Key points
- Part III of the IBC applies to personal guarantors of corporate debtors; the NCLT has jurisdiction where the corporate debtor's CIRP is pending or concluded.
- Filing a Section 95 application triggers an interim moratorium on all debts of the guarantor, but it also stays the guarantor's own proceedings.
- The guarantor can propose a repayment plan; if it fails, the creditor can seek bankruptcy under Chapter IV.
The framework
The Central Government notified Part III of the Code for personal guarantors to corporate debtors from 1 December 2019. In Lalit Kumar Jain v. Union of India (2021) the Supreme Court upheld the notification and held that approval of a resolution plan for the company does not discharge the guarantor. In Dilip B. Jiwrajka v. Union of India (2023) it upheld the constitutionality of Sections 95 to 100, confirming that the resolution professional's role at the report stage is facilitative and that natural justice is satisfied at the admission hearing.
The process
A creditor files under Section 95 after a demand notice under the rules and a 14-day default. An interim moratorium under Section 96 starts on filing. The NCLT appoints a resolution professional who examines the application and submits a report within 10 days recommending admission or rejection. On admission, a moratorium under Section 101 applies for 180 days and the guarantor must submit a repayment plan through the RP for creditors' approval by 75% in value.
What the guarantor can do
Challenge the debt or the guarantee's validity at the admission stage; negotiate a repayment plan that preserves essential assets; or, where the guarantee has been discharged by the creditor's conduct, contest liability. A guarantor may also file voluntarily under Section 94 to obtain a moratorium and structure a plan.
Consequences of bankruptcy
If no plan is approved or implemented, the creditor or debtor may apply for bankruptcy. A bankruptcy trustee takes over the estate; the bankrupt is disqualified from directorships and certain public offices until discharge.
Frequently asked questions
Does the interim moratorium stop the bank from selling my mortgaged property?
Yes, in respect of the guarantor's debts, proceedings including SARFAESI action are stayed during the interim moratorium and moratorium.
Can the bank pursue the guarantor and the company at the same time?
Yes. Proceedings against the company under Part II and against the guarantor under Part III can run in parallel before the same NCLT bench.
Related practice area: Insolvency & Bankruptcy
This article is for general information and does not constitute legal advice. Laws, rules and limitation periods change and depend on the facts; please take advice on your own situation before acting. Reading this article does not create a lawyer-client relationship with Akhtars Legalitarian.