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SC: personal guarantors liable for corporate debt

Topics Covered: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

SC: personal guarantors liable for corporate debt:


Context:

In November 2019, a government notification had allowed creditors, usually financial institutions and banks, to move against personal guarantors under the Indian Bankruptcy and Insolvency Code (IBC).

  • The Supreme Court has now upheld this move.
  • The court said there was an “intrinsic connection” between personal guarantors and their corporate debtors.

Implications:

This will allow lenders to initiate insolvency proceedings against personal guarantors, who are usually promoters of big business houses, along with the stressed corporate entities for whom they gave guarantee.

About the IBC:

  • The IBC was enacted in 2016, replacing a host of laws, with the aim to streamline and speed up the resolution process of failed businesses.
  • The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

The Code creates various institutions to facilitate resolution of insolvency. These are as follows:

Insolvency Professionals: A specialised cadre of licensed professionals is proposed to be created. These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.

Insolvency Professional Agencies: The insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.

Information Utilities: Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.

Adjudicating authorities: The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.

Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code.  The Board will consist of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law.

InstaLinks:

Prelims Link:

  1. What is insolvency and bankruptcy?
  2. Various institutions established under the IBC code.
  3. NCLT- composition and functions.
  4. What are debt recovery tribunals?

Mains Link:

Discuss how suspension of initiation of fresh insolvency proceedings will help shield companies impacted by the outbreak of Covid-19.

Sources: the Hindu.