One of the principle aims of the Insolvency and Bankruptcy Code, 2016 (“Code”) is resolution of insolvency of corporate persons, firms, and individuals in an effective, efficient and time bound manner. Chapter III of Part III of the Code deals with insolvency resolution and bankruptcy for individuals and partnership firms, including personal guarantors. Section 5(22) of the Code defines the term ‘personal guarantor’ as an individual who is the surety in a contract of guarantee to a corporate debtor. Rule 3 (1) (f) of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (“Rules”) also defines a guarantor as a debtor who is a personal guarantor to a corporate debtor and in respect of whom guarantee has been invoked by the creditor and remains unpaid in full or part.
Ever since these Rules were brought in force through a notification dated November 15, 2019, creditors could also opt to initiate insolvency proceedings against the personal guarantors of corporate debtor. However, it is to be kept in mind that the insolvency resolution process (“IRP”) of a personal guarantor is different from the IRP of a corporate debtor. Furthermore, there was recently a challenge to the constitutional validity of the provisions governing IRP of personal guarantors, which was rejected by the Hon’ble Supreme Court in the case of Dilip B. Jiwrajka versus Union of India (Dilip B. Jiwrajka). The present write up dwells deeper into these two aspects of IRP of personal guarantors along with the implications of the judgment of the Hon’ble Supreme Court and scope for specific guidelines/regulations, if any.
IRP of Personal Guarantors vis-à-vis Corporate Debtors
The process for the insolvency resolution of a personal guarantor varies from the IRP of a corporate debtor. This is further broadly illustrated below.
|IRP of Corporate Debtor and Personal Guarantor
|Points of Differences
|Personal Guarantor to a Corporate Debtor
|Initiation of IRP
|A financial creditor, an operational creditor or the corporate debtor itself may initiate a Corporate Insolvency Resolution Process (“CIRP”) in respect of a corporate debtor who commits a default [Sections 7, 8 and 10 of the Code].
|IRP can be initiated by a debtor or creditor acting as an individual entity or on behalf of other creditors. [Sections 94 and 95 of the Code].
|Role of Resolution Professional
|It is appointed to conduct the CIRP or the pre-packaged insolvency resolution process by the Adjudicating Authority [Section 5 (27) of the Code].
|It is required to examine the application of initiation of IRP within ten days of appointment and submit a report to the Adjudicating Authority with a recommendation to either accept or reject the application. For making such a recommendation, further information in relation to the application can be sought by the resolution professional [Section 99 of the Code].
|Initiation and Cessation of Moratorium
|It gets triggered on the insolvency commencement date through an order passed by Adjudicating Authority. It ceases to have effect when the CIRP is completed [Section 14 of the Code].
|Submission of an application under Section 94 or Section 95 itself initiates the interim moratorium which ceases to have effect on the date of the admission of the application [Section 96 and 100 of the Code].
|Effects of Moratorium
|The institution of suits, continuation of pending suits, or proceedings including execution proceedings against the corporate debtor shall stand prohibited [Section 14 (1) (a) of the Code].
The transferring, encumbering, alienating or disposing of any of its assets or any legal right or beneficial interest therein by the corporate debtor shall stand prohibited [Section 14 (1) (b) of the Code].
Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 shall stand prohibited [Section 14 (1) (c) of the Code].
Recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor shall stand prohibited [Section 14 (1) (d) of the Code]
|Any legal action or proceedings pending in respect of any debt shall be deemed to have been stayed [Section 96 (1) (b) (i) of the Code]. Creditors of the debtor cannot initiate any legal action or proceedings in respect of any debt [Section 96 (1) (b) (ii) of the Code].
|Role of Adjudicating Authority
|Adjudicating Authority shall, within fourteen days of the receipt of the application for initiation of CIRP, ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor [Section 7 of the Code].
Adjudicating Authority shall, within fourteen days of the receipt of the application for initiation of CIRP can either accept or reject the application in case of an operational debt or in case an application is being filed by corporate debtor himself [Section 9 and 10 of the Code].
|Adjudicating Authority is required to pass an order either admitting or rejecting the application for initiation of IRP within fourteen days from the date of the submission of the report under Section 99 [Section 100 (1) of the Code].
From the aforesaid, it is clear that there are certain major differences in relation to the IRP of a corporate debtor and that of a personal guarantor. Whether these differences are necessary or not was a point of discussion in the Dilip B. Jiwrajka judgment and also a ground for challenging the provisions relating to IRP of personal guarantors. This ground and the other grounds of challenge are discussed hereinbelow.
Challenge to the IRP of Personal Guarantors
The Hon’ble Supreme Court dealt with the challenge to the constitutional validity of the provisions relating to insolvency of a personal guarantors in the Dilip B. Jiwrajka case. To be specific, the constitutional validity of Sections 95(1), 96(1), 97(5), 99(1), 99(2), 99(4), 99(5), 99(6), and 100 of the Code was challenged. These provisions were challenged on various grounds, some of which said:
- That there is no determination of the existence of a debt by a judicial body but instead it is being done by a resolution professional;
- That automatic initiation of interim moratorium and appointment of a resolution professional after filing of application under Section 95 of the Code should not be done;
- That power of resolution professional to seek information from the guarantors and third parties is discretionary and untrammelled;
- That instead of a resolution professional, intervention of a judicial body under Section 97 of the Code must be allowed;
- That in view of both the requirements of establishing the creditor-debtor relationship at the very beginning and the impact of the enquiries which are made by the resolution professional, civil consequences are bound to follow upon an enquiry under Section 99 of the Code conducted by the resolution professional and hence natural justice must be read into the provisions at this stage; and
- That a similar model for insolvency resolution as applicable to the corporate debtor must be applicable to the personal guarantors too and right to adjudicatory hearing must be given to the guarantors prior to the appointment of resolution professional.
The Full Bench of Hon’ble Supreme Court dealt with the submissions of respective parties and upheld the constitutionality of the provisions under challenge by observing and concluding:
- That no judicial adjudication is either contemplated or involved from Sections 95 to 99 of the Code;
- That role of the resolution professional is merely facilitative and recommendatory in nature;
- That reading the requirement of adjudicatory function under Section 97 (5) of the Code would be to re-write the statute, which is out of the scope of judicial review;
- That resolution professional is only entitled to seek information which is strictly relevant to the examination of the application for IRP;
- That the nature of natural justice is liable to vary with the exigencies of the situation;
- That in the present case, there is no violation of principles of natural justice as the debtor is not deprived of an opportunity to participate in the process of the resolution professional’s examination of the application;
- That Adjudicating Authority must observe principles of natural justice while accepting or rejecting the application under Section 100 of the Code; and
- That the provisions under challenge do not violate Articles 14 and 21 of the Constitution of India.
Implications and Effects of the Dilip B. Jiwrajka Judgment
National Company Law Tribunal (“NCLT”) has received 2,289 cases pertaining to personal guarantees involving corporate debt of INR 1.63 lakh crore, according to the most recent data from the Insolvency and Bankruptcy Board of India (“IBBI”). Out of these, 282 have been accepted, and 21 of them have brought in INR 91.27 crore.
NCLTs have admitted 117 cases against personal guarantors in the first three quarters of Financial Year 2022-23, up from 28 cases in the entire Financial Year 2021-22 and nine cases in Financial Year 2020-21. During the first quarters of Financial Year 2022-23, 428 complaints were brought by creditors and lenders, demanding INR 32,765 crore in outstanding debts. There were 913 such cases in Financial Year 2021-22, and the claims made through the insolvency proceedings totalled INR 65,222 crore.
In light of the Dilip B. Jiwrajka ruling, it is anticipated that the IRP of personal guarantors will function effectively with ensured stability. It should be highlighted that the creditors possibly stand to benefit from the personal guarantors’ swift and effective insolvency resolution process. On the other hand, the filing of an IRP against personal guarantors may impact their credit standing and future ability to borrow money. The process of insolvency resolution and the associated consequences may have long-term effects on the creditworthiness and financial situation of the personal guarantor.
Moreover, it is not clear as to what all information can be sought from the personal guarantor under Section 99 of the Code and even the judgment seems to be silent on this aspect. The expression ‘relevant to the examination of the application’ can be interpreted in many ways and may not be of much help as it still offers a lot of room for the resolution professional to exercise his discretion and demand information of multiple sorts from the personal guarantors. Neither the Rules nor the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 offer much help in this respect. Therefore, it is imperative that certain specific guidelines and/or regulations in this regard is also formulated.
Evidently, the Ministry of Corporate Affairs took note of the NCLT’s concerns regarding the misuse of initiation of the IRP by personal guarantors to take advantage of the interim moratorium. To remove any perverse incentives to initiate IRP, amendment to Section 96 is being considered, which will make it inapplicable for personal guarantors. Certainly, if such a modification is possible, specific guidelines/regulations relating to the requisition of documents under Section 99 of the Code can indeed be added to enhance the efficiency, effectiveness, and clarity of insolvency procedures of personal guarantors.
 Dilip B. Jiwrajka v. Union of India, 2023 SCC OnLine SC 1530 (Dilip B. Jiwrajka)
 Comprising of Hon’ble Chief Justice of India Dr. D. Y. Chandrachud, Hon’ble Mr. Justice J. B. Pardiwala, and Hon’ble Mr. Justice Manoj Misra,
 The Quarterly Newsletter of the Insolvency and Bankruptcy Board of India, July-September 2023, available at https://ibbi.gov.in/uploads/publication/b4ce3516920836e9ff9b1e816137bf97.pdf.
 Invitation of comments from the public on changes being considered to the Insolvency and Bankruptcy Code, 2016, available at https://www.mca.gov.in/content/dam/mca/pdf/IBC-2016-20230118.pdf.