A statutory gap in the personal guarantor insolvency framework under The Insolvency and Bankruptcy Code, 2016 - Part II

In practice, the PGIRP requires longer than 180 days, i.e., the maximum duration of moratorium U/s. 101 for completion of the entire process, including collation, verification, and admission of claims, preparation of the repayment plan, conduct of CoC meetings, and approval or rejection of the said plan by the NCLT. As per the data available on the IBBI website, the PGIRPs which have culminated in approval of a repayment plan have taken, on an average, well over one year. This indicates that, in most cases, the moratorium U/s. 101 would lapse long before the repayment plan is even placed before the NCLT for approval. The consequences flowing from such a disconnect are discussed hereinbelow:

Defeat of the collective mechanism envisaged by the Code through individual recoveries

First, and most fundamentally, the expiry of the moratorium prior to the completion of the PGIRP defeats the very objective which the Code was conceived to achieve, i.e., the resolution of insolvency in a structured and collective manner. Once the moratorium comes to an end, creditors are free to pursue their individual remedies. Thus, secured creditors, mostly banks and financial institutions, may initiate recovery proceedings and seek attachment or sale of assets under the relevant laws, including the SARFAESI Act, 2002 and the Recovery of Debts and Bankruptcy Act, 1993 (“RDB Act”). Furthermore, it is not uncommon for multiple creditors to hold security interests over the same asset of the PG. In such cases, the expiry of the moratorium would give rise to a race amongst such creditors to secure orders in respect of the asset.

Such fragmented recovery actions by creditors would also have an adverse effect on the PG. The IBC framework is intended to provide the PG with a pathway back to solvency through the restructuring of his debts. However, separate enforcement actions would require the PG to defend multiple proceedings before different forums and possibly across jurisdictions, effectively subjecting him to an uncoordinated liquidation of his assets. This would not only increase the financial burden on the PG but may also foreclose the possibility of a successful resolution altogether.

It may be pertinent to note here that while both Sections 14 and 101 of the Code are intended to facilitate insolvency resolution, the scope of protection under the two moratoriums differs significantly. While a CD continues to enjoy protection U/s. 14 throughout the CIRP, the moratorium protecting a PG ceases much earlier. Such differential treatment between a CD and a PG, both of whom fall within the insolvency framework under the Code, warrants reconsideration for all practical purposes, and the gap needs a fix sooner than later.

Frustration of the repayment plan and erosion of stakeholder confidence

Let us consider a scenario wherein the CoC, after conducting multiple rounds of negotiation, approves a repayment plan of the PG incorporating certain properties, and the same is pending before the NCLT for approval. Meanwhile, upon expiry of the moratorium U/s. 101 of the Code, an executing court orders attachment and sale of some of the most high-value properties forming part of the repayment plan. By the time the plan comes up for consideration before the NCLT, the assets forming its very foundation may already stand depleted.

In such a scenario, the entire exercise undertaken by the CoC in negotiating, formulating and approving the repayment plan becomes largely futile, resulting in wastage of time, stakeholder resources and commercial effort invested in the resolution process. The cumulative effect of such consequences is the erosion of stakeholder confidence in the PGIRP framework.

Unequal recovery of similarly placed creditors

The expiry of the moratorium may also lead to unequal recoveries amongst creditors. Once the moratorium lapses and individual enforcement begins, a creditor’s recovery is no longer governed by the equitable distribution framework under the IBC, but by the speed and forum of its enforcement proceedings. For instance, in Vistra ITCL (supra), the creditor’s claim of INR 385,00,00,000/- (Indian Rupees Three Hundred Eighty-Five Crore) fell within the original civil jurisdiction of the Delhi HC under the Commercial Courts Act, 2015. However, by contrast, a creditor holding a claim of INR 1,00,00,000/- (Indian Rupees One Crore) against the same PG would ordinarily file for execution before a District Commercial Court, where proceedings may move at a slower pace.

Therefore, despite being similarly placed creditors holding claims against the same PG, their recoveries would ultimately depend upon the relative speed at which their claims are enforced. Such individual enforcement outside the PGIRP framework also runs contrary to the principle of parity amongst creditors that the Code seeks to preserve through its unified insolvency resolution mechanism.

Legislative Amendment

Courts have consistently held that Section 101 does not permit extension of the moratorium beyond the stipulated 180-day period. The issues identified above can therefore be addressed only through legislative intervention by Parliament.

At this juncture, it is important to note that creditors’ concerns cannot be ignored. An open-ended moratorium could indefinitely delay the proceedings, and a PG may misuse it by avoiding submission of the repayment plan or refusing to cooperate with the RP while continuing to enjoy protection from enforcement proceedings. This concern is especially significant in the context of PGIRP, since, unlike the CIRP, the repayment plan is submitted by the PG himself, and not by independent resolution applicants.

Therefore, to balance these interests in line with the objectives of the Code, Section 101 of the Code may be amended to empower the NCLT to grant case-to-case extensions of the moratorium upon a reasoned application by the RP. The NCLT may grant extensions in cases where the RP’s progress reports demonstrate cooperation on part of the PG and progress in the resolution process. Conversely, where the NCLT finds that the PG is delaying the process, the moratorium may be permitted to lapse upon expiry of the statutory period.

Role of the stakeholders in the interim:

Until the law is amended, the burden of holding the framework together falls upon the stakeholders. The following measures merit consideration:

1.  RP:

   As custodian of the PGIRP, the RP has a key role in mitigating this lacuna. From the outset, the RP should:

    (i) Monitor the statutory timelines and structure the process so that milestones, such as collation and verification of claims, formulation of the repayment plan, and CoC meetings, are completed within the 120-day period under Regulation 19 of the PG Regulations, enabling the NCLT to pass an order on the plan before the 180-day moratorium expires;

   (ii) Apprise the PG and creditors, at the outset, of the applicable timelines and the consequences of the moratorium expiring before the plan is approved, to encourage timely participation and, where feasible, standstill arrangements; 

   (iii) Monitor recovery and enforcement proceedings initiated by creditors under the SARFAESI Act, the RDB Act, and other relevant laws, so that any contingency may be factored into the plan and disruption to the PGIRP may be minimized; and

   (iv) Where the CoC-approved repayment plan is pending before the NCLT and the assets it includes are threatened with attachment, sale or other enforcement measures, promptly seek expedited listing so as to obtain an order on the plan before the moratorium expires.

2. NCLT:

   After the claims’ submission timeline in the public notice expires, parties often seek condonation of delay by seeking recourse to the NCLT’s inherent powers under Rule 11 of the NCLT Rules, 2016. While dealing with such applications, the NCLT ought not to grant condonation as a matter of course, but only in exceptional cases where the applicant demonstrates circumstances that prevented timely submission of the claim. Adopting such a strict approach would foster discipline amongst creditors and preserve the time-bound nature of the process.

3. Creditors: 

   Creditors should actively monitor the public announcements published on the IBBI website and submit their claims to the RP within the prescribed timeline.

4. PG: 

   Since the repayment plan, i.e., the very foundation of the PGIRP, is required to be submitted by the PG himself, timely submission of the plan is essential. Such cooperation by the PG is also in his own interest as it improves the prospects of a collective resolution of his debts rather than exposing him to bankruptcy proceedings or multiple enforcement actions across forums.

Section 101 of the Code, as it presently stands, leads to the creation of a gap between the duration of the moratorium and the actual time required for completion of the PGIRP. While courts have rightly interpreted the provision in accordance with its plain language and declined to extend the moratorium beyond the statutory limit, the practical consequences that follow reveal a lacuna that needs to be addressed urgently.

The auto-expiry of the moratorium before the PGIRP concludes may cause fragmented recovery proceedings by creditors, frustration of the repayment plan, unequal recoveries amongst similarly placed creditors, and ultimately erosion of stakeholder confidence in the collective mechanism that the IBC framework contemplates.

There is a need for legislative intervention. An amendment to Section 101 empowering the NCLT to extend the moratorium in appropriate cases would address this gap, while a safeguard requiring the NCLT to satisfy itself as to the PG’s cooperation and the progress of the resolution process before granting any extension would prevent misuse by non-cooperative PGs and ensure that the moratorium is not used as an instrument for indefinite delay.

Until such reform is introduced, the responsibility of preserving the framework falls on the RP, NCLT, creditors, and the PG. While the measures outlined above may ease some practical difficulties, they cannot substitute a statutory amendment. Ultimately, preserving the credibility of the PGIRP will require aligning the duration of the moratorium with the resolution process itself.

About the authors: Palash Taing is a Partner and Shobhna Vijay is an Associate at TLH, Advocates & Solicitors.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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