Appraising The Evolving Liability Framework of Personal Guarantors Under The Insolvency And Bankruptcy Code, 2016[1]
ABSTRACT
There has been a fast and consequential change in the insolvency regime of personal guarantors under Insolvency and Bankruptcy Code, 2016 (IBC) especially since the 2019 notification that operationalizes the situation of insolvency proceedings against personal guarantors of a corporate debtor. This has been brought about by the pronouncement of the judiciary most especially the Lalit Kumar Jain v. Union of India, which have widened the boundaries of guarantor liability by revitalizing the notion of co-extensive liability and maintaining independence of the proceedings against guarantors after a resolution plan has been approved of the corporate debtor. Although this creditor-centric interpretation has been implemented by the courts to enhance the credit ecosystem, it has also created some doctrinal ambiguities, contravention of contractual principles, and even some over-deterrence issues to the promoters, especially in MSMEs, that usually give personal guarantees as a condition to access credit.
There have been structural gaps brought about by unclear standards on the amount on guarantor liability to be quantified, guarantor asset treatment, priority of creditors and the effects of concurrent insolvencies. Also, there is no logical process of discharging guarantors after the resolution is issued and this has become the source of confusion and speculations in the business world. This research study is a critical assessment of the liability framework of individual guarantors under the IBC, 2016, as how it has evolved through the years and how it has been embellished by the court, along with other economic factors.
KEY WORDS
Insolvency Framework, Personal Guarantors, Liability, Judicial Embellishments
INTRODUCTION
The Insolvency and Bankruptcy Code, 2016 (IBC) has become one of the most radical legislations in the economic relation in the post-liberalization period in India. The Code is envisaged to upgrade and correct the current framework regarding reorganization and insolvency administration of corporate entities, partnership companies, and individuals, which is a paradigm shift in a debtor-in-control machine to a creditor-centric one. Another important change in this legal architecture has been the expansion of IBC regime to personal guarantees of corporate debtors, which was strengthened by 2019 to create an ecosystem of insolvency in the Code.
In India, credit relationships are based on personal guarantees to a large extent, particularly to small and medium enterprises and promoter led companies. Promoters can provide personal security of corporate loans to financial institutions to reduce credit risks, and to provide a higher rate of recovery. Nevertheless, the commencement of insolvency against personal guarantors under the IBC created challenging legal issues on the nature, scope, and the duration of liability on the part of the corporate debtor in the case of insolvency after the corporate debtor is resolved. These provisions have been a real subject of judicial and academic controversy since the Supreme Court made a landmark decision in Lalit Kumar Jain v. The case of Union of India (2021), that approved that IBC proceedings are applicable to personal guarantors.
In spite of this judicial clarity, there are still serious grey areas in determining the exact boundaries of the guarantor liability- especially where the resolution plan adopted by the corporate debtor abolishes the actual debt. The two simultaneous exposures of the guarantors as suggested by the Indian Contract Act, 1872 and the IBC give opposing readings regarding the extent of subrogation rights, removal of obligations and preservation of the liability.[2] Furthermore, the lack of interaction with the economic consequences of such liability, e.g. the impact that such liability has on the entrepreneurship risk-taking and credit flow within the economy, demonstrates one of the research gaps.
The research paper attempts to follow the doctrinal development of the law of the personal guarantor on the IBC and analytically discuss its overall economic implications. Through scrutinizing judicial embellishments and putting them in context with the changing realities in the market, the paper aims at discussing to determine whether present interpretations are in line with the twofold aims of the IBC to guarantee the recovery of creditors and ensuring economic stability. In this question, the research will be making a contribution to the debate on establishing a just, effective, and financially viable insolvency regime in India.
RESEARCH PROBLEMS
The current research study primarily focuses upon the dearth of a clear and comprehensive legal and regulatory framework governing the scope and extent of the liability of the personal guarantors under the Insolvency and Bankruptcy Code, 2016. The existing legal framework, does not clearly enumerate the extent of liability of the personal guarantors post the approval of the resolution plans by the Committee of Creditors and the Adjudicating Authority. Thus, there is an immense need to formulate a framework clarifying the liability of the guarantors pre and post approval of the resolution plans.
Further, the recent judicial decisions focusing upon providing clarity upon the interpretation of the principle of co-extensive liability of the guarantors in lieu of the insolvency framework, extended the scope and extent of liability of the personal guarantors under the IBC as that of the Contract Act, 1882 under the name of the aforesaid principle. This extends the scope of the liability of the personal guarantors of the corporate debtors undergoing CIRP, resulting in the unnecessary concurrent proceedings.
RESEARCH OBJECTIVES
1. To evaluate the dearth of clear and comprehensive framework governing the regulation of concurrent legal proceedings against the corporate debtors and the personal guarantors.
2. To scrutinize the evolution of the scope and extent of the liability of the personal guarantors under the IBC framework and judicial precedents.
3. To ascertain if the judiciary has broadened or exceeded the scope and applicability of the co-extensive liability principle under the Contract Law.
4. To comprehend the economic impact of the absolute and ambiguous liability on personal guarantors under the legal framework.
RESEARCH METHODOLOGY
The current research paper has followed the doctrinal and analytical research methodology as the primary method for collecting or gathering data and further dissecting the collected data. The doctrinal methodology portrays the study of the existing legal and regulatory framework governing the determination of the liabilities for the personal guarantors’ alongwith the scrutinization of the judicial embellishments. Further the study focuses upon the qualitative data rather than the quantitative data and thus, delves into scrutinizing the existing data in lieu of the future reforms and recommendations.
REVIEW OF LITERATURE
The Insolvency and Bankruptcy Code (IBC) 2016 in India initially covered the issue of corporate insolvency. The IBC (Amendment) Act, 2017, that amended Section 2(e) to make corporate-debtor guarantors debtors and added Sections 60(2)(3) with the National Company Law Tribunal (NCLT) holding jurisdiction over insolvency of a personal guarantor based on a corporate debtor, was the first to place personal guarantors in the picture. Part III (ss. 94-100) is applied specifically to the cases of personal guarantor to corporate debtor, but these provisions were only notified in November 2019 by a government notification. More importantly, the amendment of the Section 14(3) was to be done to make it clear that the general moratorium of Section 14(1) shall not be applicable to a personal guarantor. Such clarification had been proposed by the Insolvency Law Committee to avoid freezing of creditor rights to personal guarantors by Section 14.[3]
The IBBI in late 2019 gave notices of regulations and rules pertaining to the Personal Guarantor proceedings like Insolvency Resolution Process for Personal Guarantors (PGs) to Corporate Debtors Regulations, 2019. These impose low charges (initially Rs.1,000) and process of insolvency among the Personal guarantors. Concerns that the previous provisions favored too much towards Personal guarantors also resulted in an IBC (Amendment) Bill that was parliamentary scrutinized in 2025.[4] The proposals proposed under the IBC Bill, 2025, such as explicitly restrict the interim moratorium of guarantors and golden chain the burdens of repayment, make creditors strong. It again restates that the discharge of a CD under a resolution plan does not discharge personal guarantors of their liability.
In the Supreme Court and the appellate tribunals, the liability of PG has been substantially narrowed down as per the IBC:
Moratorium Protection: In State Bank of India v. V. Ramakrishnan (2018), the SC stated that the automatic moratorium of Section 14 is limited to the corporate debtor but not to the personal guarantor of a debtor. The Court observed that the text and history (repeal of SICA Section 22) of the Code testify that Parliament did not intend that joint liability should not be imposed on the guarantors. The 2018 Amendment (Section 14(3) ordinance) was deemed clarificatory and retrospective, and stated that creditors remain entitled to act against guarantors despite the CIRP of a CD.
The co-extensive Liability: The SC has pointed out that the liability of a PG is co-extensive of the principal debt in Section 128 of the Contract Act. A decision on CD guarantor decides, therefore, that the guarantor is not necessarily discharged by consenting to a resolution plan. Notably, in Lalit Kumar Jain v. The SC (2021) affirmed the 2019 extension of IBC to PGs notification, and mentioned again that the discharge of a corporate debtor under a plan does not have the effect of discharging the liabilities of PGs. This made it beyond question that guarantors are still liable on their standalone contracts once a CD is settled.[5]
NCLT Jurisdiction In Mahendra Kumar Jajodia (NCLAT 2020, upheld by SC), it was determined that all insolvency cases involving PG (even without a proceeding in a CD) have to be filed in the NCLT (not in DRT). This eliminated confusion regarding forums. Section 60 therefore leaves NCLT as the sole decision maker of PGs and maintains institutional homogeneity. Concurrent Proceedings The NCLAT have stated that simultaneous insolvency proceedings between a borrower and a guarantor do not bear any bar. In Athena Energy Ventures v. The NCLAT (2020) on its part stayed an order of NCLT to the contrary, noting that a guarantor cannot merely abscond in the event of a default on the side of the borrower; the concurrent claims in both CIRPs can go through the process of recovery, but may do so at the expense of each other.[6]
Procedural Rights and Natural Justice The most recent move of the SC decision dated 9 November 2023 confirmed the constitutionality of the Sections 95-100 (PG provisions) to be found in the Constitution. The Court affirmed that all pre-admission proceedings are non-adjudicatory: the Resolution Professional (RP) is only compiling facts and makes recommendations, and no jurisdictional facts are to be heard until Section 100. Notably, it decided that there is no breach of natural justice during the screening phase since the debtor (PG) is at libero to interact with the RP. This is because the report of the RP is purely recommendatory and the NCLT has to implement natural justice when making the decision on the Section 100 admission/ rejection. Guarantor Protections External IBC, the Delhi High Court in Brij Bhushan Singal v. Piramal Finance (2022) has emphasized that with a number of guarantors, the liability of one party is independent and the moratorium of one party does not remain against co-guarantors. On the same note, courts have also ruled that the offloading of liability by citing to corporate plan payouts will not work, such an assignment in a resolution plan which discharges the initial debt may bar further recovery, but in the absence of such an assignment, the guarantee remains alive.
The IBBI has underscored the fact that creditors were recovering a lot of value due to the invocation of personal guarantees and the need to have an efficient resolution of personal guarantees. Its newsletters state that the pressurising of credit through the insolvency of PG was implemented over time to bring about discipline in the credit. Before the Ramakrishnan ruling of the SC, the Insolvency Law Committee of the IBBI has suggested the amendment of Section 14 in order to highlight the interests of the creditors (lest the interpretation of the moratorium be interpreted broadly to make guarantees infructuous).
Even within the changing framework, there are still great uncertainties and questions about the policy:
Procedural Uncertainty: The issue of procedural triggers differs between courts and commentators. Indicatively, the issue of a demand notice and default under the particular guarantee contract being considered as default under IBC is in dispute. According to the last decisions of Adjudicating Authorities, the statutory demand is required, but invocation by the guarantor should follow the terms of a contract. There are still certain problems should a personal guarantor be able to dispute a report provided by RP prior to admission The existing belief is that there is no judicial issue before acceptance, but many guarantors and debtors had originally filed writ petitions in High Courts on due process. Several Proceedings: Concurrent proceedings are allowed but may confuse. Indicatively, is there an additional claim against the PG by bringing in a resolution plan regarding the CD bar? In the courts, liability of the plan will not be discharged unless the plan expressly discharges that debt. However, creditors fear that after a corporate claim has been discharged, a guarantor will argue that the debt is no longer outstanding.
Overall, the literature reveals that the Indian system of personal guarantors under the IBC has quickly developed, due to the amendments to the legislation, the most significant court decisions, and the continuous discussion of the policy. The statutory reforms and jurisprudence have been largely converging with the need of holding the guarantors liable in regards to co-extensive liabilities, but there are still the procedural and economic uncertainties. Researchers demand further transparency and protection – such as by the reforms of 2025 to limit the effects of the PG delay, legal clauses to recover assets, and by continuing to monitor the effect of the small promoter. Put simply, these developments and criticisms chart a new regime in which creditor enforcement and the right to guarantee is scrutinized and yet to be determined.[7]
ANALYSIS AND FINDINGS
It is the independent and coextensive liability of the personal guarantors with that of the corporate debtor under the Insolvency and Bankruptcy Code, 2016 (IBC), which is embodied in the Indian Contract Act, 1872, Section 128 that defines the liability of the personal guarantors. The Supreme Court made a very clear ruling in this case Lalit Kumar Jain v. Union of India (2021), which highlighted the fact that guarantor is not necessarily discharged of its liability through the approval of a corporate resolution plan. This straightforward legal stance enables creditors since it enables them to seek insolvency action against both the debtor company and the personal guarantor simultaneously; thus creating a paradigm shift in the insolvency law. The individual proceedings are an effective means of recovering the creditors but they are also a huge burden and risk to the personal guarantors.
The concurrent insolvency procedures mechanism embedded in the IBC enables the creditors to start an insolvency process with regard to personal guarantors in the face of the insolvency settlement procedure of the corporate debtor. In particular, the provisions of the protective moratorium that prevent coercive acts of creditors in respect of corporate debtors in the Corporate Insolvency Resolution Process (CIRP) are inapplicable to personal guarantors. This lack of guarantor moratorium also implies that creditors are free to directly and immediately enforce their security interest over the personal property of guarantors, improving their creditor position but also greatly increasing the risk exposed to guarantors.[8]
The judicial interpretations, though consistent on the principle of independent liability, have unveiled ambiguities in the doctrine in the impact of the corporate debt resolution plans, more so those to do with full and final settlements or even assignments of the debt; on the obligations of the guarantors. The courts have argued that in some cases such a resolution plans relieve the liability of the guarantor, but in other cases, liabilities do not go away unless this is explicitly written in the resolution plan. This leads to judicial fragmentation that creates legal confusion among the stakeholders and makes the area of personal guarantor liability a nightmare, with the result of lengthy litigation and mixed results.
Doctrines of contract which are based on the Indian Contract Act including the nature of guarantees (continuing, on-demand) and defenses to be available under the sections about novation and alteration of debt are still relevant but interpreted strictly in the circumstances of insolvency. Such defenses have often been restricted in their application by courts, and hence greatly overburden personal guarantors. This case law supports the high standards of accountability framework but equally poses issues on the fair protection of guarantors in the course of insolvency.[9] The financial consequences of such strict liability scheme are very high and intricate. Although the creditor recovery rate will likely rise, the liability risk, which is transferred to the guarantors, will discourage the entrepreneur to take up the business risk and decrease their willingness to make personal guarantee and eventually narrow the formal credit channel. Such risk aversion could potentially choke innovation and growth and may actually push borrowers to unregulated or informal ways of acquiring credit. The comparative analysis shows how other jurisdictions such as the United Kingdom and Singapore address these competing interests by introducing discharge rights and rehabilitative measures to guarantors, to allow promotion of entrepreneurship without compromising the creditor interests.
CONCLUSION
In a nutshell, the liability designation of personal guarantors in the Insolvency and Bankruptcy Code, 2016 is a vital consideration in the Indian insolvency ecosystem that raises creditor empowerment and has set up complicated legal and economic issues. Under the Indian Contract Act, Section 128 of the Act which established the principle of coextensive liability, the Supreme Court affirmed the rule that personal guarantors are not to be relieved of their independent liability together with the corporate debtor so that creditors can conduct insolvency proceedings concurrently. Nonetheless, there are still judicial ambiguities especially on the effects of corporate debtor resolution plans and debt assignments on guarantor obligations that result in inconsistent judicial results and operational difficulties. Guarantor contractual defenses are done so strictly so as to weigh heavily on their liability.
[1] Authored by Dhruv Singh Chauhan student a Second-year law student at Sushant University.
[2] Kumar, Ayush, Insolvency Proceeding on Guarantors’ Liability in India, IBC Laws (Apr. 15, 2025), https://ibclaw.in/insolvency-proceeding-on-guarantors-liability-in-india-by-ayush-kumar/.
[3] Gaurav Juneja & Aayush Jain, Supreme Court settles the debate: No Moratorium for Personal Guarantors under Section 14 of the Insolvency and Bankruptcy Code, Khaitan & Co. (Aug. 24 2018), https://www.khaitanco.com/thought-leadership/supreme-court-settles-the-debate-no-moratorium-for-personal-guarantors-under-section-14#:~:text=By%20way%20of%20the%20Insolvency,the%20corporate%20insolvency%20resolution%20process.
[4] Insolvency and Bankruptcy Board of India, Report of the Working Group on Individual Insolvency (Aug. 2017), https://ibbi.gov.in/uploads/resources/Final-Report_of_WG_on_Indiv_Insol-Aug_2017.pdf#:~:text=for%20initiating%20an%20insolvency%20resolution,Rupees%20one%20thousand.
[5] Gaurav Juneja & Aayush Jain, Landmark Ruling of the Supreme Court on Personal Guarantors under IBC Will Shape the Future of Lender-Creditor Dynamics, Econ. Laws Prac. (Nov. 9, 2023), https://elplaw.in/wp-content/uploads/2023/11/Landmark-Ruling-of-the-Supreme-Court-on-Personal-Guarantors-under-IBC-will-shape-the-Future-of-Lender-Creditor-Dynamics.pdf#:~:text=May%202021%2C%20the%20Supreme%20Court%2C,principal%20borrower%27s%20discharge%20under%20IBC.
[6] Banerjee, Varsha & Singh, Vishawjeet, Invocation of Personal Guarantees: When Does the Liability of a Personal Guarantor Truly Arise?, Mondaq (Aug. 7, 2025), https://www.mondaq.com/india/insolvencybankruptcy/1662762/invocation-of-personal-guarantees-when-does-the-liability-of-a-personal-guarantor-truly-arise.
[7] Panda, Saurav & Khan, Ahkam, Challenges Resolving Insolvencies of Personal Guarantors under IBC, Global Law Experts (Aug. 21, 2022), https://globallawexperts.com/challenges-resolving-insolvencies-of-personal-guarantors-under-ibc/#:~:text=The%20National%20Company%20Law%20Appellate,raised%20in%20a%20recent%20writ.
[8] Singh, Zorawar & Mankar, Hitesh, Upholding the Validity of Provisions Related to Personal Guarantors Under IBC – Good for Lenders, Bad for Guarantors, SCC Online (Jan. 3, 2024), https://www.scconline.com/blog/post/2024/01/03/upholding-the-validity-of-provisions-related-to-personal-guarantors-under-ibc-good-for-lenders-bad-for-guarantors/.
[9] Tayal, Haini, Tracing the Liability of Personal Guarantors under IBC, 5 Int’l J. Law Mgmt. & Human. (4) 145 (2022), https://ijlmh.com/paper/tracing-the-liability-of-personal-guarantors-under-ibc/.
Author Bio
very well written