Personal Guarantor is a guarantee given by either a promotor or a director in lieu of loan given to a corporate entity. Personal guaranty can be given also in lieu of loans given to LLP and other forms of loan. However, Personal Guarantors of Corporate Entity including LLP are currently being pursued in Insolvency and Bankruptcy Code, 2016. Personal Guarantor have repeatedly used corporate cloak to avoid being responsible for the guarantees being given in lieu of their companies debt. the business owner or principal becomes a cosigner on the credit application. The guarantor may also pledge their own personal assets and agree to repay a debt from personal capital in case the company defaults as part of their personal guarantee. Not only does this make credit more accessible to businesses, but it also mitigates the risks to creditors since they have a legal claim to the individual’s personal assets. It also improves the terms which will be based on the profile of both the business and the individual in the underwriting process.
Personal Guaranty can invoked in default of original debt and can be enforced in civil courts for non-corporate Entities. However, Insolvency Bankruptcy Code, 2016 has brought in section that specifically bring CIRP process for personal guarantors that is independent of Corporate CIRP based on section 7,9,10 of Insolvency Bankruptcy Code, 2016. Bankruptcy proceeding against Personal Guarantors are illustrated in sections 94 to 184 of IBC, code 2016. IBC sections against personal guarantors are gamechangers since creditors can have increased recoveries and they can files insolvency petitions against corporate debtor and personal guarantors in the same avenue of NCLT.
Section 94-101 of IBC, 2016
Section 94 : Application by debtor to initiate insolvency resolution process.
A debtor who commits a default may apply, either personally or through a resolution professional, to the Adjudicating Authority for initiating the insolvency resolution process, by submitting an application.
(2) Where the debtor is a partner of a firm, such debtor shall not apply under this Chapter to the Adjudicating Authority in respect of the firm unless all or a majority of the partners of the firm file the application jointly.
(3) An application under sub-section (1) shall be submitted only in respect of debts which are not excluded debts.
(4) A debtor shall not be entitled to make an application under sub-section (1) if he is—
- an undischarged bankrupt;
- undergoing a fresh start process;
- undergoing an insolvency resolution process; or
- undergoing a bankruptcy process.
(5) A debtor shall not be eligible to apply under sub-section (1) if an application under this Chapter has been admitted in respect of the debtor during the period of twelve months preceding the date of submission of the application under this section.
Section 95: Application by creditor to initiate insolvency resolution process.
(1) A creditor may apply either by himself, or jointly with other creditors, or through a resolution professional to the Adjudicating Authority for initiating an insolvency resolution process under this section by submitting an application.
(2) A creditor may apply under sub-section (1) in relation to any partnership debt owed to him for initiating an insolvency resolution process against—
(a) any one or more partners of the firm; or the firm.
(3) Where an application has been made against one partner in a firm, any other application against another partner in the same firm shall be presented in or transferred to the Adjudicating Authority in which the first mentioned application is pending for adjudication and such Adjudicating Authority may give such directions for consolidating the proceedings under the applications as it thinks just.
(4) An application under sub-section (1) shall be accompanied with details and documents relating to—
- the debts owed by the debtor to the creditor or creditors submitting the application for insolvency resolution process as on the date of application;
- the failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand; and
- relevant evidence of such default or non-repayment of debt.
(5) The creditor shall also provide a copy of the application made under sub-section (1) to the debtor.
(6) The application referred to in sub-section (1) shall be in such form and manner and accompanied by such fee as may be prescribed.
(7) The details and documents required to be submitted under sub-section (4) shall be such as may be specified.
The analysis:
Section 94 introduces the insolvency petition being filed by the debtor who might be personal guarantor or individual who might debts who might have debts far beyond their mean to pay. This section and provisions of this section are going to be important for future of IBC, 2016. But currently it is not used actively. Section 95 is what is actively used by creditors to recover from personal guarantors who had guaranteed their corporate debt to Financial Creditors. Cursory look at section 95 of IBC, 2016 is similar to section 7 of IBC, 2016. An application would be filed by the creditors in NCLT against the Personal Guarantor with evidence of default on corporate debt. Furthermore, Personal Guarantor should be issued notice for debt and they need to clear the debt demanded, if they are not able to do so. Then section 95 petition could be filed as a last-ditch effort to recover debt. Personal Guarantors had challenged the above section in Supreme Court in the case.
(CIVIL) NO. 245/2020- LALIT KUMAR JAIN ….PETITIONER(S) VERSUS UNION OF INDIA & ORS. RESPONDENT(S)
Supreme Court has declared that IBC sections are valid in relation to personal guarantors and interim moratorium exists only for corporate debtor and guarantors of debt. Personal Guarantor do constitutionally have right to interim moratorium separately from their corporate ownership.
Conclusion: The Insolvency and Bankruptcy Code’s approach to personal guarantors represents a paradigm shift in how financial liabilities are managed in the corporate sphere. By enabling creditors to pursue personal guarantors alongside corporate debtors in insolvency proceedings, the IBC ensures a more comprehensive recovery mechanism. This not only enhances accountability but also fortifies the legal framework governing corporate borrowing and personal guarantees. The landmark judgment by the Supreme Court reaffirming the constitutionality of IBC provisions pertaining to personal guarantors further cements their importance in the insolvency landscape. As we await further developments and insights in subsequent discussions, it is clear that the IBC’s stance on personal guarantors is a gamechanger, offering both challenges and opportunities in the quest for financial stability and integrity within India’s business environment.
Next Article we would explore then process of insolvency process of personal guarantors.
Author Bio
Now a days, in the election propaganda of the political party in power on TV, words “modi ki guarantee” are being bandied about repeatedly. What could be the legal implication of such personal performance guarantee. Should the provisions pertaining to contingent liability applicable to such personal performance guarantee?