The Insolvency and Bankruptcy Code (IBC) has brought about significant changes in the insolvency and bankruptcy regime in India. One of the major changes introduced by the IBC is the inclusion of personal guarantors in the insolvency resolution process. In this blog, we will discuss the legal framework for personal guarantors under the IBC.

Who is a Personal Guarantor?

A personal guarantor is an individual who provides a guarantee for a loan taken by a borrower. The personal guarantor becomes liable to repay the loan if the borrower defaults on the payment.

Inclusion of Personal Guarantors under the IBC

The IBC was amended in 2019 to include personal guarantors in the insolvency resolution process. This means that if a borrower defaults on a loan, the creditor can initiate insolvency proceedings against both the borrower and the personal guarantor.

Insolvency Resolution Process for Personal Guarantors

The insolvency resolution process for personal guarantors is similar to that of corporate debtors. The process is initiated by the creditor by filing an application with the National Company Law Tribunal (NCLT). The NCLT then appoints an insolvency professional to manage the affairs of the personal guarantor and oversee the insolvency resolution process.

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The insolvency professional is responsible for preparing a resolution plan, which is then approved by the committee of creditors. If the resolution plan is approved, it is implemented, and the personal guarantor is discharged from his/her liabilities. If the resolution plan is not approved, the personal guarantor goes into liquidation, and the proceeds from the sale of assets are distributed among the creditors.

Rights and Liabilities of Personal Guarantors

Personal guarantors have certain rights and liabilities under the IBC. The personal guarantor has the right to receive notice of the insolvency proceedings and participate in the process. The personal guarantor can also submit a resolution plan and claim for the distribution of proceeds from the sale of assets.

However, personal guarantors also have certain liabilities. If the borrower defaults on the loan, the personal guarantor becomes liable to repay the loan amount. In case the insolvency resolution process fails, the personal guarantor is required to pay the outstanding dues.

Conclusion

The inclusion of personal guarantors in the insolvency resolution process under the IBC has significant implications for both creditors and personal guarantors. Personal guarantors have certain rights and liabilities under the IBC and are subject to the same insolvency resolution process as corporate debtors. It is important for personal guarantors to understand the legal framework under the IBC and seek professional advice in case of default.