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DAILY NEWS ANALYSIS

  • 22 May, 2021

  • 15 Min Read

Personal guarantors liable for corporate debt

Personal guarantors liable for corporate debt

Insolvency and Bankruptcy Code, 2016

  • It deals with debt default of companies and limited liability entities, partnership firms and individuals.
  • It was based on T K Vishwanathan Committee on Bankruptcy Law Reforms Committee (BLRC) in 2014.
  • It proposes a framework to ensure early detection of stress in a business, initation of the insolvency resolution process by debtor, financial creditor or operational creditor; liquidation of unviable business and aboiding destruction of value of failed business.
  • The Code separates commercial aspects of the insolvency proceedings from judicial aspects.
    • IPs will deal with commercial aspects such as affairs of corporate debtor, committee of creditors.
    • Judicial issues will be handled by proposed Adjudicating Authorities (NCLT/DRT).
    • ‘Information Utility’ is created which would store financial information in electronic databases.
  • Insolvency and Bankruptcy Board of India (IBBI) is set up.
    • IBBI is a unique regulator i.e. It regulates both professions and transactions.
    • It has regulatory oversight over Insolvency Professionals (IPs), IP Agencies (IPA) and Information Utilities (IU).
    • It writes and enforces rules of corporate insolventcy, corporate liquidation, individual insolvency and individual bankruptcy under IBC.
    • IBBI is responsible to implement the IBC and amend laws for insolvency resolution of Corporate persons, partnership firms and individuals in a time bound manner for maximization of valuation of assets of such person.
    • To promote entrepreneurship, credit availability and balancing the interest of all stakeholders.
    • So far, IBBI has produced 3 sets of regulations: IPs; IPA and bye laws and Governing board for IPAs.
  • The Code also provides a fast track insolvency resolution process for corporates and LLPs. This will be an enabler for start-ups and SMEs to complete the resolution process in 90 days (extendable to 45 days in deserving cases).
  • The Code also addresses the cross border insolvency with a detailed framework soon.
  • When a corporate entity defaults on its debt, control shifts from shareholders/ promoters to Committee of Creditors (CoC). CoC have 180 days to evaluate the case (90 days extendable).
  • IBC has amended India's Corporate insolvency resolution process. Prior to the approval of resolution plan, the antecedants, credit worthiness and credibility of resolution applicants including Promoter are considered by Committee of Creditors.
  • IBC empowers operational creditors (workmen, suppliers etc.) also to initiate the insolvency proceedings upon non-payment of dues.
  • During waterfall (liquidation) Financial debts owed to unsecured creditors have been kept above the Government’s dues..
  • Recently India amended IBC and prohibited near relatives, their CA, Promoters in Bidding process during Insolvency.
  • Even RBI allowed ECB for re bidding under IBC.
  • RBI allowed faulty organizations to bid for their subsidiary organization if they pay interest over loan in which default is taken place.
  • IBC was spearheaded by MoF but now from 2016, the administration is transferred to Mo Corporate Affairs.
  • IBC Amendment, 2019 =
    • Time bound resolution, voting rules for financial creditors
    • Homebuyers as creditors. Can initiate proceedings.
    • 330 days deadline, Creditors who voted against majority can receive minimum liquidation value, Resolution plan to be binding on all.

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021

  • Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 promulgated on 4th April, 2021 provides for pre-packaged insolvency resolution process (PPIRP) for corporate debtors classified as micro, small and medium enterprises.
  • The Insolvency and Bankruptcy Board of India notified the Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021 (PPIRP Regulations) today to enable operationalisation of PPIRP.
  • The PPIRP Regulations detail the Forms that stakeholders are required to use, and the manner of carrying out various tasks by them as part of the PPIRP.

These provide details and manner relating to:

  1. Eligibility to act as resolution professional, and his terms of appointment;
  2. Eligibility of registered valuers and other professionals;
  3. Identification and selection of authorised representative;
  4. Public announcement and claims of stakeholders;
  5. Information memorandum;
  6. Meetings of the creditors and committee of creditors;
  7. Invitation for resolution plans;
  8. Competition between the base resolution plan and the best resolution plan;
  9. Evaluation and consideration of resolution plans;
  10. Vesting management of corporate debtor with resolution professional;
  11. Termination of PPIRP.

What is the news? Lenders can initiate insolvency proceedings against personal guarantors for Corporate debt

  • The Supreme Court upheld a government move to allow lenders to initiate insolvency proceedings against personal guarantors, who are usually promoters of big business houses, along with the stressed corporate entities for whom they gave guarantee.
  • In a judgment which will ring loud and clear across the business community, a Bench of Justices L. Nageswara Rao and S. Ravindra Bhat held that the November 15, 2019, government notification allowing creditors, usually financial institutions and banks, to move against personal guarantors under the Indian Bankruptcy and Insolvency Code (IBC) was “legal and valid”.
  • The court said there was an “intrinsic connection” between personal guarantors and their corporate debtors.
  • Justice Bhat, who authored the 82-page verdict, said it was this “intimate” connection that made the government recognise personal guarantors as a “separate species” under the IBC.
  • It was again this intimacy that made the government decide that corporate debtors and their personal guarantors should be dealt with by a common forum — National Company Law Tribunal (NCLT) — through the same adjudicatory process.
  • In this context, Justice Bhat referred to how the November 2019 notification had not strayed from the original intent of the IBC. In fact, Section 60(2) of the Code had required the bankruptcy proceedings of corporate debtors and their personal guarantors to be held before a common forum — the NCLT.
  • “The adjudicating authority for personal guarantors will be the NCLT if a parallel resolution process is pending in respect of a corporate debtor for whom the guarantee is given,” Justice Bhat noted.

Source: TH


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