Personalising The Personal Guarantee Regime

The Insolvency and Bankruptcy Code, 2016(“IBC/CODE”) is not only a unified framework for resolving financially distressed entities, but also provides a framework for enforcement of personal guarantors. In Dilip B. Jiwrajka v. Union of India, the Supreme Court upheld the validity of initiating bankruptcy proceedings against guarantors, reaffirming the enforceability of personal guarantees despite defaults by companies. From then on, the Creditors have been given, a sort of, Statement of Practice, to simultaneously proceed against the personal guarantors for maximum recoveries, but this more likely used as a restraint measure, in context of traditional Indian society embargoes.

Interestingly, recent trends like Reliance Naval, HNG etc. indicate that creditors, in various cases are inclined to sell off the personal guarantees or assign the personal debt of guarantors during the pendency of proceedings. Few cases like Ujaas energy, Shivaji Cane processors etc. even suggest that creditors scout for one time recovery through the resolution mechanism under the Code and are interested in clubbing the personal guarantees in the asset pool for better and instant price discovery. Since the intent of the Code and relevant provisions were refuted here, IBBI has suggested the elimination of such cumulative bargains.

Though the creditors could realise only 2.16 per cent against the claimed amounts, but the number each quarter is growing with the hope that these meagre figures would soon be inflated. This is possible if the underlying causes of such figures are identified and the same may be done by studying the trajectory of each legal point involved.

The National Company Law Tribunals (NCLTs) across India have tackled numerous complex issues concerning the insolvency of personal guarantors leading to significant jurisprudential developments and with implementation of such key takeaways, not only the figures of recoveries would whoop high but also the faith in the insolvency and contractual agreements would be reposed. The Creditors with minor tweaks in their enforcement actions like ensuring fresh service of personal guarantee invocation, revisiting of existing guarantee agreements, engaging in periodical revival of guarantees when principal terms are materially altered etc. could witness substantial positive impact in legal proceedings. Even in consortium documents or Security Trustee Agreement, clauses indicating the tenability of individual action of a lender against the personal guarantor, in the event of default, may be specifically incorporated and this clause may then be timely invoked for the best interest of the creditor.

The limited jurisprudence reveals that debt acknowledgement by the corporate debtor would be tantamount to debt acknowledgement by personal guarantor and this doctrine of relatability has helped creditors in various cases. Further, number of cases have affirmed various propositions in favor of creditors like debt restructuring to not to absolve guarantor’s liability, fresh period of limitation to accrue from the date of recovery certificate issued, single application to be filed against the single guarantor etc.

The guarantors, finding a no escape zone, have often seen to be tantalizing the provisions by filing simultaneous applications for initiating resolution proceedings against themselves for seeking the benefit of interim moratorium. The impact of the same would thus, halt or suspend the pending proceedings with respect to any debt against them as the sweet honeymoon period commences instantly on the filing of application. Even the two creditors who have initiated the parallel proceedings against the single guarantor often land up in a fix, while the guarantor finds a safe harbor in the said clash of proceedings. Few of such relevant provisions require judicial scrutiny as the beta phase of individual insolvency is underway and alignment of all diverse opinions is warranted.

To conclude, Since the code has been hailed as a creditor centric one, it is up to the creditors to bring the best out of it. The ball of conflicting legal issues would be rolled down soon by judiciary, but the creditors must navigate their own recovery strategy under the Code. The recommendations in terms of proper documentation, identification of key guarantors/assets, due diligence, timely invocation etc. would certainly fine tune the existing legal impediments paving the way for maximised recovery. Even suitable internal controls or effective procedural checks would ensure bright prospects from a legal tangent and the preamble objective of the Code would be facilitated with such minor tweaks.