IBBI discussion paper suggests changes in insolvency process for personal guarantors to corporate debtors

To ensure faster resolution and greater efficiency during insolvency proceedings, the Insolvency and Bankruptcy Board of India (IBBI) has proposed changes in the process of appointing resolution professionals for personal guarantors to corporate debtors, while recognising the interconnectedness between the two. 

In a new discussion paper, the IBBI has also proposed sharing reports prepared by the resolution professional (RP) under section 99 of the Insolvency and Bankruptcy Code (IBC) with the personal guarantor and creditors as well as mandating that a meeting of the creditors be summoned in case of insolvency resolution process of personal guarantors to corporate debtors. 

The IBBI has sought public comments by October 19 and would look at making enabling amendments to the regulations based on the feedback. 

It has suggested removing the restriction on appointing a common resolution process for the corporate debtor (CD) and the personal guarantor (PG). “This will enable the creditors of the CD to appoint the resolution professional (RP) or liquidator of the CD as RP in the PG matter for enhanced harmonisation of both the processes. Even in the case of replacement of the insolvency resolution professional, RP or liquidator of the CD, the Committee of Creditors in its commercial wisdom may appoint a common insolvency professional in both the processes,” the IBBI has proposed. 

As per the information available with the Board, as of June, 2,039 applications have been filed for the initiation of insolvency resolution process of PGs. “It has been observed that on numerous occasions, the appointed RPs encounter significant challenges in submitting the report under section 99, primarily due to the lack of cooperation from the PGs,” it said, adding that as the RPs appointed in the PG matters have limited access to the financial records, it becomes exceedingly complex to perform their duties diligently. 

It also highlighted that the aspect of increased efficiency due to better coordination has also been tested in some of the corporate insolvency resolution cases such as Videocon Industries and Adel Landmarks, where one RP was appointed for all the group entities and was the crucial reason for effective coordination. 

Sub-section (10) of section 99 mandates the RP to share a copy of the report to the debtor or creditor, as the case may be. “It is proposed to clarify the requirement for the RP to share the report of recommendations prepared under section 99(7) with the debtor and the creditor in all cases. This will ensure that debtor and the creditor are well-informed about the evaluation and recommendations made by the RP, thereby promoting transparency and informed decision-making,” the IBBI said. 

Similarly, it has also suggested that making meeting of the creditor’s mandatory under section 106 in case of insolvency resolution process of PGs to CDs would ensure that the collective voice of creditors is factored into the resolution process, providing a more holistic perspective on the repayment plan. 

Experts welcomed the move, saying it would ensure better efficiency of insolvency proceedings in such cases. 

Nishant Singh, Partner, Luthra and Luthra Law Offices India, said, “The move to statutorily incorporate these practices is a step in the right direction towards maximising value and ensuring better recovery for creditors, as it looks to bolster the rights and involvement of the creditors in the resolution process for personal guarantors to corporate debtor,” he said, adding that these proposals further strengthen the creditor-driven process of insolvency resolution in India, while also promoting the efficiency and transparency of the insolvency process. 

Asish Philip Abraham, Partner at Lakshmikumaran & Sridharan Attorneys, said the measures aim to address the challenges faced during the resolution process of personal guarantors and recognise the interconnectedness of the obligations of personal guarantors and corporate debtors. “The proposal to remove the restriction of having a common resolution professional for personal guarantor and corporate debtor insolvency will lead to a free flow of financial information that is often withheld by non-cooperating guarantors and lead to higher efficiency,” he noted. 

The proposal to share the report with both the guarantor and the creditors will keep all stakeholders aware of the evaluation and recommendation made by the RP and may expedite the process of submission of objections on admission or rejection of the Section 94/95 application, Abraham added.  

Also Read: Mahadev app case: How a Rs 200-cr UAE wedding paid for in cash put the betting app under ED scanner