Supreme Court's clarification on the legality of notifications related to personal guarantors (PGs) under the Insolvency and Bankruptcy Code in Dilip B. Jiwrajika v. Union of India and Others, REED 2023 SC 11575, significantly impacting creditors' recovery prospects in insolvency proceedings.
The Insolvency and Bankruptcy Code, of 2016 was established to efficiently resolve financial distress for both corporate entities and individuals within a specified timeframe to maximize value. Initially introduced in 2016 for corporate persons, the Code was later amended in 2018 to categorize individuals into personal guarantors (PGs) corporate debtors (CDs), partnership firms, proprietorship firms, and other individuals. This phased approach aimed to implement provisions for individual resolution.
Section 128 of the Indian Contract Act, 1872 states that the liability between a principal debtor and a surety is co-extensive unless specified otherwise. As corporate and personal insolvency proceedings are interconnected due to a common debt, the government, in November 2019, notified provisions related to insolvency resolution for PGs to CDs. This allowed creditors to simultaneously initiate proceedings against CDs and PGs, optimizing recovery and ensuring a coordinated approach to insolvency resolution.
The National Company Law Tribunal (NCLT) serves as the Adjudicating Authority for insolvency and bankruptcy proceedings of PGs to CDs. The process involves filing applications by the PG or creditor before the NCLT, which imposes an interim moratorium on legal actions related to the PG's debts. The Resolution Professional (RP), appointed by the NCLT, examines the application, submits a report, and the NCLT adjudicates whether to admit or reject it. Upon admission, the RP collaborates with the PG to formulate a debt repayment plan, subject to majority creditor approval.
Challenges to the rights and responsibilities of PGs under the IBC have been brought to various High Courts and the Supreme Court. In 2021, the Supreme Court upheld the legality of the notification related to PGs and clarified that approving a resolution plan for a CD does not discharge PGs' liabilities. Subsequent challenges to the procedural aspects were addressed in the matter of Dilip B. Jiwrajika v. Union of India and Others, REED 2023 SC 11575, where the Supreme Court upheld the constitutionality of provisions related to PGs, emphasizing the facilitative role of the RP.
This clarification by the Supreme Court has removed obstacles in insolvencies involving PGs, relieving lenders facing legal challenges. With over 2,467 insolvency applications filed against PGs, involving debts exceeding ₹1.71 lakh crore as of December 2023, the Supreme Court's guidance enhances creditors' prospects of recovering dues.
To enhance efficiency and transparency in insolvency resolution processes for PGs, the Insolvency and Bankruptcy Board of India (IBBI) has implemented measures such as allowing the same RP to manage both PG and CD processes, mandating RP to share recommendations with debtors and creditors, and requiring RP to conduct creditors' meetings for all PG cases.
Recognizing delays in the Corporate Insolvency Resolution Process (CIRP) due to litigation, the IBC prioritises debt restructuring for PGs during the insolvency resolution process, providing an opportunity for cooperation and debt discharge instead of immediate bankruptcy.
In summary, highlighting the coherence of simultaneous procedures for corporate debtors (CDs) and personal guarantors (PGs) with the legislative purpose of the Code, advocating for thorough resolution strategies, swift resolutions, and the optimization of value. Creditors are urged to capitalize on these advancements to unlock resolution possibilities and improve outcomes in insolvency proceedings.
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