First, it applied the provisions of Part II of the OCA on the liquidation of business bankruptcies. It also applied certain related provisions of Parts IV and V of the CIB relating respectively to the accelerated procedure for the liquidation of business bankruptcies and to the voluntary liquidation of persons. It should be noted that the general concept of security derives from section 126 of the Indian Contract Act 1872, which states that the collateral agreement consists of 3 parties, namely the debtor, the creditor and the guarantor in such a contract, when a debtor fails to repay the debts he owes to the creditor. It is the responsibility of the guarantor to pay the debt. In such a situation, the creditor does have the right to open insolvency proceedings against the personal guarantor if the debtor has not paid its debt to the creditor. A personal guarantor is a person who guarantees a debtor under a guarantee agreement. Until 2016, in the event of default by a debtor company, creditors had the option of recovering their contributions from personal guarantors by (i) bringing proceedings in the civil courts under the Presidential Cities Insolvency Act of 1909 or the Provincial Insolvency Act of 1920; (ii) bring a civil action to enforce its contractual remedies (iii) contact the Debit Recovery Tribunal under the Securitisation and Rebuilding of Financial Assets and Enforcement of Interest in Securities Act 2002. For the purposes of Article 5(22) of the IB Code, `personal guarantee` means a natural person who guarantees the debtor undertaking in a contract of guarantee. In Lalit Kumar Jain v. Union of India, the Supreme Court upheld the opinion of 15. November and ruled that personal guarantors, although part of the broader group of individuals, should be treated differently given their inherent relationship to corporate borrowers. The court also held that the approval of a resolution plan and the discharge of the borrower`s debt through involuntary, i.e.
ipso facto in insolvency proceedings, do not relieve a personal guarantor of its obligations under the independent collateral agreement. Now, this decision has opened up a new dimension because the Part II process and the Part III provisions for proceedings against personal guarantors and commercial debtors have been legally merged. Let us understand that the procedure for resolving personal insolvency is set out in Part III of the Code. Insolvency and bankruptcy proceedings may be initiated against a personal guarantor either by a creditor or by a resolution professional under section 95 of the OCC, by filing an application with the NCLT. The steps to initiate insolvency proceedings against a personal guarantor are as follows: In accordance with Rule 3(e) of the Insolvency and Bankruptcy (Application to the Judicial Authority for Insolvency Resolution Proceedings of Personal Guarantors for Corporate Debtors) 2019 (the «Rules»), a guarantor means a debtor who is a personal guarantor for a debtor for which the debtor creditor has invoked security and which: is not paid in whole or in part. Insolvency proceedings against personal guarantors under Part III of the IBC are opened by an application under Articles 94 and 95 of the IPC in the following scenarios: Yes, the CIRP of a debtor and the insolvency and bankruptcy of a personal guarantor for such a debtor enterprise can take place simultaneously. The framework for insolvency proceedings against personal guarantors under the IPC does not provide for recovery in cases of tax evasion or fraudulent transactions, although such provisions exist for debtors and in the event of bankruptcy of natural persons. There is concern that assets may be misappropriated before the settler takes custody of the personal guarantor`s assets.
In the absence of a framework to recover them, the personal guarantor`s estate would be eroded by misappropriated or skimmed assets. As soon as the application is accepted, the moratorium on the guarantor automatically comes into effect. In order to achieve these objectives, the central government, by notice of 15 November 2019, adopted provisions on personal guarantors (PG) for debtor companies (CDs) with effect from 1 December 2019. Subsequently, several petitions were filed in various high courts challenging the above-mentioned notice and the associated rules and regulations. Due to the majority of written petitions filed in various supreme courts, the Bankruptcy and Bankruptcy Bureau of India has asked the Supreme Court to deal with the legal issue holistically. In addition, Paragraph 100(4) of the ZPO determines whether the guarantor`s application for insolvency is rejected because the guarantor made such an application with the intention of misleading the creditors or the regulatory committee. That refusal decision states that the guarantor`s creditors have the right to apply for bankruptcy within the meaning of Chapter IV of the Code.