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Personal Guarantor Insolvency under IBC

By August 29, 2020 August 31st, 2020 2 Comments

A. INTRODUCTION

On 15th November, 2019, a notification was issued by the Ministry of Corporate Affairs which has rendered the insolvency and bankruptcy proceedings against personal guarantors to be governed by the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the regulations in this regard came into force as on 01st December, 2019. For the purpose of understanding the concept of insolvency and bankruptcy against personal guarantors, it becomes essential to understand the concept of guarantee. Section 126 of the Indian Contracts Act, 1872 deals with the concept of contract of guarantee. A contract of guarantee is an agreement wherein there are three parties which inter alia include the debtor, creditor and the guarantor. In the event of failure on the part of the debtor to repay the debt amount owed to the creditor, the guarantor shall repay the debt amount to the creditor on behalf of the debtor and in the event of failure to repay such debt amount, the creditor reserves the right to initiate insolvency proceedings against the personal guarantor.

B. WHO IS A PERSONAL GUARANTOR UNDER IBC?

Section 5 (22) of the IBC defines a personal guarantor as an individual who is the surety in a contract of guarantee to the corporate debtor.

Pursuant to Rule 3 (e) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (“Rules”), a guarantor means a debtor who is a personal guarantor to a corporate debtor in respect of whom guarantee has been invoked by the creditor and remains unpaid in full or in part.

This article covers the insolvency procedure to be initiated against a personal guarantor under IBC.

C. INITIATION OF INSOLVENCY PROCEEDINGS AGAINST PERSONAL GUARANTORS:

Pursuant to Section 60 of the IBC, the National Company Law Tribunal (“NCLT”) has the territorial jurisdiction in relation to the insolvency resolution for corporate persons including the corporate debtors and personal guarantors.

The insolvency and bankruptcy procedure can be initiated against a personal guarantor, either by a creditor or through a resolution professional pursuant to Section 95 of the IBC by filing an application before the NCLT. Following are the steps which put forth the process of initiation of insolvency against a personal guarantor:

1. Serving a Demand Notice: Pursuant to Rule 7 (1) of the Rules, a demand notice shall be served by the creditor on the personal guarantor demanding the payment of amount in default and such demand notice shall be served on the personal guarantor in Form B. Within 14 (fourteen) days from the date of receipt of the demand notice, the personal guarantor shall pay the debt amount to the creditor, failing which the creditor reserves the right to file an insolvency application before the NCLT.

2. Filing of Application: Upon failure to make payment of the debt amount, the creditor reserves the right to file an application before the NCLT. The application shall be filed in Form C and a fee of 2000/- (Rupees Two Thousand only) shall be paid by the creditor in lieu of filing of the application before the NCLT. The following documents shall be attached to the application in the form of annexures:

  • List of documents attached to this application in order to prove the existence of debt and the amount in default.
  • Copy of demand notice served on the guarantor in Form B.
  • Copy of the Income Tax Returns with detailed computation of the income of the guarantor, or the firm as the case may be, for the previous three years, if available.
  • Copy of personal guarantee contract.
  • Copy of authorization, wherever required under the form.
  • Proof that the application fee has been paid.
  • Documents evidencing the debt and the default in relation to the debt, as may have been provided by the guarantor at any point in time, if available.
  • Documents evidencing the assets, liabilities, income and any other relevant information as may have been provided by the guarantor at any point in time, if available.
  • Documentary evidence of all information sought in each entry for each part of the form.

A copy of the application shall be served upon to the personal guarantor and the corporate debtor.

3. Interim Moratorium: Once the application has been filed with the NCLT, an interim moratorium shall commence from the date of filing of the application with respect to all the debts which would cease upon the admission of the application. During such interim moratorium period, any legal action which is pending in relation to the debt shall be stayed and the creditors shall not initiate any legal action in relation to the debt.

4. Application filed through a Resolution Professional: In the event the application under Section 95 has been filed through a resolution professional, the NCLT shall direct the Insolvency and Bankruptcy Board of India (“Board”), within 7(seven) days from the date of the application to ensure that no such disciplinary action is pending against the resolution professional. Within the aforesaid period of 7 (seven) days, the Board shall communicate to the NCLT in writing either confirming the appointment of the resolution professional or rejecting the appointment of the resolution professional. When a resolution professional is rejected, nominating another resolution professional for the insolvency resolution process.

In the event the application is filed by the creditor himself and not through the resolution professional, the NCLT shall direct the Board within 7 (seven) days to nominate a resolution professional from the date of filing of such application. Upon the receipt of such direction from the NCLT, the Board shall nominate a resolution professional within 10 (ten) days. The NCLT shall by passing an order appoint a resolution professional as recommended or nominated by the Board. A copy of the application shall be provided by the applicant to the resolution professional within 3 (three) days from the date of appointment of the resolution professional.

5. Replacement of a Resolution Professional: In the event, the creditor is of the opinion that the resolution professional shall be replaced, the creditor shall apply to the NCLT for the replacement of the resolution professional. Upon receipt of the application for such replacement, the NCLT shall make the reference to the Board and within 10 (ten) days from the date of receipt of such application from the NCLT, the Board shall recommend a name to the NCLT and it shall be ensured by the Board that no disciplinary proceedings shall be pending against such resolution professional. The creditor may apply to the NCLT for the replacement of the resolution professional, where it has been decided in the meeting of the creditors to replace the resolution professional with a new resolution professional for the sole purpose of the implementation of a repayment plan. When such application for replacement is admitted by the NCLT, the NCLT directs the Board to confirm of no disciplinary action against the resolution professional and the Board shall be required to send a communication within 10 (ten) days of the direction of the NCLT either confirming or rejecting and nominating a new resolution professional. The new and replaced resolution professional is said to be appointed upon the passing of an order in this regard by the NCLT. The old resolution professional shall be directed by the NCLT to share all the information with the replaced resolution professional and shall be directed to fully cooperate with the replaced resolution professional.

6. Report to be submitted by the Resolution Professional: The application shall be examined by the resolution professional within 10 (ten) days from the date of his/her appointment and the resolution professional shall submit a report to the NCLT wherein the resolution professional shall recommend approval or rejection of the application. The debtor shall be required by the resolution professional to prove the repayment of the debt claimed as unpaid by the creditor by way of furnishing evidence showcasing the electronic transfer of unpaid amount from the bank account of the debtor; evidence showcasing the encashment of the cheque and a signed acknowledgement from the creditor accepting the dues from the debtor. Further, information may be sought by the resolution professional and the person from whom such further information may be sought shall be furnished by him/her within 7 (seven) days from the date of receipt of the request made by the resolution professional. The reasons for the acceptance or rejection of the application shall be recorded by the resolution professional in the report. A copy of the report shall be given by the resolution professional to the creditor.

7. Application- accepted/rejected: Within 14 (fourteen) days from the date of submission of the report by the resolution professional the NCLT passes an order either accepting or rejecting the application. Upon acceptance, the NCLT shall upon the request of the resolution professional issue instructions pertaining to the negotiations and for arriving at a repayment plan. The NCLT shall provide a copy of the order along with the report of the resolution professional and the application to the creditor within 7 (seven) days from the date of passing of the order. In the event of rejection of the application by the NCLT pursuant to the report of the resolution professional, the creditor shall be entitled to file for a bankruptcy order.

8. Moratorium upon admission: Upon the application being admitted, a moratorium for a period of 180 (one-hundred and eighty) days shall commence with respect to the debt and shall cease to have effect upon the completion of the period of 180 (one-hundred and eighty) days beginning from the date of admission or on the date on which the NCLT passes an order with respect to the repayment plan.

9. Claims from creditors: The NCLT shall issue a public notice within 7 (seven) days inviting claims from the creditors. All the claims of the creditors shall be received within 21 (twenty-one) days from the date of such issue of the public notice. The notice shall mention in detail the order admitting the application, particulars of the resolution professional with whom the claims are to be registered and the last date with respect to the submission of such claims. Such notice shall be published in English language and vernacular newspaper, in the area in which the guarantor resides. The notice shall also be affixed in the premises of the NCLT and shall be placed on the NCLT website. The creditors shall send their claims to the resolution professional along with their personal information.

10. List of creditors: A list of creditors shall be prepared by the resolution professional within 30 (thirty) days.

11. Repayment Plan: A repayment plan shall be formulated by the debtor in consultation with the resolution professional which shall contain a proposal to the creditors for restructuring of the debts or affairs. The repayment plan may authorize the resolution professional to carry on the business of the debtor and the repayment plan shall contain the justification for the preparation of such plan and the reasons as to why the same shall be considered by the creditors. The repayment plan shall contain the term of the repayment plan, its implementation schedule, sources of funds that will be used to pay the resolution costs, budget for the duration, finance required for implementation of the plan, details of the excluded assets and excluded debts of the guarantor and the terms for the discharge of the guarantor.

12. Report on the repayment plan: Within 21 (twenty-one) days from the date of submission of claims of the creditors, the resolution professional shall submit the repayment plan to the NCLT along with a report. The report submitted by the resolution professional shall contain that the repayment plan is in compliance with the law, has a reasonable prospect of being approved and implemented and may recommend the summoning of a meeting of the creditors. The date and time of the meeting of the creditors shall be clearly specified in the report. The meeting shall be conducted on a date which shall be not less than 14 (fourteen) days and not more than 28 (twenty-eight) days from the date of submission of the report with the NCLT. The convenience of the creditors shall be considered for the purpose of fixing the date, time and venue of the meeting.

13. Meeting of creditors: A notice shall be issued by the resolution professional calling for the meeting of the creditors which shall be atleast 14 (fourteen) days before the date of the meeting fixed. The notice shall be sent to the list of creditors, which the resolution professional prepared. The notice shall clearly mention the address of the NCLT and shall be accompanied by the copy of the repayment plan, copy of the statement of affairs of the creditors, the report of the resolution professional and proxy forms for the purpose of voting. In the meeting, the creditors may decide as to whether the repayment plan shall be approved, modified or rejected. In the event, modifications are suggested, the same shall be made by the resolution professional in the repayment plan. Creditors shall have the right to vote at every creditors meeting with regard to the repayment plan as per the voting share assigned to each creditor and the voting share shall be determined by the resolution professional for each creditor. However, a creditor shall not have the right to vote, in the event the creditor is not a creditor in the list of creditors prepared by the resolution professional and is associated with the debtor. Pursuant to Regulation 11 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors of Corporate Debtors) Regulations, 2019 (“Regulations”), a meeting of the creditors shall be convened by the resolution professional by creditors having 33% of the voting share. The voting share shall be in proportion to the debt owed to the creditor. Any decision of the creditors shall require the approval of more than 50% voting share of the creditors who voted. Pursuant to Regulation 13 of the Regulations, a meeting of the creditors shall be quorate if creditors representing 33% of the voting share are present either in person, through proxy or through video conferencing, provided that the quorum has been modified by the creditors in the meeting of the creditors. The secured creditors shall be entitled to participate in the meeting of the creditors and the voting in the creditors meeting with respect to the repayment plan forfeits his right to enforce the security during the period of the repayment plan. However, in the event, the secured creditor is not willing to forfeit his security, an affidavit shall be submitted to the resolution professional by the secured creditor at a creditors meeting stating that the right to vote is being exercised by the secured creditor in lieu of the unsecured portion of the debt and the estimated value of the unsecured part of the debt. Upon submission of such affidavit, the secured and unsecured portion of the debts shall be treated as separate debts.

14. Approval of Repayment Plan: The repayment plan or such modification to the repayment plan shall be approved by the majority of  3/4th in value of the creditors in person or through proxy and the voting on the meeting of the creditors.

15. Meeting of creditors report: A report of the meeting of creditors shall be prepared by the resolution professional. The report shall include as to whether the repayment plan has been approved or rejected and if approved, the list of modifications if any made to the repayment plan, the resolutions proposed at the meeting and the decision in regard to the resolutions, list of creditors who were present and their voting records and such information which the resolution professional may deem appropriate shall be informed to the NCLT.

16. Filing of repayment plan and order of the NCLT: The resolution professional shall file the repayment plan with the NCLT and the NCLT may pass an order either approving or rejecting the repayment plan on the basis of the report of the meeting of the creditors prepared and submitted by the resolution professional. In the event a meeting of creditors is not summoned by the resolution professional, the NCLT may pass an order based on the report of the resolution professional. Upon the approval of the repayment plan by the NCLT, it shall be binding on the creditors and the debtor. Upon rejection, the creditors shall be entitled to file a bankruptcy application. A copy of the order passed by the NCLT shall be provided to the Board for the purpose of recording of the entry.

17. Completion of the repayment plan: Upon completion of the repayment plan, the resolution professional shall within 14 (fourteen) days forward to the persons bound by the repayment plan a notice that the repayment plan has been completely implemented and the copy of a report showcasing all the receipts and payments made pursuant to the repayment plan and the extent of implementation of such plan as compared to the repayment plan approved at the creditor’s meeting. A time extension may be forsaken by the resolution professional of not more then 7 (seven) days in this regard from the NCLT. 

18. Premature end of repayment plan: If a repayment plan is not implemented fully with regard to the persons bound by it within the time period mentioned in it, it is considered to have been come to an end prematurely. In such an event, the resolution professional shall submit a report to the NCLT stating the reasons for the premature end of the repayment plan, receipts and payments made in pursuance of the repayment plan and the creditor details whose claims are not fully satisfied. The creditors whose claims are not satisfied reserve the right to file for bankruptcy.

19. Discharge order: Based on the repayment plan, the resolution professional shall apply to the NCLT for a discharge order with respect to the debts as detailed out in the repayment plan and the NCLT may pass a discharge order. The repayment plan may either provide for an early discharge or discharge on the completion of implementation of the repayment plan. Such order passed by the NCLT shall be forwarded by the Board for the purpose of recording of entries. The discharge order does not discharge any person from any liability with respect to his debt.

D. CONCLUSION

On the occasions when a corporate debtor takes a loan, wherein a guarantee of repayment is provided by a personal guarantor, the creditor through the aforementioned procedure laid down in this article reserves the right to seek a remedy against the personal guarantor, in the event of default of loan by the debtor. The regulations of the personal guarantor insolvency and bankruptcy has provided the creditors with a second pocket from which the payments in lieu of the debt can be recovered which have not been paid by the debtor himself.

Authors: Prashant Jain, Co-Founder & Partner; Abhishek Gupta, Associate; Kriti Sanghi, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prashant@samistilegal.in (ii) abhishek@samistilegal.in (iii) kritisanghi@samistilegal.in.

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