This article deals with the remedies that are available to a creditor Bank to enforce a contract of personal guarantee executed by a person guaranteeing dues of a corporate debtor, both under the Insolvency and Bankruptcy Code, 2016 and the Code of Civil Procedure, 1908.
The notification of certain provisions under Chapter III of the Insolvency and Bankruptcy Code, has armed the creditor bank with speedier and effective remedies against guarantors of a corporate debtor. By Notification dated 15th November, 2019 issued by the MCA, provisions relating to the Insolvency of Personal Guarantors of Corporate Debtors (“the Insolvency Rules”) and the Bankruptcy of Personal Guarantors of Corporate Debtors (“the Bankruptcy Rules”) were brought into effect from 1-12-2019.
Noticeably, the remedies available under the said provisions are in addition to and without prejudice to the rights of the creditor Bank under the relevant provisions of the said IBC against the corporate debtor.
A guarantor, who fails to discharge his obligation under the guarantee despite a demand for payment being made by a bank thereunder, will be treated as a “defaulting guarantor” and a debtor of creditor bank. Such a defaulting guarantor may also owe monies to several other creditors including foreign creditors.
Current scenario in recovery
India has been experiencing a problem of huge arrears of pending cases. The backlog of cases has resulted not only in the dilution of access to timely justice, but in cases of banks and financial institutions, it has led to stagnation in the recovery of legitimate dues. In India, due to crumbling infrastructure like lack of sufficient Judges, complex procedures, etc, courts and specialised tribunals established for banks and financial institutions have not been able to clear the logjam of cases which in turn has resulted in hampering the recovery process by banks and financial institutions.
In today’s legal scenario, a bank can initiate Insolvency Resolution Proceedings (IRP) against the corporate debtor (main borrower) and the said insolvency proceedings have to be completed within 180 days and may be extended to a maximum of 330 days subject to, of course, power of NCLT/NCLAT to extend the time for IRP in appropriate cases. In this regard, useful reference can be made to the order and judgment of the Supreme Court in the matter of Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta. However, in the case of defaulting guarantor of a corporate debtor, banks are posed with a challenge of selecting the right legal remedy as there are several choices and legal complications associated therewith. The choice of appropriate legal remedy would be crucial for the creditor bank to protect not only its legal rights but also recovery prospects.
Amongst other scenarios, there could be a situation wherein a foreign creditor of the corporate debtor would have already obtained a decree from a foreign court against the defaulting guarantor; which has been discussed below.
Foreign creditor armed with a foreign decree
By the time, an Indian creditor bank is able to get a decree against a defaulting guarantor in an Indian court or tribunal, a foreign creditor might be already armed with a foreign decree against such defaulting guarantor. Moreover, if such decree is passed by a court situated in any of the reciprocating countries covered by a treaty with India as contemplated under Section 44-A of the Code of Civil Procedure,1908, (as amended), such foreign creditor decree-holder would march ahead of the Indian creditor bank in the race for recovery from such defaulting guarantor. In such a scenario, the foreign creditor concerned would be entitled to proceed with the execution of the foreign decree and the Indian creditor bank, who might have initiated recovery steps by filing a suit against the defaulting guarantor, would be still awaiting a decree without which the creditor bank cannot initiate execution proceedings.
Under Section 73 of the Code of Civil Procedure, 1908 (as amended), in the matter of distribution of assets of a judgment debtor, barring secured creditors (who would enjoy priority in the matter of realisation of their securities amongst creditors), the judgment creditors would enjoy priority against non-decree holder creditors. In such a situation, any delay in obtaining a decree against the defaulting guarantor would subject the Indian creditor bank to a serious disadvantage as against the judgment creditors of reciprocating foreign countries covered by Section 44-A of the Code of Civil Procedure, 1908 (as amended).
Question before Indian Creditor Bank
The above circumstances would essentially compel an Indian creditor bank to take urgent immediate legal steps to protect its recovery prospects against the defaulting guarantor concerned. However, the question that would arise before such Indian creditor bank is “What should be the appropriate remedy both in law as well as from the viewpoint of business strategy.”
The answer to the above question would vary with the circumstances faced by such an Indian creditor bank and there could be two scenarios.
- 1st Scenario – Wherein the Indian creditor bank might have already initiated insolvency proceedings against the main borrower for whom the defaulting guarantor had extended a guarantee to the Indian creditor bank.
- 2nd Scenario – Wherein the Indian creditor bank has not initiated Insolvency proceedings and the claim of Indian creditor bank is above Rs 20 lakhs.
In the first scenario, the Indian creditor bank might have already initiated insolvency proceedings against the main borrower for whom the defaulting guarantor had extended guarantee to the Indian creditor bank. On account of the Notification, it is now permissible for a creditor bank to initiate insolvency resolution process against the defaulting guarantor under Sections 60(1), (2) & (4)of the Insolvency and Bankruptcy Code, 2016 after issuing a 14-day prior notice to such defaulting guarantor. If such a step is taken by the creditor bank, in the opinion of the author, an interim moratorium would commence on the date of the application filed in relation to resolution of all debts of such defaulting guarantor and shall continue till the date of admission of such application.
During such an interim moratorium period, any legal action or proceedings pending in respect of any other debts including decretal debts owed by such defaulting guarantor shall be deemed to have been stayed and other creditors of such defaulting guarantor including foreign decree holding creditors would not be able to initiate any legal action or proceedings in respect of any debt owed by the said defaulting guarantor.
Subsequently, a fresh moratorium shall commence on admission of the application for IRP (Insolvency Resolution Process) by NCLT under Sections 60(1) & (4) and Section 100 read with Section 101 of the said IBC and shall cease to have effect at the end of 180 days beginning with the date of admission of the application or on the date of adjudicating authority passing an order of repayment plan under Section 114 of the Code whichever is earlier, subject to of course, power of NCLT and NCLAT to extend the time-limit in suitable cases. As per Section 60(2) of the Code, an application inter alia relating to the insolvency resolution process or liquidation or bankruptcy of the personal guarantor (defaulting guarantor) as the case may be, can be filed before NCLT. Therefore, by virtue of the aforesaid section, in the opinion of the author, NCLT would be able to pass necessary orders of interim moratorium as contemplated.
At this juncture, it must be made clear that the decision of the Central Government to suspend the provisions of Sections 7, 9 & 10 of the Code for a period of six months by incorporating Section 10-A to IBC and proposed to be extended up to 1 year, would in no manner affect the provisions of Section 60 of IBC which contains provisions in respect of the insolvency resolution process (IRP) of personal guarantors of corporate debtors (against whom insolvency resolution process has already been initiated) read with the provisions of Chapter III of IBC which would mutatis mutandis apply in respect of the insolvency resolution process of personal guarantors of a corporate debtor.
In this regard, it may be clarified that as per Section 60(4) of the Code, NCLT shall have all the powers of the Debts Recovery Tribunal as contemplated under Part III of the Code for the purpose of sub-section (2) of Section 60 of the Code. Therefore, in the opinion of the author, inter alia by virtue of Sections 95 and 96 of the said Code, in relation to interim moratorium and moratorium as applicable under the said Part III of the Code (which deals with Insolvency Resolution and Bankruptcy for Individuals and Partnership Firm’s debt of debtors as contemplated under Part III of the said Code) would also be applicable mutatis mutandis to the debt of personal defaulting guarantor.
In the event of the creditor bank being required to file an application for bankruptcy of the said personal guarantor, as contemplated under Section 121 of the Code, an interim moratorium as contemplated under Section 124 of the Code shall operate from the date of making an application and shall cease to have effect on the date of the bankruptcy commencement. In the event of a bankruptcy order being passed under Section 126 of the Code, the estate of the bankrupt (including the defaulting guarantor) as contemplated under Section 128 of the Code shall vest in the bankruptcy trustee as provided under Section 154 of the said Code.
Subsequently, the said estate shall be divided amongst the creditors. Noticeably, in this situation, other creditors (save and except the secured creditors), including the foreign decree- holding creditors may not enjoy any special priority over the Indian creditor bank unlike in the case of execution proceedings before a civil court.
This, in the opinion of the author, would be definitely an advantageous situation for the Indian creditor bank. At this juncture, it must be stated that the remedies mentioned above under the aforementioned section of the said IBC available to Indian creditor bank are completely independent of and without prejudice to the rights of the creditor bank against the corporate debtor or any other resolution plan that may be approved by a Committee of Creditors including the creditor bank in respect of the debts of a corporate debtor.
It also needs to be mentioned that any concession that may be given by the creditor including the creditor bank to the corporate debtor concerned, or in other words, any haircut that may be taken by the creditor including the creditor bank in respect of the debt of the corporate debtor concerned would in no manner affect the claim of the creditor including the creditor bank as against guarantor of such corporate debtor. This legal position has been made clear by the judgments of various courts including the Supreme Court of India.
The law laid down by the Supreme Court in Committee of Creditors of Essar Steel India Ltd . v. Satish Kumar Gupta  (supra), (whereby the earlier judgment of the Supreme Court in State Bank of India v. V. Ramakrishnan was approved), it would be clear that in the absence of initiation of any insolvency resolution process/insolvency proceeding against the personal guarantor by the creditor bank concerned, the creditor bank would be entitled to enforce the personal guarantee against the said personal guarantor outside the insolvency resolution process of the corporate debtor. Further, as held by the Supreme Court in the aforementioned judgments and even in view of Section 31 of the Code, the personal guarantor is required to pay for debts due without any moratorium applying to save the personal guarantor.
In the second scenario, if the claim of Indian creditor bank is above Rs 20 lakhs, it would be open for it to file an Original Application before DRT (Debts Recovery Tribunal) constituted under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. However, if the claim of the Indian creditor bank is below Rs 20 lakhs, the only other option for recovery would be to file a summary suit before the civil court concerned and to seek a speedy disposal thereof. During the pendency of such original application or civil suit as the case may be, for justifiable reasons, the Indian creditor bank may seek attachment before the judgment, of assets of such defaulting guarantor or deposit/providing of sufficient security by the said defaulting guarantor.
At the same time, it must be stated that in the event of some other creditor initiating any insolvency resolution process (IRP) against such defaulting guarantor, during the period of interim moratorium or moratorium as the case may be in such IRP, the original application or the summary suit, as the case may be, filed by the Indian creditor bank would remain stayed to the disadvantage of the Indian creditor bank.
The new “Insolvency Rules” and “the Bankruptcy Rules” that have been brought into force so far as personal guarantors to corporate debtors who have defaulted are concerned, are a welcome initiative of the legislature as its spirit is aimed at improving the efficiency of recovery and maximising realisation of debts by banks and financial institutions. To ensure the success and effectiveness of the new amendments, it will be the duty of the courts and tribunals to ensure that the banks and financial institutions are not once again caught in a litany of proceedings and that recovery is not only a dream but a reality which takes place. These Rules are like a light at the end of a dark tunnel for banks and financial institutions and has lit a ray of hope in the way of banks and financial institutions who are looking for actual and meaningful recoveries.
Disclaimer: This article is for information purposes only. Nothing contained herein is or is intended as legal advice and readers should obtain legal advice before acting on any information or view expressed herein. The author makes no representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this article.
 The Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019
 The Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019
 2019 SCC OnLine SC 1478
 Notification dated 15.9.2019 issued by Ministry of Corporate Affairs brought into effect on 1.12.2019
 2019 SCC OnLine SC 1478
 (2018) 17 SCC 394