An Unfair Code for Personal Guarantors

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The Insolvency and Bankruptcy Code (“IBC”) was enacted in 2016 to provide a stimulus to the insolvency and bankruptcy process in India, which had not been performing as per the desired pace due to the lack of effective mechanism in the previous legislations. The IBC is a comprehensive legislation enacted with an aim to consolidate the laws relating to insolvency, liquidation and bankruptcy process of companies, partnership firms and individuals and to ensure the resolution in a time bound manner for maximisation of value of assets and balance the interests of all stakeholders.

Initially, only those provisions of IBC that dealt with insolvency and liquidation process of corporate persons were made applicable. The mechanism with respect to the insolvency of the partnership firms and individuals is provided under part III of the IBC, which was brought into force vide Government Notification dated 15.11.2019 in so far as it is applicable to personal guarantors of corporate debtors. However, these provisions are still not applicable to individuals who are not personal guarantors.

The vires and the validity of the notification dated 15.11.2019 was challenged in various proceedings preferred under Article 32 of the Constitution of India and was upheld by Hon’ble Supreme Court of India in Lalit Kumar Jain vs Union of India (2021) 9 SCC 321.

Pursuant to the enforcement of part III of IBC to personal guarantors, various insolvency proceedings were initiated by banks and financial institutions against the personal guarantors of the corporate debtors. As on September 30, 2022, 1403 applications have been filed against personal guarantors, out of which 123 applications have been admitted.

In certain cases, the creditors initiated the insolvency proceedings against both the corporate debtor and the personal guarantors. The Supreme Court in Lalit Kumar Jain held that simultaneous proceedings are valid against both corporate debtor and personal guarantor with the caveat that the creditors cannot recover amount more than that of the total amount claimed.

Insolvency Proceedings vis-à-vis personal guarantors

The insolvency proceedings against personal guarantor differ from the proceedings against corporate debtor in significant ways. Section 95 of IBC provides that “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”. Therefore, the creditors have power to initiate insolvency proceedings against the personal guarantors through a resolution professional of their choice. In case, there are no disciplinary proceedings pending against such resolution professional, the Adjudicatory Authority shall by order appoint such resolution professional for carrying out insolvency resolution process of personal guarantor. It is pertinent to mention that the personal guarantor is not provided any opportunity to present his case or dispute the initiation of insolvency resolution process or appointment of the resolution professional.

Further, an interim moratorium is imposed upon the personal guarantor under section 96 of IBC upon filing of application for initiation of the resolution process.

As per section 99 of IBC, the resolution professional is required to examine the application filed under section 94 or 95, within ten days of his appointment, and submit a report to the Adjudicating Authority recommending for approval or rejection of the application.

Under section 100 of IBC, the Adjudicating Authority shall, within fourteen days from the date of submission of the report under section 99 pass an order either admitting or rejecting the application referred to in section 94 or 95. Pursuant to admission of application under section 100 of IBC, a moratorium is imposed as per section 101 of IBC, wherein, (i) no legal proceedings can continue or be initiated against the personal guarantor in respect of any debt; (ii) personal guarantor is not allowed to transfer, alienate, encumber or dispose of any of his assets or his legal rights or beneficial interest therein. However, it needs to be clarified as to whether, this moratorium would be applicable to even those transactions which are made by personal guarantors for their subsistence.

The personal guarantor is restricted to transfer, alienate, encumber or dispose of any of his assets or his legal rights or beneficial interest without providing any opportunity to present his case before the Adjudicating Authority. Although Section 95(2) of IBC provided the resolution professional may require the debtor to prove repayment of the debt claimed as unpaid by the creditor by furnishing evidence of payment to the creditor with respect to the debt, however, this is discretionary and in most of the cases, the resolution professionals do not take into account the explanations of personal guarantors in their report. This is due to the reason that the resolution professionals in these cases are proposed by the creditor, and they often work as per the convenience and benefit of these creditors. This raises questions over the credibility of the reports submitted by resolution professionals.

Challenge to provisions

These provisions of IBC are inherently violative of principles of natural justice and right to equality under article 14 of the Constitution as unlike, the corporate debtors, the abovementioned provisions regarding insolvency resolution process of personal guarantors, do not contemplate any opportunity of hearing before appointment of the resolution professional and imposition of interim moratorium. In cases where operational creditors initiate insolvency proceedings against corporate debtors, the corporate debtors get opportunity to show an existence of dispute with respect to the alleged debt. Further, in light of Supreme Court’s judgment in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. Civil Appeal No. 4633 of 2021, the financial creditors can also get out of the clutches of the IBC, if they are able to show their viability based on the overall financial health. In such cases, the Adjudicating Authority may in its discretion not admit the application of a Financial Creditor.

However, in case of personal guarantors, the provisions in IBC make it mandatory for Adjudicating Authority to appoint a resolution professional without going into the merits of the matter or judicial scrutiny. Moreover, the resolution professional is provided wide powers under section 99(4) to seek such further information or explanation in connection with the application as may be required from the personal guarantor. The personal guarantor is under obligation to provide such information under section 99(5) of IBC. This is violative of the right to privacy guaranteed under Article 21 of the Constitution.

The provisions related to insolvency resolution process of the personal guarantors have been challenged and are pending adjudication before the Supreme Court in bunch of matters filed by various personal guarantors including Mr. Anil Ambani. The lead matter in these bunch petitions is Surendra B. Jiwrajika and Anr. vs. Omkara Assets Reconstruction Private Limited SLP(C) No. 016464/2021.


These provisions need to be scrutinised by Supreme Court in light of the fact that they are prima facie violative of various constitutional provisions and the principle of audi altrem partem. Further, it shall also be kept in mind that IBC is a beneficial legislation enacted to improve the business environment in India. The provisions relating to personal guarantors give immense power to resolution professionals without much checks and balances, which might result in discouraging people to furnish personal guarantees thereby, adversely affecting the businesses and economy. Further, due to these provisions, there is possibility that the creditors may choose to prefer initiating insolvency proceedings against personal guarantors instead of going against principal borrower/corporate debtors.

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