The Insolvency and Bankruptcy Code (IBC), 2016, marked a significant overhaul of India's insolvency regime, notably extending its reach to encompass personal guarantors. This expansion has profound implications for individuals who guarantee corporate debts, making it essential to understand their liability and rights within IBC proceedings.
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Understanding Personal Guarantors
A personal guarantor commits to fulfilling a borrower's obligations if the latter defaults. Traditionally, this role facilitated corporate borrowing by adding a layer of security for lenders. However, the introduction of IBC has shifted the landscape, placing personal guarantors in a position where they must be acutely aware of the legal implications of their commitments.
Pre-2019 Judicial Landscape
Before significant regulatory changes in 2019, India's Supreme Court in cases like "State Bank of India vs V. Ramakrishnan" clarified that the IBC's moratorium provisions are not for personal guarantors and it would not absolve them of their liability. This stance underscored a clear delineation between the treatment of corporate debtors and personal guarantors under the IBC, highlighting the individual responsibility that guarantors bear.
Transformative Amendments in 2019
The amendment on November 15, 2019, was a turning point, explicitly bringing personal guarantors under the IBC's purview. This change allowed creditors to initiate insolvency proceedings directly against personal guarantors, aligning with the IBC's goal of streamlining and unifying the insolvency process. The amendment underscored the intention to treat personal guarantors distinctly from other individual or corporate entities, streamlining the resolution process for both the corporate debtor and their guarantors.
Implications for Personal Guarantors
With these amendments, personal guarantors now face the real possibility of insolvency proceedings against them, potentially leading to the liquidation of personal assets. It's a development that necessitates a thorough understanding of the risks involved in providing personal guarantees. Guarantors must now navigate these waters carefully, given the enhanced legal mechanisms for recourse available to creditors.
Supreme Court's Stance on Guarantor Liability
The landmark ruling in "Lalit Kumar Jain vs. Union of India" further gave a clarification on the position of personal guarantors under the IBC. The Supreme Court affirmed that the approval of a resolution plan does not absolve personal guarantors of their liabilities. This ruling reinforces the notion that personal guarantors hold an independent obligation, unaffected by the resolution or liquidation of the corporate debtor's debts.
It also highlighted the legislative intent to treat the insolvency of corporate debtors and their personal guarantors in a unified manner before the same adjudicating authority, emphasizing the comprehensive approach of the IBC towards insolvency resolution.
Current Challenges and Pending Litigation
Despite these clarifications, the constitutional validity of Chapter III of the IBC, which deals with personal guarantors, is still under scrutiny in the Supreme Court. Cases like "Dilip B. Jiwrajka Vs. Union of India" are pivotal, as their outcomes could significantly impact the legal framework governing personal guarantors under the IBC.
Conclusion
The inclusion of personal guarantors under the IBC regime represents a significant shift, highlighting the need for guarantors to proceed with caution. It underscores the importance of understanding the full extent of liabilities that come with providing personal guarantees for corporate debts. As the IBC continues to evolve, further jurisprudence will undoubtedly clarify the scope of rights and obligations of personal guarantors, ensuring a balanced approach to insolvency proceedings that considers the interests of all parties involved.
Corporates, while taking loans, may have furnished the details of their directors as personal guarantors. During the Insolvency or Liquidation process, the banks may invoke this guarantee to recover their amounts.
Amongst the various insolvency services offered by Master Brains Consulting, one is identifying the right counsel for preparation, drafting, and representation of the case of the personal guarantors of loans undertaken by the corporate. By availing our legal services Corporate Guarantors can understand what are their rights and obligations as Corporate Guarantors and accordingly represent their case confidently before authorities.
The amendment to the Insolvency and Bankruptcy Code, 2016, (“IBC”) dated March 13, 2020, deemed to be in effect from December 28, 2019 (“IBC Amendment”), provides relief to homebuyers by considering homebuyers as ‘financial creditors’ and allowing them to initiate the corporate insolvency resolution process (“CIRP”) under the IBC against the developer.
This article analyses the remedies available to homebuyers against the developers of a real estate project in context of the aforesaid IBC Amendment and vis-à-vis the Real Estate (Regulation and Development Act), 2016.Precedence of proceedings under RERA and the IBCWhile the homebuyers may initiate CIRP against the developers, in view of the IBC Amendment, however, CIRP may be initiated only if the application is filed jointly by not less than: (a) 100 (one hundred); or (b) 10% (ten percent) of the total number, of such allottees under the same real estate project, whichever is less.Further, when any proceedings are initiated and subsequently admitted under the IBC, then the adjudication process envisaged under Real Estate (Regulation and Development Act), 2016 (“RERA”) may be done away with.
However, the application as filed by the allottee before the National Company Law Tribunal (“Tribunal”) under the IBC (“Application”) should meet the eligibility criteria as laid down under the IBC and the allottee must be able to prove that the developer has defaulted[1].
The allottees should initially make out an application demonstrating a “default” which shall include amounts due and payable to the allottee.Tatva Legal, Hyderabad has an experienced team of lawyers who, amongst other services, advise on transactions covering multiple practice areas such as insolvency and bankruptcy, real estate transactions including RERA compliance and title due diligence, and legal advisory for financing related activities specific to real estate projects.
With the advent of insolvency and bankruptcy code, every business should take ahead the initiative to manage insolvency.
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Since then, the Modi government is working towards recovering the loans and stabilizing the banks.
One such major step was the Insolvency and Bankruptcy Code (IBC) passed in 2016.
Broadly two methods are seen- Resolution and Liquidation.
Broadly, the IBC has been much effective than any of the previous loan recovery mechanisms like Debt Recovery Tribunals, Corporate Debt Restructuring Scheme, Joint Lenders’ Forum, S4A, etc.
The quarterly newsletter released by the Insolvency and Bankruptcy Board of India for the quarter ending on 30th September shows a great detail about the work going on under IBC.
Operational Creditors are those who have lent to the defaulting company for covering operational expenses like salaries, dues, purchasing of raw materials, inventory management and sales.
If you have decided to file for bankruptcy protection, need lawyers in India who experts in insolvency and bankruptcy law, the Consult with Ahlawat & Associates, who is one of the best Legal firms in India.
https://baneylaw.com/preparing-bankruptcy-attorney-consultation/They ask such question to identify what bankruptcy chapter in the Bankruptcy Code will give you the debt relief you want, whether it’s Chapter 7 13
