The Insolvency and Bankruptcy Board of India advanced its regulatory framework for personal guarantor insolvency proceedings in December 2023, building on the Supreme Court's landmark judgment in Dilip B. Jiwrajka v. Union of India, which upheld the constitutional validity of Sections 95 to 100 of the Insolvency and Bankruptcy Code, 2016, on 9 November 2023. The IBBI's initiatives included a discussion paper proposing amendments to Section 96 to address the misuse of interim moratorium provisions by personal guarantors.
Background
Part III of the IBC, dealing with insolvency of individuals including personal guarantors to corporate debtors, was notified on 15 November 2019 through the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019. Since then, over 2,289 applications related to personal guarantor insolvency had been filed before the NCLT, involving aggregate corporate debt of approximately Rs 1.63 lakh crore.
The constitutional validity of this framework was challenged on multiple grounds, including that it imposed a parallel insolvency process on personal guarantors without adequate procedural safeguards and that the interim moratorium under Section 96 was susceptible to misuse by guarantors seeking to avoid enforcement of their guarantee obligations. The Supreme Court, in Dilip B. Jiwrajka, rejected these challenges and upheld the framework as constitutionally valid.
Key Provisions
The IBBI's post-Jiwrajka regulatory activities encompassed the following:
Section 96 amendment proposal: The IBBI's discussion paper, published in October 2023, proposed that the interim moratorium under Section 96 — which automatically applies upon the filing of an application for insolvency resolution of a personal guarantor — should not apply to personal guarantors of corporate debtors. The proposal was motivated by concerns that guarantors were filing insolvency applications primarily to obtain the benefit of the moratorium and delay enforcement action by creditors.
Procedural clarifications: The IBBI issued clarifying guidance on the procedural aspects of personal guarantor insolvency, including the role of the resolution professional, the conduct of creditor meetings, and the formulation of repayment plans.
Data transparency: IBBI publications for Q2 FY2023-24 included detailed data on personal guarantor cases, providing transparency on the volume, geographical distribution, and outcomes of proceedings across NCLT benches.
Coordination with NCLT: The Ministry of Corporate Affairs took note of NCLT concerns regarding the misuse of interim moratorium provisions and initiated the legislative process for amending Section 96 to align the framework with its intended objectives.
Implications for Practitioners
Insolvency practitioners and banking lawyers should closely monitor the proposed Section 96 amendment. If enacted, the removal of the automatic interim moratorium for personal guarantors of corporate debtors would fundamentally alter the strategic calculus for both creditors and guarantors in IBC proceedings.
For financial creditors, the current interim moratorium operates as a significant obstacle to the parallel enforcement of personal guarantee claims during corporate insolvency resolution processes. Its removal would enable creditors to pursue personal guarantors through civil enforcement mechanisms simultaneously with the CIRP of the corporate debtor.
Practitioners advising personal guarantors should note that the Supreme Court's endorsement of the Part III framework in Jiwrajka forecloses constitutional challenges to the basic structure of personal guarantor insolvency. Future challenges are more likely to focus on specific procedural aspects or the proposed amendments to Section 96, rather than the fundamental constitutionality of the framework.