DEMYSTIFYING THE PROCEDURES AND CHALLENGES UNDER PART III: IBC

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 is the hallmark of path breaking legislation that
envisages resolution of corporate persons, partnership and individuals in an established time
frame. It attempts to maximize the value of assets, encourage entrepreneurship and makes an
effort to create balance between the interests of all the stakeholders. For this purpose provisions
for corporate insolvency resolution, corporate liquidation and also voluntary liquidation of
corporate debtors were introduced.

When such insolvency resolution process begins, especially corporate debtor with guarantors, on
various occasions invoke guarantee given to them on these debts. Under the Contract law, the
liability of principle debtor and the surety is separate and co-extensive in nature. Meaning
thereby that a creditor is not bound to exhaust his remedy against the principle debtor no matter
if the debtor has been sued or not for the said claim. ----------------------------------------------------
It goes together with the Second Amendment under Sub-Section (2) of Section 60 of the Code,
2016 which states that where a corporate insolvency resolution process or a liquidation process is
pending before the National Company Law tribunal (NCLT), application for insolvency
resolution or liquidation of corporate guarantor or personal guarantor will be filed before the
NCLT.

PRESENT STATE OF QUANDARY

With a proper mechanism in place for insolvency resolution of corporate guarantor, it is

acknowledged that individual guarantors and corporate debtor also share the same run where
proceedings concerning these two are immensely related to each other. To overcome the absence
of a regime for resolution of insolvency of personal guarantors, Central Government by the way
of a Notification dated 15th November 2019 bring into effect Part III of the Code, 2016 regarding
the Insolvency and Bankruptcy of Individuals and Partnership Firms pertinent to Personal
Guarantors of a Corporate Debtor.
Currently in the prevailing situation of a Covid-lockdown where the trouble lies with
transportation facilities, reduced workforce, ill functioned logistics & poor cash flow we observe
a rise in the number of insolvencies in the near term. The government has already enacted
Section 10 A under the Code, 2016 and suspended initiation of proceedings vis-à-vis companies.
With the primary objective of the above mentioned notification is to impart benefit to the debtors
and creditors with low income and assets, we must realize that the alternative to continue with
other recovery laws is still available. It nowhere bars insolvency process against personal
guarantors of the company therefore promoters or directors who provided personal guarantees to
the debtors can still be taken to the insolvency court by the way of this enactment.

This post focuses upon the procedural aspects of this enactment and further highlights the
lacunas present with the law.

APPLICATION FOR INSOLVENCY – In accordance with (Application to Adjudicating

Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors)
Rules, 2019; Section 94 & 95 of the Code, 2016 lays for application for initiating insolvency
resolution process in respect to the guarantor by debtors and creditors respectively. This is
initiated by filling up the FORM-A; that declares the particulars of the guarantor, debtor, debt
claimed and the details of the insolvency professional (if applicable). Furthermore the copy of
such application is served to the creditor(s), the concerned corporate debtor along with a fee of
rupees two-thousand charged for this purpose. Likewise for application by a creditor under
Section 95- FORM-C is filled up which encloses the proof of failure to pay the amount of
default within 14 days time period of servicing the demand notice in the FORM – B with the
same fee of rupees two thousand only is charged.

The Code repudiates embracing certain debts to be a part of the insolvency process, such debts
are to be paid normally in the due course of the business. Section 79 (15) (e) defines ‘excluded
debts’ which includes liability to pay fine imposed by a court or tribunal, liability to pay
damages, student loans etc.

INTERIM-MORATORIUM – Section 96 of the Code, 2016 lays down for interim-moratorium

that comes into effect from the date of filing the application and terminates at the date of
admission of the application. It bars creditors from initiating any legal proceeding in respect of
any debt, moreover any pending legal action pertaining to an debt will be deemed to have been
stayed. Once the application is filed, interim moratorium is imposed, unlike the CIRP there is no
concept for an interim resolution professional. Under Part III of the Code, in accordance with
Section 97 and 98 the DRT either directs the IBBI to go for a background check for the
appointed Resolution Professional or nominate a suitable Resolution Professional for the
applicant.

SUBMISSION OF REPORT – The way NCLT decides if the application needs to be admitted
under the CIRP, likewise under Part III it’s the resolution professional that submits the report on
the same- in a time bound manner i.e. within 10 days of its appointment. As stated under Section
99 of the Code, the RP can recommend either accepting or rejecting the application, support with
proper reasons for such recommendations. The legislation also empowers the RP to recommend
if the debtor is eligible for a fresh start process, where no repayment of the debt is required
(Although not enacted yet). The said report later on becomes the basis for the DRT to either
accept or reject the application as it also assist in trimming down the amount of litigation dealt
with the tribunal.

ACCEPTANCE OF APPLICATION – In case with the submission of the abovementioned

report, the application gets rejected a status quo is maintained. The situation reverts back to its
conventional way of operation. On the contrary if the application gets accepted, interim-
moratorium changes to moratorium as mentioned under Section 85 of the Code. It starts with the
date on which the application is admitted and ends on the date on which an order approving the
repayment plan is passed by the DRT or at the expiry of 180 days from the date of admission of
the application – whichever is earlier. This is followed by a public notice issued by the DRT
within 7 days of passing the order admitting the application [Section 102 of the Code]. A time-
bound window of 21 day after such announcements is given to the creditors for inviting their
claims. This is followed by the preparation of a repayment plan comprising of the terms which
the debtor has agreed in order to repay the debts to its creditors.

CHALLENGES WITH THE ENACTMENT

RISING LITIGATION - Looking up at the legislation, Section 179 of the Code, 2016 it clear
lays down that the Adjudicating Authority with respect to insolvency proceedings of individuals
and firms shall be the Debt Recovery Tribunal (DRT) having the territorial jurisdiction of the
concerned area. However personal guarantors have jurisdiction with DRT as well as NCTL
under various circumstances. As per Section 60(2) of the Code, 2016 application for Insolvency
Resolution Process of the personal guarantor shall be filed with the NCLT provided the CIRP or
the liquidation process is continuing against the corporate debtor from whom the guarantee is
given. The Supreme Court upheld the same rationale in State Bank of India v. V. Ramakrishna
and Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta stating that the
creditor is allowed to reclaim the debt owed to it by invoking the contract of guarantee at the
time of ongoing insolvency proceedings. This is expected to line up a number of multiple
insolvency proceedings in the near term. Since we know that the liability of the debtor and
guarantor are co-extensive in nature the fundamental question - if the creditor can file a claim in
a insolvency proceeding is he allowed filing for the remaining claim based on the same debt in
other insolvency proceedings still sustains.

CONTRACT VARIANCE – In the context of Section 133 of The Indian Contract Act, 1872 –
Any variance in the terms of the contract made without the surety’s consent may discharge the
surety from performing the transaction subsequent to such variance. This concept is applied in
the matters of continuing guarantee. Under many situations liability of personal gurantors can be
discharged on account of material variations like alterations in relation to the rate of interest,
amount claimed, term of the contract etc. In light of the current pandemic, such variations might
discharge the guarantor from its liability. However as per – Khushalchand v. Gauri Shankar [AIR
1835 Lah. 906] a surety is not discharged by the discharge of the principal debtor by operation of
law. Whether the defaults occurring due to the corona-outbreak will also amount to discharge of
personal guarantor’s liability will be subjected to the facts and circumstances of the matter. This
will furthermore attract huge amount of litigation for NCLTs which are presently ill-equipped in
terms of their institutional preparation.

CONCLUSION

So far we observed the procedural aspects and challenges yet to be faced by this enactment. This
regime consciously attempted to recognize and solve the issues faced an entirely separate social
strata that comprises of individuals, proprietorship firms even directors and promoters that were
prudent in their approach towards insolvency and bankruptcy process. However yet again it has
created certain loopholes with its enactments and some peculiar uncertainties leaving a huge
floodgate of litigations coming up in the near future. Such unsettled inferences observe certain
unsmiling implications with no complete solution to counter the economic dishevel caused by
the Corona-pandemic. The eyes are yet upon the government to mark a way forward the
upcoming policy decisions and find what upholds next.