This presentation provides for the insolvency resolution process of guarantors to a corporate debtor. It further takes into account the nature and definition of a contract of guarantee and how the same is treated under the Insolvency and Bankruptcy Code, 2016 pointing out the key case laws on the subject followed by a brief discussion on the constitutional validity of notification enabling CIRP of personal guarantors.

1. Insolvency
Resolution Process
of Guarantors
under IBC.
- Karan Valecha
Advocate | Insolvency
Practitioner
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2. Contents
1. Contract of Guarantee
2. Types of Guarantors
3. Rules and Regulations
applicable to
guarantors.
4. Treatment of Guarantee
under the Code
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3. Contract of Guarantee
(Nature)
• Contract of Guarantee is a specific performance contract.
• Contract of Guarantee is Specific performance because the remedy is not
the damages awarded by the court.
• The party must fulfil its obligation under the contract i.e. perform a
certain action he promised to do, instead of just paying money for his failure
to fulfil obligations under the contract.
• It is the guarantor who commits to pay in case of default by the person
for whom he has guaranteed.
• The nature of relief is of specific nature since guarantor has to perform
the specific obligation, which he had undertaken under the agreement i.e.
pay the assured.
Contd./-
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4. Contract of Guarantee (Definition)
Section 126 of the Indian Contract Act defines the
Contract of Guarantee –
A contract of guarantee involves three parties. It
relates to the performance of contract on behalf of the
third person whereby fulfilling his obligation under
the contract by the guarantor.
The person who gives the guarantee is called the
‘’Guarantor/Surety’’; the person in respect of whose
default the guarantee is given is called the
‘’Principal Borrower/Debtor’’, and the person to
whom the guarantee is given is called the
“Lender/Creditor”. A guarantee may be either oral or
written.
Contd./ -
Lender /
Creditor
Loan Agreement & Deed of Guarantee
Borrower /
Debtor
Co-extensive Liability
Guarantor /
Surety
Co-extensive Liability
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5. Contract of Guarantee
• A Contract of Guarantee is a contract by way of which a 'surety'
affirms to safeguard the interest of creditors/ lenders towards the
repayment obligation of the principal borrower qua the loan
amount, in case of a default.
• In a commercial transaction, suretyship forms a secondary
obligation to the principal contract to guarantee its performance
or to furnish means to indemnify the creditor in case of
performance.
• In Halsbury's Laws of England, it has been stated that "A
guarantee is an accessory contract whereby the promisor
undertakes to be answerable to the promise for the debt, default or
miscarriage of another person, whose primary liability to the
promise, must exist or be contemplated".
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6. Types of Guarantors
under the Code
CORPORATE
Section 5 [5(A)] of
the Code defines
“corporate
guarantor” which
means a corporate
person who is the
surety in a contract
of guarantee to a
corporate debtor.
PERSONAL
As per Section 5(22) of the
Code “personal guarantor”
means an individual who is
the surety in a contract of
guarantee to a corporate
debtor.
As per Rule 3(e) of PG
Insolvency Rules, guarantor
means a debtor who is a
personal guarantor to a
corporate debtor and in
respect of whom guarantee
has been invoked by the
creditor and remains unpaid
in full or part.
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7. Rules and Regulations
applicable to Guarantors
Corporate Guarantors –
1. IBBI (Insolvency Resolution
Process for Corporate Persons)
Regulations, 2016.
2. IBBI (Application to AA)
Regulations, 2016.
Personal Guarantors –
1. IBBI (Insolvency Resolution
Process for Personal Guarantors to
Corporate Debtors) Regulations,
2019; and
2. IBBI (Bankruptcy Process for
Personal Guarantors to Corporate
Debtors) Regulations, 2019
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8. Adjudicating
Authority for
Guarantors
As per Section 179, for insolvency resolution and bankruptcy
process of individuals and firms, the Debt Recovery Tribunal
(DRT) has been designated as the Adjudicating Authority and
as per Section 181, appellate Authority is the Debt Recovery
Appellate Tribunal (DRAT). Part III of the Code is applicable
for Insolvency and Bankruptcy against individual and firm.
Section 60 deals with Adjudicating Authority for corporate
persons. Sub-section (2) of Section 60 provides that where an
application for insolvency resolution or liquidation
proceeding of a CD is pending before a National Company
Law Tribunal (NCLT), an application relating to insolvency
resolution or liquidation or bankruptcy of a corporate
guarantor or a personal guarantor shall be filed before the
NCLT. Further Sub-section (3) provides that insolvency
resolution, liquidation or bankruptcy proceeding of a
corporate guarantor or a personal guarantor of the CD
pending in any court or tribunal shall stand transferred to the
NCLT dealing with insolvency resolution or liquidation
proceeding of such CD.
** Punjab National Bank Vs. Carnation Auto India Pvt. Ltd.
& Anr. [NCLAT]
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9. Treatment of
Guarantee
under the Code
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10. Moratorium and Guarantors
As per Section 14(3) (introduced vide 2018 amendment), the
provisions of moratorium under Section 14 of the Code shall not
apply to a surety in a contract of guarantee to a corporate
debtor.
The Hon’ble Supreme Court in the matter of State Bank of India
Vs. V. Ramakrishnan & Anr. held that Section 14(3) of the Code
is retrospective.
It has noted that, the object of the Code of 2016 is not to allow
personal guarantors to escape from an independent and
coextensive liability.
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11. Pre-initiation
of CIRP
against
Principal
Borrower
In this connection, it is to be pointed out that it may not be
necessary to start CIRP against the Principal Borrower before
initiating against the Corporate Debtor.
A ‘corporate debtor’ must be a ‘corporate person’, [Section 3(7)]
who owes a ‘debt’ [Section 3(11)], to any person [Section 3(23)].
The ‘debt’ as used in Section 3(8) has to be a ‘debt’ defined
under Section 3(11). It must be the ‘liability’ or ‘obligation’ in
respect of a ‘claim’ [Section 3(6)] which is due from any person
[Section 3(23)] – which means even a corporate entity and shall
include ‘financial debt’ and ‘operational debt’ as defined under
section 5(8) and 5(21). A guarantee becomes a debt or as soon as
the guarantee is invoked against it whereinafter a guarantor
(‘corporate guarantor’) becomes a ‘corporate debtor’ in terms of
the Code.
***Ferro Alloys Corporation Ltd. Vs. Rural Electrification
Corporation Ltd. [NCLAT]
***Bijay Kumar Agarwal Vs. State Bank of India and Anr.
[NCLAT]
*** Laxmi Pat Surana Promoter/Director and Shareholder of
Surana Metals Limited. Vs. Union Bank of India [Financial
Creditor can file application under section 7 of the Code
against a Company who is guarantor to a individual/Sole
Proprietorship firm]
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12. During ongoing
CIRP of
Principal
Borrower
• A plain reading of the provisions of the Code would indicate that
while an Application for CIRPs or liquidation proceedings of
corporate debtors are pending before NCLT i.e. to say during the
pendency of a process of CIRP of the Corporate Debtors, an
Application against the Personal Guarantor shall have to be filed.
• This itself indicates that the process of CIRP of the Corporate Debtors
in an Application relating to insolvency resolution etc. of a personal
guarantor needs to be filed and can be prosecuted.
• The law does not envisage that the insolvency resolution of the
personal guarantor should follow only when the process of CIRP of
the corporate debtor has come to an end.
• **** State Bank Of India Vs. Anil Dhirajlal Ambani held that
notwithstanding pendency of the Resolution Plans, the personal
guarantor can be proceeded against under section 60(2) read with
sections 95 and 97(3) of the Code.
• **** Schweitzer Systemtek India Pvt. Ltd. Vs. Phoenix ARC Pvt. Ltd.
& Ors. held that if CIRP, or liquidation proceeding of a corporate
debtor is pending before the Adjudicating Authority, an application
relating to the insolvency resolution or bankruptcy of a personal
guarantor required to be filed before the same Bench of Adjudicating
Authority, meaning thereby, separate application for initiation of
resolution process require to be filed against the guarantor before the
same very Bench of the Adjudicating Authority who is hearing the
corporate resolution process or liquidation proceeding against
principal corporate debtor.
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13. Against same
set of DEBT
AND CLAIM
The questions arise for consideration in the
matter Dr. Vishnu Kumar Agarwal Vs.
M/s. Piramal Enterprises Ltd.
• Whether the CIRP can be initiated against a
Corporate Guarantor, if the Principal Borrower is
not a Corporate Debtor or Corporate Person?
• Whether the CIRP can be initiated against two
Corporate Guarantors simultaneously for the
same set of debt and default? The question can
be looked from another angle. Whether the
Financial Creditor can claim same amount from
the Resolution Professional appointed pursuant
to the CIRP against the Corporate Guarantor
No.1, as also from the Resolution Professional
appointed pursuant to CIRP initiated Corporate
Guarantor No.2?
• *** State Bank of India Vs. Athena Energy
Ventures Private Limited
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14. Constitutional validity of notification
enacting CIRP of Personal Guarantors
a. The Ministry of Corporate Affairs (‘MCA’) issued a Notification on 15.11.2019
[http://www.mca.gov.in/Ministry/pdf/Notification_ 18112019.pdf ] whereby Part III of the
Insolvency and Bankruptcy Code, 2016 which provides a framework for initiation of
insolvency resolution process and bankruptcy proceedings against Individuals and Partnership
Firm, was brought into effect to be made applicable ONLY TO THE PERSONAL
GUARANTORS TO A CORPORATE DEBTOR (except provisions dealing with fresh start
process) basis which a Lender can initiate CIRP proceedings under Section 95 of IBC against
the individual personal guarantors.
b. However, it is relevant to mention that Part III of the Code is yet not been notified with respect to
Individuals and Partnership Firms.
c. The MCA further notified the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process
for Personal Guarantors to Corporate Debtors) Regulations, 2019
[https://ibbi.gov.in//uploads/legalframwork/ 2019-11-22-171205-h10bx-
8573c02ee31bba941201afff84b95ae4.pdf] in this regard which provide for the procedure to be
followed for initiation of insolvency resolution process of the personal guarantors of the
corporate debtor.
Contd./-
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15. Challenge of
Notification
before various
High Courts
The aforesaid notification dated 15.11.2019 was challenged before
Delhi High Court as well as other High Courts on the ground that the
provisions enumerated in Part III of the Code are unconstitutional in
so far as they apply to personal guarantors of corporate debtors.
As similar challenges to the said notification were pending before
different High Courts, the Insolvency and Bankruptcy Board of India
(“IBBI”) filed Transfer Petitions before the Supreme Court of India
seeking transfer of the petitions from various High Courts to the
Supreme Court.
The Transfer Petitions were heard by a three-judge bench of
Supreme Court, which allowed the transfer petitions vide Order
dated 29.10.2020 and the passed following directions:
• All the Writ Petitions filed challenging the Notification dated
15.11.2019 and related issues be transferred to the SC.
• No further Writ Petitions involving the challenge to the
Notification dated 15.11.2019 by which Part III of the IBC and
other provisions in so far as they relate to personal guarantors to
corporate debtors have been brought into force shall be
entertained by any High Court.
• The Court also directed that: If any interim Orders had been
passed by the HCs, then it shall continue till any further Orders.
Subsequent
Transfer of
proceedings to
Supreme Court.
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16. As on date a total batch of 50+ writ petitions are
pending adjudication before the Supreme Court
challenging the constitutional validity of
notification dated 15.11.2019 and since the
subject matter is now vested with the Supreme
Court, stay has been granted by Supreme Court
in all matters wherein application for
insolvency resolution of individuals personal
guarantors to corporate debtor is filed.
Thus, the constitutional validity of notification
dated 15.11.2019 is still under adjudication.
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17. THANK YOU
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