In this Leading Questions piece, Abhishek Kumar and Shubham Singh discuss the position of personal guarantors under the Insolvency and Bankruptcy Code, 2016.

Question: A personal guarantee is often seen as a secondary obligation. In practice, how accurate is this perception and who can initiate insolvency proceedings against a personal guarantor under the Insolvency and Bankruptcy Code, 2016?

Answer: Contrary to the popular belief, personal guarantees are not merely secondary obligations. Under Section 128 of the Indian Contract Act, 1872, a personal guarantor’s liability is co-extensive with that of the principal borrower. Under the Insolvency and Bankruptcy Code, 2016 (“IBC”), creditors can directly initiate proceedings under Section 95, and an interim moratorium under Section 96 applies in such case. It is incorrect to believe that action follows only after exhausting remedies against the borrower. Personal guarantees are treated as independently enforceable obligations, and thus, an action against a personal guarantor need not be preceded by an action against the main borrower.

Under the IBC, insolvency proceedings against a personal guarantor can be initiated before the NCLT, either by the creditor (banks, financial institutions, or any debt-owing party) under Section 95, or voluntarily by the guarantor himself under Section 94 if unable to repay the debt.

Question: Why has the insolvency process for personal guarantors evolved into a distinct and complex area despite specific provisions under the IBC?

Answer: The insolvency of a personal guarantor is a complex process as it lies between the individual liability and liability of a corporate debtor under the same ‘debt’. While CIRP is governed under Part II, the insolvency of a personal guarantor is governed under Part III of the Code. However, Section 60 confers the jurisdiction to adjudicate both, upon NCLT itself, which may lead to possible parallel proceedings. This overlap often creates practical challenges in timing, coordination, and recovery.

Question: What is the procedure for insolvency of a personal guarantor?

Answer: When a creditor files an application under Section 95 (or the debtor himself under Section 94), all legal actions against the debtor are immediately paused in terms of Section 96 (interim moratorium). A Resolution Professional is then appointed under Section 97 to review the case and submit a report, after which the NCLT decides to admit or reject the application. Once admitted, a permanent 180-day moratorium begins and creditors are invited to file their claims through public notice (Section 102). The debtor, thereafter, submits a repayment plan, which, may or may not be placed before the creditors. The NCLT, thereafter, shall approve or reject the plan subject to conditions specified under the Code. If approved, the plan shall be implemented and a discharge order would be passed, otherwise, the debtor or creditor shall be entitled to file for bankruptcy.

Question: Does the current framework adequately balance the rights of creditors and personal guarantors?

Answer: The IBC attempts to balance creditors’ and guarantors’ interests by granting creditors direct enforcement powers, while at the same time, providing guarantors procedural safeguards, such as examination by Resolution Professional, before any formal action. However, practical challenges persist, including overlapping debts, guarantors' right to recover from the principal borrower, and uncertainty over how corporate resolution plans affect guarantor liability.

Question: Has judicial pronouncements under the IBC settled the legal position concerning personal guarantors, or do parties continue to encounter challenges?

Answer: Judicial intervention has played a significant role in clarifying the position of personal guarantors. In Lalit Kumar Jain Vs. Union of India - (2021) 9 SCC 321, Supreme Court upheld the liability of personal guarantors under the IBC and affirmed their close linkage with CIRP. The Court clarified that mere approval of a resolution plan for a corporate debtor does not automatically discharge a personal guarantor.

However, one key drawback of the above process is the overlap of proceedings under Section 60, to be initiated against a corporate debtor and a guarantor which may lead to confusion and delays. There is also an uncertainty with respect to guarantor’s liability even after approval of a resolution plan. A personal guarantor may be stuck under IBC till the time the resolution plan approved with respect to the corporate debtor is not implemented. This may also cause unnecessary harassment for a personal guarantor. From a creditor’s perspective, the statutory right to initiate insolvency proceedings independently against a personal guarantor constitutes a significant safeguard provided under the IBC.

Abhishek Kumar is a Partner and Shubham Singh is an Associate at Singhania & Partners.