Personal Guarantor to Corporate Debtor: A Comprehensive Overview

INTRODUCTION

A personal guarantor to a corporate debtor is an individual who pledges their personal assets to secure a loan or credit facility extended to a corporate entity. Often a director, promoter, or stakeholder of the company, the guarantor ensures that in case the corporate debtor defaults on its obligations, their personal wealth can be used to repay the debt. This arrangement bridges trust between creditors and corporate borrowers, enabling businesses to access larger credit lines or better terms. However, it also places significant financial and legal responsibilities on the guarantor, as their personal liabilities become intrinsically tied to the corporate debtor’s performance.

INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (INSOLVENCY

RESOLUTION PROCESS FOR PERSONAL GUARANTORS TO CORPORATE

DEBTORS) REGULATIONS, 2019

This regulation provides a structured framework for resolving insolvency cases of personal guarantors to corporate debtors. It outlines eligibility criteria for resolution professionals, ensuring their independence and detailing their appointment and responsibilities. The regulations mandate submission and verification of creditors’ claims, formation of a creditors’ list, and structured processes for meetings to discuss and vote on repayment plans, ensuring transparency and adherence to timelines. They also include provisions for debt counselling, record preservation, and guidelines for conducting creditors’ meetings, including notice, voting mechanisms, and quorum requirements.

The regulations emphasize realistic financial schedules in repayment plans, prioritization of resolution costs, and allowances for guarantors’ family needs. They address asset sales, modifications in repayment terms, and variations in contracts. Resolution professionals are tasked with supervising implementation, addressing breaches, and reporting non-compliance to the adjudicating authority. Additional provisions handle non-cooperation by guarantors and ensure fairness in asset dealings. Standardized forms streamline claim submissions, proxy appointments, and consent for professional roles, fostering procedural integrity and balancing creditors’ recovery with guarantors’ financial stability.

REGULATIONS GOVERNING INSOLVENCY PROCESS FOR PERSONAL GUARANTORS

The IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 provide detailed procedures for managing insolvency resolution for personal guarantors.

1. Appointment of Resolution Professional (RP): The RP is tasked with verifying claims, preserving records, preparing repayment plans, and overseeing the process.
2. Submission and Verification of Claims: Creditors must submit claims in prescribed forms, supported by documentary evidence, which the RP verifies to prepare a list of creditors.
3. Repayment Plan: Personal guarantors propose a repayment plan that may involve asset sales, debt restructuring, or modified payment terms. Creditors vote on the plan during meetings convened by the RP, and approved plans are submitted to the adjudicating authority for sanction.
4. Discharge Order: Upon successful implementation of the repayment plan, the guarantor may apply for a discharge order, releasing them from residual liabilities.

RECENT JUDICIAL PRONOUNCEMENTS

1. Liability Of Personal Guarantors Under the Insolvency and Bankruptcy Code:

The Supreme Court’s ruling in Surendra B. Jiwrajika v. Omkara Assets Reconstruction Private Limited [(2023) ibclaw.in 148 SC] significantly addressed the ambiguity surrounding personal guarantors’ liabilities under the Insolvency and Bankruptcy Code (IBC). However, additional complexities persist, as evidenced by earlier decisions.

2. Guarantor’s Liability under the Indian Contract Act:

The Maharashtra State Electricity Board Bombay v. Official Liquidator [1982 AIR 1497, 1983 SCR (1) 561], case clarified the application of Section 134 of the Indian Contract Act (ICA). It held that personal guarantors are not automatically released from their obligations even if the corporate debtor’s liability is discharged through liquidation, which occurs by operation of law and not due to the creditor’s actions or inactions. The court underscored that a guarantor’s duty, stemming from an unambiguous contractual promise, continues unless expressly dismissed under Section 134.

3. Discharge of Guarantor’s Obligations in Resolution Plans

The Supreme Court in State Bank of India v. V. Ramakrishnan [AIR 2018 SUPREME COURT 3876] addressed the impact of resolution plans approved under Section 31(1) of the IBC on guarantors’ liabilities. It held that such approval does not automatically discharge the guarantor from their obligations. Creditors retain the right to pursue guarantors for any residual amounts not covered by the resolution plan. This judgment clarified that the IBC’s approval mechanisms aim to restructure the corporate debtor’s liabilities while preserving creditors’ rights to enforce guarantees separately.

4. Binding Nature of Resolution Plans and Guarantor Liability

In Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [(2020) 8 SCC 531: 2019 SCC OnLine SC 1478] the Supreme Court further elaborated on Section 31(1) of the IBC. The court held that an approved resolution plan binds all stakeholders, including guarantors. However, in this case, the terms of the resolution plan explicitly preserved creditors’ rights to enforce guarantees, both corporate and personal, post-approval. The decision highlights that guarantors’ liabilities hinge not only on statutory provisions but also on the specific terms of the resolution plan negotiated and approved during insolvency proceedings.

CONCLUSION

The role of personal guarantors in corporate finance is both crucial and challenging. While it provides much-needed assurance to creditors, it places substantial financial and legal responsibilities on guarantors. The introduction of a robust insolvency framework under the IBC ensures a structured approach to addressing defaults, balancing creditor recovery with fairness to guarantors.

Our experts at Chhota CFO will guide you through the entire filing process for filing the insolvency petition by the personal guarantor to a company, ensuring compliance with the provisions of the Insolvency and Bankruptcy Code, 2016. From preparing the necessary documentation and drafting the petition to liaising with authorities and ensuring all procedural requirements are met, we provide end-to-end support to make the process seamless and hassle-free.

-Article by Adv. Akhila Bolla and Adv. Samiksha Shivakumar