NEW DELHI: The government has firmed up a plan to remove the bar on personal guarantors to transfer or dispose of their assets under the insolvency resolution process, according to an official source. This is despite the Supreme Court upholding the constitutionality of the moratorium. The move by the ministry of corporate affairs (MCA) is aimed at ensuring the proceeds of such asset sales can be used to facilitate repayment of the loans. Currently, when a plan under the corporate insolvency resolution process (CIRP) is admitted in a tribunal, the assets of debtors and personal guarantors are placed under moratorium as per Section 96 of the Insolvency Bankruptcy Code (IBC).
However, under the individual insolvency resolution process (IIRP), an interim moratorium is imposed on the assets of the debtors concerned, including personal guarantors (usually promoters), as soon as the insolvency professional (IR) starts inquiry. This is despite the IR’s findings not being legally binding, and subject to validation by the National Company Law Tribunal (NCLT).
The MCA reckons that personal guarantors therefore have a “perverse incentive” to initiate the IIRP, even though it requires subjecting their relevant assets to the moratorium clause. This is because once the moratorium is imposed, as per law, all legal actions or proceedings pending in respect of the concerned debt shall remain stayed, and creditors shall not initiate any legal action or proceeding with respect to such debt. In effect, the moratorium is being used by personal guarantors to buy time, and defer or impair the repayment. Insolvency experts also note that unlike corporate insolvency, individual insolvency is to be addressed simply with recovery of the dues by the lenders, rather than resolution or restructuring. Insolvency lawyer Sumant Batra said, “Fundamentally, the IBC allows secured creditors freedom to stay out of the repayment plan and recover their dues by enforcing security interest. The interim moratorium provision (under IIRP) is being used by erring guarantors only to thwart this lawful recovery process. It serves no useful purpose as no restructuring is involved. This provision should be taken out.”Of course, use of personal guarantors’ assets for recovery of dues by lenders will be done with independent valuation of the assets and involving mostly the auction route for sale.
The official source said the government is aiming to remove the interim moratorium clause in IBC by amending Section 96, which was recently upheld by the Supreme Court. The official said though the decision to go ahead with the amendment could lead to fresh cases being filed in the apex court, these wouldn’t stop the government from implementing the plan which it is convinced would help loan recovery. The MCA is expected to introduce the amendments in the next financial year, after the 2024 general elections. According to data from the Insolvency and Bankruptcy Board of India (IBBI), over 2,200 insolvency applications involving debt amounts of Rs 1.64 trillion have been admitted against personal guarantors since 2019. As of September, only 21 cases involving personal guarantees have led to repayment plans being approved, and the creditors have realised only 5.2% of their admitted claims.
Last month, the Supreme Court upheld the constitutionality of the provisions of the IBC relating to the Personal Guarantors Insolvency Resolution, which became effective through amendments in 2019. The provisions had been challenged by a group of promoters, including Anil Ambani, on the ground that they were not given a chance to present their case, among other things. The SC, however, found their arguments untenable. The moratorium on personal guarantors’ assets, the three-judge bench headed by Chief Justice of India DY Chandrachud noted, was automatically imposed at the time of the insolvency petition being filed.
In a discussion paper floated in January, the MCA had said: “The NCLT has, on occasion, expressed concerns regarding the misuse of initiation of the individual insolvency resolution process by PGs to take advantage of the interim moratorium.”Legal experts aver that the government has all the authority to amend the provisions of the existing IBC provisions, linked to PGs, even after the SC’s ruling. Anoop Rawat, partner, Shardul Amarchand Mangaldas & Co, however, said that while the move to make Section 96 of IBC (interim moratorium) inapplicable to personal guarantors may have sufficient experiential basis, it would be interesting to see whether such carve-out for personal guarantors from the general provision that is otherwise applicable to other individual insolvencies would satisfy the “rational classification test”.
Siddharth Srivastava, partner, Khaitan & Co, noted that majority of the provisions dealing with personal guarantors, including interim moratorium, were challenged in the Supreme Court, but the court said the law is not violative of the Constitution. He, however, added that, the government was well within its rights to amend the existing IBC provisions, without violating the Constitution. According to him, if interim moratorium is removed, it would give lenders more confidence to initiate personal insolvency cases.
Source: The Financial Express
