Accommodation Guarantors And The Blunt Edge Of Section 238 IBC: Limits Of Contractual Justice
- IJLLR Journal
- 4 days ago
- 2 min read
Aashish Barman, Jindal Global Law School, O.P Jindal University, Sonipat, Haryana
ABSTRACT
The Insolvency and Bankruptcy Code, 2016 (IBC) enforces an insolvency framework applicable to personal guarantors of corporate debtors with disregard to their protections under the Indian Contract Act, 1872 (ICA), on account of the overriding provisions of Section 238 of the IBC. The framework’s constitutional validity was affirmed by the Supreme Court in Lalit Kumar Jain v. Union of India (2021), wherein the court held that personal guarantors, being insiders with managerial control and information asymmetry along with commensurate benefit from the transaction, were justified in coming under the purview of this legislation. This paper challenges the said legal presumption, arguing that the assumption underlying this position is inaccurate and misleading.
IBC adopts a monolithic approach to defining the personal guarantor category, treating both the promoter-guarantor with managerial control over the debtor enterprise and the relationship-driven guarantor, who gives a guarantee for reasons other than exercising such control, under one common legal standard. Such blanket application of Section 238 of IBC results in a structural imbalance, where the latter type of guarantors are denied the benefits of ICA defense mechanisms, including the co-extensiveness clause under Section 128 and discharge clauses under Sections 133 to 141, but remain liable for obligations surviving under the Section 31(1) proviso. This paper refers to such structural inequality as the “Contract of Subjugation.”
This paper examines comparative frameworks established under the UK, US and UNCITRAL Legislative Guidelines on Insolvency Law. It further relies on Articles 14 and 21 of the Indian Constitution. In light of these, the paper argues that personal guarantors should be classified into insiders and non-insiders. This will pave way for several amendments, such as providing for ICA defences for non-insiders, pre-execution disclosure requirements and modifications in the moratorium provision so that primary residence of relationship-driven guarantors cannot be taken over during insolvency proceedings.
Keywords: Personal Guarantors, Contract of Subjugation, Suretyship, Section 238 IBC.
