Even During Covid-19 Pandemic Proceedings can be Initiated Against Personal Guarantors Under IBC

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (‘Ordinance’) was promulgated on June 5, 2020 with an aim to exclude the defaults arising on account of nationwide lockdown due to Covid-19 pandemic. By this Ordinance, section 10A was added in Insolvency and Bankruptcy Code, 2016 (‘Code’) which provided that no application shall be filed for initiation of corporate insolvency resolution under section 7,9 and 10 of the Code for a default arising on or after March 25, 2020 for period of 6 months or any other period notified, but shall not be more than one year i.e. not beyond March 24, 2021. A proviso to this section also clarifies that no application can be filed for initiation of corporate insolvency resolution process (‘CIRP’) of a corporate debtor for a default occurring during period specified. To put it simply, no creditor can ever approach tribunals for the defaults of the corporate debtor for the period specified in the Ordinance. Also, section 66 of the Code is amended by inserting clause 3, which mentions that no application can be filed by a resolution professional against director or partner of the corporate debtor for fraudulent or wrongful trading under this section in respect of defaults against which initiation of CIRP is suspended by section 10A.

By way of a notification dated November 15, 2019, the Central Government brought into effect Part III of the Code which deals with insolvency resolution and bankruptcy for individuals and partnership firms, with effect from December 1, 2019. Part III of IBC is applicable to 3 categories of individuals:(i) Personal Guarantors to Corporate Debtors; (ii) Individuals with Partnership Firms or Sole Proprietorships, and (iii) other Individuals. By the notification only part related to personal guarantors have been notified. Therefore, as section 60(2) of the Code, the NCLT will have jurisdiction to entertain application filed by the personal guarantor himself as specified in section 94 of the Code or by a creditor as specified in section 95 of the Code. Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 defines  “guarantor” as a debtor who is a personal guarantor to a corporate debtor and in respect of whom guarantee has been invoked by the creditor and remains unpaid in full or part. Code defines “personal guarantor” as an individual who is the surety in a contract of guarantee to a corporate debtor.

After the Ordinance, there were speculations as to whether initiation of insolvency proceedings against personal guarantors also stands suspended. Bare perusal of the Ordinance leaves no doubt that only section 7, 9 and 10 application has been suspended. Therefore, an application under section 94 and 95 of the Code be filed by/against the personal guarantors.

To put an end to further confusion, MS Sahoo, the chairman of the Insolvency and Bankruptcy Board of India has clarified that the Ordinance only provide support to the corporate debtor for the defaults that have occurred  during Covid 19 period. He said “The relief is strictly limited to defaults arising during the Covid crisis, and that too, for initiation of CIRP (corporate insolvency resolution process) only. An insolvency proceeding can be initiated for defaults existing before the onset of Covid-19 and for defaults arising after it subsides. The Ordinance does not affect the applications already filed before the adjudicating authority for initiation of the CIRP, and ongoing corporate insolvency resolution, corporate liquidation, and voluntary liquidation proceedings……. It (Ordinance) grants relief in respect of default arising during the Covid period. It does not protect a company which had defaulted prior to March 25, 2020, and default continues or a fresh default arises. It protects a company which did not default earlier but defaulted during Covid period.

He also emphasised that there is no suspense of initiation of actions against personal guarantors. He clarified that “The Covid-19 default has been suspended for the purpose of the CIRP, and not for other purposes under the Code, including individual insolvency, and also not for purposes under any other law. Further, sections 94 and 95 relate to individual insolvency. The provisions relating to individual insolvency, except for personal guarantors, have not yet come into force. It is possible to initiate an insolvency proceeding against a personal guarantor of a corporate debtor.”

Hence, it can be safely concluded now that creditors can file an application against the personal guarantors of the corporate debtor before the NCLT having jurisdiction over the place where registered office of the corporate debtor is located by invoking section 95 of the Code.