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INSOLVENCY LAW IN INDIA, 2016

PERSONAL INSOLVENCY LAW UNDER INSOLVENCY AND BANKRUPTCY CODE 2016?

The Insolvency and Bankruptcy Code, 2016 aims to promote entrepreneurship, the availability of credit, and temporal solution of the insolvency of corporations, partnerships, and private individuals. The Code ensures that the interests of all the stakeholders are balanced during the process of resolution envisaged in the provisions.

Part III [sections 79 to 187] of the Code provisions for insolvency resolution and bankruptcy of persons and partnership firms. For this purpose, it breaks down the person into three categories, namely,

(i) personal guarantors (PGs) to corporate debtors (CDs),

(ii) partnership firms and proprietorship firms,

(iii) other individuals.

This allows the implementation of individual insolvency considering the wider impact of these provisions. As a first step in implementing Part III of the Code, the Government has notified the commencement of provisions relating to insolvency and bankruptcy processes for PGs of CDs, with effect from 1st December 2019.

It has notified rules and regulations for the same. Before the aforementioned notification, the right to continue or initiate the IBC Code against personal guarantors was exclusively in the hand of the Debt Recovery Tribunal (DRT).

With this notification, the right & jurisdiction was also given to banks, thereby greatly increasing the personal risk and liability borne by the guarantor, as well as the increased liability of the guarantor. Further, insolvency proceedings can be initiated by the creditors against all individuals who stood as personal guarantors.

Although this move was celebrated by a number of creditor groups, it was directly criticized & examined by a large number of people who have worked as guarantors in various capacities for various companies & businesses.

Working Group

The Insolvency and Bankruptcy Board of India (“IBBI”) constituted the Working Group to recommend the strategy and approach for implementation of the provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”) dealing with insolvency and bankruptcy in respect of guarantors to corporate debtors i.e. personal guarantors.

Therefore, personal guarantors and individuals who are partners in partnership firms carrying out economic activities may require a somewhat different treatment for economic reasons, the number of creditors involved, the personal and financial guarantees of the guarantors, if any, and other relevant factors involved.

The Working Group recommends that the Central Government may consider amending the Code to designate the head of district judiciary, by whichever other name called, as the Adjudicating Authority in place of Debt Recovery Tribunal.

Once provisions of Chapters III to V, Part III of the Code are notified excluding Section 179 to 183, it would be clear that the Code would only become operational concerning subjects who provided personal guarantees to debtor companies and following the intention of the regulations, are subject to the jurisdiction of the judicial authority, that is to say, to initiate proceedings before the Debt Recovery Court against individuals and partnerships engaged in entrepreneurial activities.

Articles 179A & 183 of the Code must be made operational and implemented, excluding their application to natural persons and partnerships that do not carry out commercial activities. The resultant effect of the above is that the Presidency Town Insolvency Act, 1909, and Provincial Insolvency Act, 1920 would have to be repealed in phases.

Section 243 of the Code provides for the repeal with a saving clause for which the judgment is pending based on what has been predicted, both statutes will continue to govern under said two statutes and be heard and ordered by the courts or tribunals concerned, as if the said acts had not been repealed.

LANDMARK JUDGEMENT

In the case of Lalit Kumar Jain v Union of India & Ors, The Hon’ble Apex Court upheld the provisions of the Insolvency and Bankruptcy Code relating to the insolvency of personal guarantors which entered into force in 2019. The Honorable Supreme Court noted that the amendment to include Section 2(e) and the amendment to Section 60(2) were intended to strengthen the CIRP.

 

The Court found that different provisions of the IBC had been applied at different times by the governing authority according to IBC’s purpose for a provision and the priority assigned to it. It was noted that the MCA notification had been issued within the scope of the power conferred by Parliament and in its valid exercise.

The Court held that the notification aimed at better implementation of the provisions of the IBC. The court held the opinion that the move by the Central government aimed at bringing personal guarantors who in most cases are promoters, directors, etc. within the framework and mechanism of the IRP.

So far, these parties have remained outside the scope of the IRP and have not been audited, although in most cases they were responsible for the insolvency.  It was further held that the mere approval of a resolution plan will not ipso facto discharge a guarantor from his or her liability.

The release or extinguishment of a principal borrower from the debt he owes to his creditor, by an involuntary process, e.g. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability.

The Supreme Court in Lalit Kumar Jain vs. Union of India and others held that the notification dated November 15, 2019, is legal and valid.

The Code read with the specified rules and regulation together provide for the procedure for insolvency resolution and bankruptcy process for PGs to the CDs.

An application for the insolvency resolution process may be filed before the AA on default of Rs. 1000 by a Personal guarantor himself or through a Resolution Professional (RP) (in Form A of IIRP Rules) in respect of default of debt, other than an excluded debt under Section 94 or an application can also be initiated by creditors, either individually or jointly, or through RP.  However, before starting the PIRP, the creditor must serve the demand notice on the Debtor giving 14 days to pay the debt.

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