Inequitable In Adversity (Rights Of Personal Guarantors In Insolvency Proceedings)

Nikhil Asrani, Advocate, MMB Legal

On July 11th, 2022, Reliance ADA Group Chairman Anil Ambani challenged1 several provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”) pertaining to the Personal Guarantors of a Corporate Debtor.2 Questions have been raised on the constitutionality of the provisions concerning action for recovery of debt against personal guarantors under the Insolvency and Bankruptcy code 2016. (“IBC”). A writ petition has been filed on the ground that the impugned provisions are manifestly arbitrary, unconstitutional and violates the fundamental rights under Articles 14, 19 and 21 of the Constitution of India.

In this article we shall dwell deeper into the provisions governing the recovery of debt against personal guarantors, the constitutional validity of Sections 95-100 of the IBC and the dire need for a more accountable debt recovery procedure against personal guarantors.

Who is a Personal Guarantor?

As defined under Section 5(22) of the IBC a “Personal Guarantor” refers to an individual who is the surety in a contract of guarantee to a corporate debtor. In simpler words, furnishing a personal guarantee refers to a situation wherein a corporate debtor is unable to repay the outstanding dues/arrears and the Personal Guarantor assumes the liability of the corporate debtor in the repayment of such dues/arrears.

The concept of personal guarantee is one that finds its meaning under Section 126 of the Indian Contract Act, 1882 which deals with the obligation on a surety to honour the promise of the principal debtor, by paying the principal debtor’s current or outstanding debts.