Vide an Ordinance dated 05.06.2020[1], the Government of India suspended the operation of Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (‘IBC, 2016’) with a view to shield corporates from fresh insolvency actions, citing economic slowdown on account of the COVID-19 pandemic (‘the Ordinance’). The move ensured that corporates in India could not be dragged to insolvency courts for any default in re-payment of debt which occurred after 25.03.2020. The suspension of fresh insolvency actions for defaults which occurred after 25.03.2020 was initially for a period of six months (with effect from 25.03.2020), and has been extended for another three months with effect from 25.09.2020 vide Notification dated 24.09.2020.
Introduced as a tool to help small businesses survive during the COVID-19 pandemic, the Ordinance dated 05.06.2020 attributed reasons such as:
(i) uncertainty and stress for business for reasons beyond their control;
(ii)difficulty to find adequate number of resolution applicants to rescue the corporate person who may default in discharge of their debt obligations;
(iii)expediency to exclude the defaults arising on account of unprecedented situation for the purposes of insolvency proceeding under this Code etc. for its immediate promulgation.
What is conspicuous by its absence, though, is a similar suspension of relevant provisions of Part III of IBC, 2016 dealing with individual/personal insolvency, including personal guarantors to corporates. It is fair to assume that the economic slowdown as a result of COVID-19 would affect the corporates as well as individual guarantors equally, at least insofar as their ability to repay the debts is concerned. This has led to a peculiar situation wherein the creditors now have the option of proceeding against the personal guarantors even during COVID-19 pandemic, but are statutorily barred from proceeding against the corporates/principal debtors for the same debt.
The same goes against the very objective of IBC, 2016 – which was enacted to restructure and resolve bad debts by way of a Corporate Insolvency Resolution Process. The limited suspension of provisions of IBC, 2016 on account of COVID-19 has the effect of converting the said legislation into a mere money recovery tool. While there is no quarrel with the position of law that liability of a guarantor and a principal is co-extensive, and the creditor has the option of proceeding against either of them for recovery of its debt. However, allowing a creditor to proceed against the personal guarantor of a corporate debtor, without any attempts at restructuring/resolution of debt militates against the core objectives of IBC, 2016.
It will also be seen that the provisions of Part III of IBC, 2016 have only recently been notified by the Government of India vide a Notification dated 15.11.2019. A prima facie examination of the legislative scheme envisaged under Part III of IBC, 2016 reveals that the same are unfairly prejudicial to the interests of personal guarantors.
Firstly, under the current regime of IBC, 2016, a creditor has the option of simultaneously proceeding against the Corporate Debtor and a personal guarantor of a corporate debtor for the same debt. This may lead to a situation where the creditor despite having filed and recovered part of its debt before a Resolution Professional in the Insolvency Resolution Process of the corporate, proceeds to file its claims for the complete debt in the Insolvency Resolution Process of the personal guarantor. The Insolvency Law Committee Report, 2020 (published by the Ministry of Corporate Affairs, India) recognises this anomaly and suggests that upon recovery of any portion of claim by a creditor in one proceeding, there should be a corresponding revision in the claim filed in another proceeding. This is to prevent the creditors from unjustly enriching itself and realising more amounts than what is actually due to it.
Secondly, Section 96 of the IBC, 2016 imposes an ‘interim moratorium’ in relation to ‘all the debts’ of the guarantor as soon as an application under Sections 94/95 of IBC, 2016 seeking to initiate Insolvency Resolution of the personal guarantor is ‘filed’. During the subsistence of such interim moratorium, all legal proceedings initiated against the personal guarantor in respect of any debt shall be deemed to be stayed. The same is in the teeth of established principles which require the adjudicating authorities under the IBC, 2016 (the Tribunals) to observe principles of natural justice, inasmuch as the ‘interim moratorium’ will be imposed on the date of filing of an application under Part III without any adjudication by any judicial forum and without an opportunity of hearing being afforded to the personal guarantors.
Thirdly, there appears to be no express provision under Part III of IBC, 2016 allowing a personal guarantor to appeal against the order passed by the adjudicating authority. The only provision which entitles an aggrieved party to file an appeal before the appellate authority is Section 61. However, Section 61 only allows an aggrieved a party to prefer an appeal against the orders passed by the Adjudicating Authority under Part II of IBC. Since an order of interim moratorium under Section 96 or a moratorium under Section 101 by the adjudicating authority is an order passed under Part III of IBC, 2016, the remedy to an aggrieved guarantor may not lie under Section 61.
Fourthly, there appears to be no intelligible differentia in enforcing the provisions under Part III of IBC, 2016 only qua ‘Personal Guarantors to Corporate Debtors’ vide the Notification dated 15.11.2019, and not qua other individuals and partnership firms as referred to in Part III. While the statute itself makes no sub-classification/categories of guarantors, individuals and partnership firms, the Notification dated 15.11.2019 appears to enforce the provisions of Part III only qua personal guarantors to corporate debtors.
Fifthly, as stated above, there appears to be no justification or rationale as to why suspension of initiation of insolvency resolution process of guarantors during the COVID-19 pandemic ought not to include suspension of initiation of insolvency process against personal guarantors.
The time is ripe for the legislature to take immediate steps in order to secure the interests of personal guarantors, especially during the COVID-19 pandemic.
*The author is a practising Advocate in New Delhi, and can be contacted at vipul.rmlnlu@gmail.com.
[1] Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020