Personal Guarantors under the Code: Section 95 and the Route to Recovery

When a company defaults, its lenders have commonly taken personal guarantees from its promoters or directors. For several years the Insolvency and Bankruptcy Code, 2016 dealt with companies only, and creditors pursued guarantors in the ordinary courts or before the Debts Recovery Tribunal. Since December 2019 the Code's provisions for personal guarantors to corporate debtors have been in force, and a creditor now has an additional route. This note outlines it. It is general information, not advice on a particular guarantee.

The provision and its scope

Part III of the Code deals with the insolvency of individuals and partnership firms. By a notification of 15 November 2019, effective 1 December 2019, the Central Government brought into force the provisions of Part III relating to personal guarantors to corporate debtors. The Supreme Court upheld the notification in Lalit Kumar Jain v. Union of India (2021), and held that the approval of a resolution plan for the principal debtor does not discharge a guarantor from its liability. Other individuals, such as sole proprietors and partners, are not yet covered unless a further notification says so.

The forum

Section 60(2) provides that where a corporate insolvency resolution process or liquidation is pending against a corporate debtor, an application for the insolvency resolution of its personal guarantor lies before the same bench of the National Company Law Tribunal. Otherwise, the application is made to the bench of the tribunal having territorial jurisdiction where the guarantor resides.

How a creditor begins

1. Application under Section 95. A creditor may apply, by itself or jointly with other creditors, for the initiation of an insolvency resolution process against the guarantor, on the basis of a default. The default must meet the minimum amount specified by notification, one crore rupees at the time of writing.
2. Interim moratorium. Under Section 96, from the date of the application there is an interim moratorium on legal proceedings in respect of the debt.
3. Resolution professional's report. A professional is appointed, examines the application, and submits a report within ten days (Section 99) recommending acceptance or rejection.
4. Admission. The Adjudicating Authority decides whether to admit the application within fourteen days of receiving the report (Section 100).
5. Repayment plan. The guarantor may propose a repayment plan to creditors under Section 105, and a meeting of creditors votes on it. If the plan is approved it is submitted to the tribunal, and if it fails the way may be open to a bankruptcy order under Section 121 and following.

The effect on other remedies

Once the application is admitted, a moratorium under Section 124 applies to the debts covered, and the guarantor's estate becomes subject to the process. The creditor should therefore consider the relative merits of the two routes. A suit on the guarantee or a claim before the Debts Recovery Tribunal can produce a decree against the guarantor. The Code's route aims at a collective resolution, in which all creditors participate, and it may take longer to yield payment. A creditor holding security from the guarantor has a further choice about whether to enforce it separately.

What the creditor should prepare

• The deed of guarantee, with the date, the amount covered and the conditions for invocation.
• The invocation notice and proof of delivery, and the guarantor's reply, if any.
• The record of the principal debtor's default and the amount outstanding, with the computation.
• Records of the guarantor's assets, as far as known, since the proposed plan and the estate depend on them.

The Code makes the guarantor's liability collective in practice. A creditor who has taken a guarantee should keep it in force, as discussed in the note on guarantees, and should consider the Code's route when the guarantor is a person of substance and the debt is large.