Guaranteeing repayments and not just resolutions: Apex court upholds law on action against personal guarantors

The much-awaited approval from the top Constitutional Court in India is finally here, paving path for financial creditors to relay back on the fast-paced bad debts resolution track laid by the Govt’s masterstroke law – the Insolvency and Bankruptcy Code. The Supreme Court of India on 9^th November 2023 settled the cloud around the provisions of personal insolvency of Corporate Guarantors through Dilip B Jiwrajka vs. Union of India which had put to hold legal recovery action by various lenders in the country’s leading NPA cases. The Insolvency Code which started its journey in the country around the end of the year 2016 has had a stellar performance and with the latest judicial recognition, the Code may just establish itself the one-stop solution for corporate defaults in the country.

The Insolvency & Bankruptcy Board of India (the statutory body regulating and monitoring the Code in India) had notified the rules for action against personal guarantors to Corporates on 15^th November 2019, however, since the who’s who reached the Apex Court impugning their validity, the said provisions were shadowed by poor results. Statisticians at the IBBI reveal around a 300 pc. jump in recovery using the said provisions with a mere Rs. 23.10 crore recovered in first quarter of 2023 to Rs. 91.27 Crore in the second quarter even though there had been a status quo on all the pending proceedings due to the awaited decision in the Supreme Court case. With the provisions being held as constitutionally valid and the lenders in the country gearing up, these numbers can grow exponentially now, especially as a rhetoric number of around 2282 applications against personal guarantors were pending before different Company Law Tribunals across the country which may now proceed uninterruptedly.

On the hind side, multiple sections of the economy argue that with the upholding of the personal insolvency provisions, the role of the Code in terms of resolution would be pivoted as the said rules are heavily concentrated on recoveries. Conventionally, the resolution of stressed corporate entities has always been emphasised as the corporates enjoy a different legal entity whereas, the personal insolvency regimes are targeted for recovering of debts. The two are ultimately congruent for boosting the overall credit liquidity and ensuring credit enhancement for boosting the overall economy and facilitate easier access to capital for businesses and individuals.

From a creditor’s standpoint, undoubtedly, the provisions of personal insolvency would have a deterrent effect on the personal guarantors but the varied routes for efficient escapism in this deterring landscape may be explored by the erring guarantors including the creation of trust with the specific intention of avoiding the creditors, entering the benami transactions, misusing the interim protective/moratorium measures, non-cooperation with Resolution Professionals, improper alienation of personal assets, determination of priority of Code viz-a-viz other statutes where existing attachments/ decrees already issued/passed etc. Thus, the said routes, which are detailed herein would have to be either taken care of either by policy ramifications or through procedural buyouts.

However, a thorough analysis of the relevant provisions also highlights certain technical lapses which may be infested by guarantors under the personal insolvency provisions, vis-à-vis the provisions under the Corporate Insolvency Resolution Process (CIRP). Firstly, the interim moratorium kicks in the moment the application is filed, wherein all the existing or fresh proceedings in relation to debt are stayed or barred, creating it a safe haven for seeking shelter or breather from attachment under other statutes like PMLA, GST etc., especially the white collar crimes under the pretext of submitting frivolous or sham repayment plans without having an actual intention to repay or with the intention to immediately alienate the personal assets to third parties, trusts etc. for defrauding the creditors. For corporate entities, various judicial pronouncements have already created a homogeneous environment for different laws to act and to safeguard from probable misuse.

Secondly, another long road lies ahead in the difficulty in collation of information in respect of personal guarantors which might highlight with much gravity as the individuals might be inclined to delay the process due to the benefit of interim moratorium. Since due diligence/ information collation of any corporate entities is comparatively easier due to stringent rules of MCA, SEBI and other information/regulatory depositories, however, in Indian jurisdiction, discrepancies like limited disclosures by individuals, declarations on self-sworn basis, existence of parallel economy of black money, non-availability of comprehensive information in one portal, delays in responses from departments, non-cooperation by individuals, protracted litigations etc would warrant approach to individual departments like information, taxation or revenue departments etc. which can jeopardize the entire bankruptcy process. It would therefore be interesting to witness the evolution as stringent checks would have to be introduced at each place and seamless data collection processes would have to be ensured to calibrate the individual insolvency with Indian lines.

Thirdly, the identification of assets of individuals can pose a major challenge in the smooth implementation of the personal insolvency provisions as our country is quite infamous for its benami transactions. Also, understanding the siphoning off funds in fraud cases in individual books might become the iceberg as in these cases and might warrant additional skills on part of Resolution Professional or additional disclosure requirements, centralization of records or information by various authorities. Going forward, it is expected that a revamped statute to cure the menace of such transactions would soon be rolled out to aid and ease India’s world rankings especially, when India is committed to become a third largest economy by 2027. Further, there have been questions in legal fraternities regarding the multiple criteria of jurisdiction of forums for initiation of insolvency of an individual and there might be high probability of multiple proceedings before different jurisdictions in India’s vast geographical landscape. As far as initiation of CIRP is concerned, there is a single objective test for evaluation of jurisdiction of a corporate entity, and minor amendments or statutory tweaks may be required for this aspect of the Code.

To conclude, the judicial pronouncement is another step towards bringing the pragmatic cultural shift in how India is making it easy to do business with safeguarding the interests of creditors, supporting the bonafide entrepreneurs and at the same time penalising the unruly ones. The future implications and potential challenges are acknowledged but with the IBBI already having set landmark examples of promptness, the same would be addressed by judicial or legal framework as this is just an entry pass for doors of recovery through the personal insolvency route.

The author is Partner & Head (Insolvency & Restructuring Practice) at Areness. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect Firstpost’s views.

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