Uncertainties in the Personal Guarantor Scheme in India

introduction

As part of the implementation of Bankruptcy and Bankruptcy Laws in India, the Ministry of Commercial Affairs published and promulgated the Insolvency Provisions of Personal Guarantors of Debtor Company by Notification dated November 15, 2019 . (“Notification“) [1]. According to this notification, the promoters and directors of a company who had acted as personal guarantors were served by the banks and financial institutions with formal notices proposing to initiate insolvency proceedings. In the Lalit Kumar Jain v Insolvency and Bankruptcy Board of India case, the Supreme Court upheld this notification. [2]

Arguments and decision

One of the main arguments was that a claim by a financial creditor against a guarantor would result in the double recovery of a claim. This argument was rejected, however, and it was determined that the financial creditor could only collect the outstanding debt from the personal guarantors that remained due and unrecovered from the primary borrower. The tribunal noted that there are sufficient protections against double recovery as provided by (a) the recognized principle of contract law that simultaneous recourse against co-debtors does not allow the obligee to recover more than the the full amount owed to it, and (b) the insolvency code itself.

Another problem was that if part of the debt is collected from the personal guarantor, the primary debtor will be liable to the guarantor for the outstanding debt. This idea was in conflict with the principle of double proof. In this regard, the Court stated that simultaneous actions against the principal debtor and the guarantor based on the same order do not constitute double evidence.

A critical review of the current regime

This historic case is quite significant because it gives creditors the possibility of simultaneously suing personal guarantors and companies for the recovery of their debts. This would ensure that the promoters as personal guarantors do not constitute an obstacle in the insolvency proceedings of the debtor company.

However, there are still several unresolved issues in the law regarding personal guarantors. This new regime concentrates power in the hands of banks and financial institutions, ensuring them a dominant position among lenders and borrowers. In this situation, the concern will be how cautious banks and FIs will be when dealing with simple defaults or defaults committed by micro-borrowers with minimal resources, especially when charging high rates. ‘compound interest. Another unanswered question is: what are the small default settlement options that banks may encounter in the normal course of business? If these rules are not used correctly, they will simply make it difficult for micro and small enterprises, as well as their managing directors, to grow their businesses. Considering the position of the current legal system, this can also have an influence on the risk-taking capacity of a company and its promoters.

In addition, the law on the initiation of simultaneous proceedings against the Company Debtor and the Individual Guarantor is still not clear. There is no clear decision on the issue of creating two conflicting legal regimes for insolvency proceedings against the personal guarantor. In Lalit Jain’s case, the state’s argument on the matter went unrecorded and the Supreme Court dealt with the matter using the word “maybe”, leaving the regime still ambiguous. In particular, no right of subrogation is granted to the personal guarantor.

Overall, the Supreme Court’s ruling is a small step in the right direction and is based on solid legal principles from the Insolvency Code, but there is still a long way to go for a more comprehensive regime for individuals. personal guarantors.

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