Now, Personal guarantors of corporate debtors to come under IBC regime from December 1

KR Srivats New Delhi | Updated on November 17, 2019

Resolution of personal guarantors to be available from December 1

The Centre has taken the next big step in insolvency reforms by bringing personal guarantors to corporates (corporate debtors) within the fold of the Insolvency and Bankruptcy Code from December 1.

The Ministry of Corporate Affairs (MCA) has come up with a set of  rules extending the scope of the IBC to personal guarantors of corporate debtors.

Simply put, resolution of personal guarantors to corporates will be available from December 1. This would benefit both the banks and the personal guarantors in minimising litigation, say experts.

Speaking to BusinessLine, Insolvency and Bankruptcy Board of India (IBBI) Chairman MS Sahoo said  resolution of personal guarantors under the IBC would complement the insolvency resolution of the corporate debtor and put personal guarantors and corporate guarantors on the same level playing field.

The new regime will be prospective and  invoked when there is a default, Sahoo said. “Further, the law of limitation applies,” he added.

A corporate debtor (CD) may have guarantors, who could be corporates (corporate guarantors to CDs) or individuals (personal guarantors to CDs). So far, the resolution of corporate guarantors was available under the IBC. Now, even resolution of personal guarantors will be available.

SN Ananthasubramanian, Past President of the Institute of Company Secretaries of India and a practising Company Secretary, said this is in line with the expectations and its commencement in matter of three years (since the IBC’s enactment) lends credence to the insolvency regulator IBBI's noteworthy contribution towards ease of doing business.

‘Borrowing discipline’

”This will help bring much needed borrowing discipline and propel a cultural change in banking relationships,” he added.

Sapan Gupta, Partner and National Head of Banking and Finance, Shardul Amarchand Mangaldas & Co, said: “Bringing personal guarantors under the IBC from December 1 will be a big benefit for banks as it will be a time bound process and can take all promoters (who have given guarantees) into consideration. It's a good time to do this as the Supreme Court also held in the Essar verdict that lender’s right to enforce personal guarantee can be kept outside the resolution of corporate debtor. Now, the MCA has also issued guidelines and it will be a combination of both (the SC judgment and Government guidelines) that could be used. This will hasten the process.”

L Viswanathan, Partner, Cyril Amarchand Mangaldas, said the Centre’s decision will considerably strengthen creditors’ efforts in resolution. The consequences of personal insolvency are drastic enough to serve as an effective deterrent, he said.

He said it is noteworthy that insolvency cases against personal guarantors will be heard by the NCLT that is dealing with the corporate insolvency cases of corporate debtors.

This will allow creditors achieve a comprehensive resolution of debt that is owed by a company as well as its personal guarantors thereby avoiding legal proceedings in multiple tribunals.

“The corporate insolvency regime has already resulted in several company promoters taking efforts for a settlement or a resolution with the creditors. With the introduction of this regime against personal guarantors, this trend will only increase, Viswanathan said.

Published on November 16, 2019

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