution process against the personal guarantor or vice-versa, it has been clearly provided under Section 60 under Chapter IV, Part II of the IBC that the application for resolution of personal guarantors must be filed before such NCLT where resolution proceedings against the corporate debtor or ongoing. In case the insolvency application is filed against the personal guarantor prior to such proceedings being instituted agains the corporate debtor, the former proceedings shall stand transferred to the tribunal before which the CIRP against the corporate debtor is ongoing. This has been upheld by the apex court in the very recent case of M/s Embassy Property Developments Pvt. Ltd. v State of Karnataka & Ors where the court mentions that such amendment under Section 60 has been brought to ensure that ‘CIRP of a corporate debtor and the insolvency resolution of the individual guarantors of the very same corporate debtor do not proceed on different tracks, before different Fora, leading to conflict of interests, situations or decisions.’
However, complications arise when it comes to application of the moratorium period under IBC,the rules with respect to personal guarantors are different than those applicable to the creditors under Section 14 of IBC. Section 101, Insolvency and Bankruptcy Code, 2016 provides for immediate moratorium on personal guarantors of the corporate debtor irrespective of whether such has been ordered by the NCLT while admitting such claim. Though the newly instated Rules and Regulations do not provide for the provision of moratorium in case where the insolvency proceedings against the personal guarantors will be undertaken, it would only be after the application of these newly introduced Rules and Regulations that the modality of their effective implementation be realised.
Deterrent Effect
Furthermore, the time bound procedure of resolution under IBC Code may also create a deterrent effect when it comes to personal guarantees. While a lot of differences exist under the CIRP against the personal guarantors as compared to CIRP against the corporate debtors such as grant of power of preparation of repayment plan solely in the hands of the personal guarantor and no other creditor including those who have initiated such resolution process, necessary consent of the personal guarantor in case the repayment plan present by such guarantor is required and have been agreed upon to be modified by the committee of creditors which may be considered to be favourable for the personal guarantor in contrast to a corporate debtor undergoing the CIRP, the time-bound resolution process under the IBC Code might act as a deterrent for personal guarantors to execute such guarantees hereinafter for loans and other forms of lending. Moreover, provisions introduced under the Rules and Regulations conferring a right upon the Resolution Application to file a statement before the Adjudicating Authority any time during the CIRP on the pretext non-cooperation by the personal guarantor might demotivate the personal guarantors
Thus, the picture with respect to the modality of application of the new rules to personal guarantors will become clear in due time but the steps towards ensuring a faster and less litigious recovery action against the personal guarantors can be termed as a positive step for current economy grappling with challenges of consumer demand and investment due to great scale losses be it in the case of Essar or the Jet Airways. The crisis warrants a more efficient legal paradigm of recovery and these Rules and Regulations can be considered a step forward in the right direction.
This article is written by Shreyashi Tiwari, Legal Officer – Export Import Bank of India
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