The insolvency regulator, IBBI, proposes to make it unequivocally clear that the submission or approval of a resolution plan for a corporate debtor under the IBC does not automatically release guarantors from their liability to repay the debt.
It now seeks to amend its CIRP Regulations to ensure that submitting a resolution plan does not prevent creditors from enforcing their rights against the personal guarantor (PG).
Insolvency law experts said this IBBI plan will likely provide legislative clarity, strengthen creditors’ positions, and boost recoveries from PG.
The Insolvency and Bankruptcy Board of India (IBBI) has released a discussion paper addressing, among other things, the “release of guarantees in a resolution plan.”
The last date for public comments through electronic mode is July 10, IBBI has said.
SC RULING
To clarify that approving a resolution plan does not automatically discharge a PG’s liabilities from an independent contract, the IBBI has followed the Supreme Court’s approach in Lalit Kumar Jain vs Union of India.
In the Lalit Kumar Jain vs Union of India judgment, the Supreme Court upheld the November 15, 2019 MCA notification enforcing the IBC’s provisions on personal guarantors’ insolvency. The court also ruled that approving a resolution plan does not absolve PGs from their obligations or extinguish their liability.
EXPERTS’ TAKE
Sushmita Gandhi, Partner, INDUSLAW, said that the case of Lalit Kumar is one of the many instances where judicial interpretation bridged the lacuna in the IBC, which is still a nascent law. “The proposal indicates that the IBBI is cognizant of such gaps and is attempting to bridge the same to avoid ambiguity relating to the position of release of guarantees,” she added.
Misha, Partner, Shardul Amarchand Mangaldas & Co., said the language of the proposed amendment raises concerns. “On a plain reading, it suggests that a resolution plan cannot prevent creditors from enforcing their rights against the guarantors of the corporate debtor. This should not be the case where the creditors have agreed to discharge the guarantor along with the corporate debtor,” she said.
Hari Hara Mishra, CEO, Association of ARCs in India, said that the IBBI proposal, if implemented, will be a shot in arm for creditors and a boost to improve recovery from the enforcement of guarantees. “This will reinforce the sanctity of contractual obligations, the backbone of a robust framework of credit culture,” he said.
Sumit Khanna, Partner, Deloitte India, said, “By prohibiting resolution applicants from extinguishing guarantees, this change strengthens creditors’ positions, promising a more efficient recovery process. With creditors recovering close to 2 percent of claims from PGs, this amendment is crucial for bolstering recovery.”
Vishwas Panjiar, Partner, Nangia Andersen in India, said that PGs remain liable for the guarantees they have provided. It is expected that the negotiations on personal guarantees will be more intense in the lending arrangements now, with lenders insisting for guarantees in every case and the promoters resisting the same, he added.
Anjali Jain, Partner at Areness Law Firm, said that the move would bring more recovery to creditors, as after resorting to resolution under the Code, creditors would be able to press against the personal assets of guarantors as well.
