IBC panel for allowing lenders to invoke personal guarantees

MUMBAI: The panel reviewing the Insolvency and Bankruptcy Code (IBC) has proposed that lenders to defaulting companies should be allowed to invoke personal guarantees, which in most cases are those of the promoters, even if the resolution process has been initiated, said people with knowledge of the matter.

If accepted, this will be a significant move in the light of a recent decision by the National Company Law Appellate Tribunal (NCLAT) that State Bank of India cannot invoke personal guarantees and liquidate assets in the case of Veesons Energy, which is facing bankruptcy proceedings.

The tribunal took the view that once a company is admitted to the National Company Law Tribunal (NCLT) under the IBC process, a moratorium gets triggered. This means that no legal action can be taken against the company unless a decision is taken to either adopt a resolution plan or liquidate the company. A standstill clause is incorporated in the law so that the resolution plan can be implemented without any legal intervention. But senior bank officials differ.


They say that insolvency proceedings are against the company and not against the guarantor. Thus, the moratorium applies to the company and not against the individual, they argue.

“Once a new resolution plan under the IBC is implemented, the existing loan agreement with the lender will become void,” said one of the bank officials.

“This will make personal guarantees also void, making it imperative for them to act quickly against guarantors to recover dues. Even in cases where liquidation is pronounced, the assets of the company are sold and not that of the borrower and hence both the borrower and the company have to be treated as different entities.”

The 14-member insolvency law committee was set up to identity factors that “impact the efficiency of the corporate insolvency resolution and liquidation framework” and make recommendations to address them. The recommendations along with draft amendments to the IBC are likely to be presented toward the end of the month.

ET reported earlier that the panel has also suggested that a revival plan can be approved if two-thirds of creditors endorse it against the current requirement of three-fourths. This is aimed at ensuring that small creditors do not disrupt the resolution process under the bankruptcy law. Currently, the resolution professional needs the consent of 75% of creditors to act on decisions ranging from day-today operations to strategic decisions such as approving or rejecting a resolution plan.