The Insolvency and Bankruptcy Board of India (IBBI) has come down hard on personal guarantors in its proposals to reform the resolution process, while it gave more powers to the resolution professional and eased the procedures for MSMEs.
The reform package is meant to bolster creditor rights and expedite corporate insolvency resolutions.
The centrepiece of the package is the clampdown on personal guarantors (PGs) of distressed companies, addressing a critical loophole in the existing framework.
Prior to the proposed changes, a worrying trend had emerged: resolution plans for insolvent firms were increasingly incorporating the release of personal guarantees, effectively allowing PGs to escape their financial obligations despite the company’s default.
This lacuna in the system is underscored by the dismal recovery rate of merely 2.16 per cent for creditors from PGs under the Insolvency and Bankruptcy Code (IBC), according to the IBBI.
Seeking to bridge this gap and strengthen the CIRP process, the IBBI has invited stakeholder feedback by July 10 on a series of proposals.
The cornerstone of the reforms is the proposal to ensure creditors retain the right to pursue PGs for their dues even after a resolution plan is approved.
This aligns with a recent landmark Supreme Court judgment in the case of Lalit Kumar Jain vs. Union of India. The court decisively clarified that the approval of a resolution plan does not automatically absolve guarantors from their liabilities.
“Instances where resolution plans have been approved for the release of personal guarantees without the consent of the bank or creditor holding such guarantee or securities, highlight a significant divergence from the Supreme Court’s position,” said Mukesh Chand, senior counsel at Economic Laws Practice.
“Such actions jeopardise the sanctity of the credit evaluation process, which relies heavily on personal guarantees and collateral securities. The release of these securities should not be subjected to the majority decision of the Committee of Creditors (CoC) but should solely be at the discretion of the relevant creditor or bank,” he said.
Another key proposal concerns the appointment of insolvency professionals (IPs). Under the revised framework, IP chosen by the highest-ranked financial creditor will be able to attend meetings of the Committee of Creditors (CoC) at an earlier stage. This facilitates more effective participation by creditors in the CIRP process, ensuring their voices are heard throughout the resolution journey.
For stressed micro, small and medium enterprises (MSMEs) with liabilities under ₹1,000 crore, the IBBI proposes streamlining the valuation process.
Currently, two or three registered valuers are required to assess fair and liquidation values. The new proposal suggests appointing only one valuer, thereby reducing costs and expediting the resolution process for smaller companies.
Legal experts have lauded the IBBI’s reform package. Sushmita Gandhi, partner at Induslaw, emphasises the alignment of the reforms with the Lalit Kumar Jain vs. Union of India case. “The case of Lalit Kumar is one of the many instances where judicial interpretation bridged the lacuna in the Code which is still a nascent law,” she said. “The proposal indicates that the IBBI is cognisant of such gaps and is attempting to bridge the same to avoid ambiguity relating to the position of release of guarantees.”
Vishwas Panjiar, partner at Nangia Andersen India, expects the reforms to usher in a stricter regime for guarantors. “As a result, personal guarantors remain liable for the guarantees they have provided,” he said. “This underscores the importance for personal guarantors to thoroughly assess the financial health and risks associated with the debtors for whom they are considering offering guarantees.”
Sukrit Kapoor, partner at King Stubb & Kasiva, said the reforms were a positive step. “This is another nail in the coffin for the guarantors in the cat-and-mouse game that personal guarantors have been playing with lenders since the introduction of the Code,” he said.
