Context: The Supreme Court upheld a government move to allow lenders initiate insolvency proceedings against personal guarantors.

• They are usually promoters of big business houses, along with the stressed corporate entities for whom they gave guarantee.

Key Points

• SC allowed creditors, usually financial institutions and banks, to move against personal guarantors under the Indian Bankruptcy and Insolvency Code (IBC) as “legal and valid”.
• The government has decided that corporate debtors and their personal guarantors should be dealt by a common forum - National Company Law Tribunal (NCLT) - through the same adjudicatory process.
• Section 60(2) of IBC required the bankruptcy proceedings of corporate debtors and their personal guarantors to be held before a common forum - the NCLT.

What is personal guarantee?

• The concept of ‘guarantee’ is derived from Section 126 of the Indian Contracts Act, 1872.
• A contract of guarantee is made among the debtor, creditor and the guarantor.
• If the debtor fails to repay the debt to the creditor, the burden falls on the guarantor to pay the amount.
• The creditor reserves the right to begin insolvency proceedings against the personal guarantor if the latter does not pay.
• Usually, promoters of big businesses submit personal guarantees to creditors to secure loans and assure repayment.

Note: It is different from the collateral that firms give to banks to take loans, as Indian corporate laws say that individuals such as promoters are different from businesses and the two are very separate entities. A personal guarantee, therefore, is an assurance from the promoters or promoter group that if the lender allows them the fund, they will be able to turn around the loss-making unit and repay the said loan on time.

Insolvency and Bankruptcy Code, 2016

• The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India.
• It seeks to create a single law for insolvency and bankruptcy.
• The code aims to protect the interests of small investors and make the process of doing business less cumbersome.

Key Features
Insolvency Resolution

• The Code outlines separate insolvency resolution processes for individuals, companies and partnership firms.
• The process may be initiated by either the debtor or the creditors.
• For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree.
• For start-ups (other than partnership firms), small companies and other companies (with asset less than Rs. 1 crore), resolution process would be completed within 90 days of initiation of request which may be extended by 45 days.

The Insolvency and Bankruptcy Code (Amendment) Act, 2019

• Increased the mandatory upper Time limit of 330 days including time spent in legal process to complete resolution process.

Insolvency regulator

• The Code establishes the Insolvency and Bankruptcy Board of India.
• Aim: To oversee the insolvency proceedings in the country and regulate the entities registered under it.
• The Board has 10 members, including representatives from the Ministries of Finance and Law, and the Reserve Bank of India.

Insolvency professionals

• The insolvency process is managed by licensed professionals.
• These professionals control the assets of the debtor during the insolvency process.

Bankruptcy and Insolvency Adjudicator

The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies:

• National Company Law Tribunal for Companies and Limited Liability Partnership firms
• Debt Recovery Tribunal for individuals and partnerships.