Centre Notifies Rules For Corporate Insolvency Resolution Process Of Guarantors To Corporate Debtors

Centre Notifies Rules For Corporate Insolvency Resolution Process Of Guarantors To Corporate Debtors

The Centre, through the Ministry of Corporate Affairs (MCA) has notified rules for corporate insolvency resolution process in respect of guarantors of corporate debtors, called the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

With the rules set to be enforced from 1st December 2019 itself, personal guarantors have also been brought within the fold of the Insolvency and Bankruptcy Code, 2016 (IBC). Certain provisions were notified by the MCA, in order to pave way for the new rules framed for insolvency resolution for guarantors of corporate debtor.

In notification no. S.O. 4126(E), the Centre has specified the provisions that have come into force from 1st December 2019. It is based on these provisions that the new rules for insolvency resolution for have been framed, only in so far as they relate to personal guarantors to corporate debtors.

Excluded assets

Certain assets of the debtor are to be excluded while considering for corporate insolvency resolution. The value of unencumbered personal shall not exceed one lakh rupees, and the value of unencumbered single dwelling unit owned by the debtor shall not take more than twenty lakh rupees (in the case of dwelling unit in an urban area), rupees ten lakhs (if the dwelling unit is in a rural area).

Application for initiating corporate insolvency resolution process

An application for initiating the corporate insolvency resolution process (CIRP) in respect of guarantors, either an application under section 94(1) of the IBC, along with Form B has to be attached. For initiating the process, the other way is for the creditors to initiate the corporate insolvency by preferring an application under section 95(2) along with Form C.

Confirmation or nomination of Insolvency Professional

If the application for initiating CIRP is made through a resolution professional (RP), the Adjudicating Authority has to direct the IBBI (Insolvency and Bankruptcy Board of India) to confirm within 7 days that no disciplinary proceedings are pending against the RP. Accordingly, the application is either accepted or rejected, in which case a new RP has to be appointed.

Copy of Application

The one initiating the CIRP has to provide a copy of the application to the RP within 3 days of his appointment, if not shared earlier. One copy has also to be submitted to the Board for the purpose of record keeping.

Filing of applications and documents

Till the time, rules of procedure to be followed specifically for personal guarantors are notified by the Centre, the procedure as per Part III of the NCLT Rules, 2016 or Debt Recovery Tribunal (Procedure) Rules, 1993 and Debt Recovery Tribunal Regulations, 2015, are to be followed.

Till the time the facility for filing the applications in electronic form is made available, the accompanying documents can be submitted in electronic form, in scanned, legible portable document format in a data storage device such as compact disc or a USB flash drive - acceptable to the Adjudicating Authority.

Withdrawal of application

The Adjudicating Authority may permit withdrawal of the application submitted under section 94 or 95, provided that such a request is made before its admission, on a request made by the applicant; of after its admission, if ninety per cent of the creditors agree to such withdrawal.

A previous amendment of 2018 to the Code to Section 14(3), by which moratorium under section 14 would not be applicable to personal guarantors, has been distinguished from the moratorium under section 101 of Part III of the IBC - "the reason why personal guarantors are not proceeded against under section 14, was the object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them."
This has also been discussed in the SC's earlier judgment in State Bank of India vs. V. Ramakrishnan, in which case it was held that all personal guarantors are outside the ambit of the IBC.

Click to Read the Notification of Provisions that have come into force w.e.f. 1st December 2019.

Click to Read the new rules pertaining to Corporate Insolvency Resolution of Personal Guarantors.