INITIATION OF INSOLVENCY RESOLUTION PROCESS BY AND AGAINST PERSONAL GUARANTORS

[Mr. M. GOVINDARAJAN]

Introduction

Chapter III of Part III of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides for the insolvency resolution process of personal guarantor to Corporate debtor.

Section 94 of the Code provides for the initiation of insolvency resolution process by a debtor who is in default.  Section 95 of the Code provides for the initiation of insolvency resolution process by a financial creditor.

Application under Section 94

Section 94 provides that a debtor (personal guarantor) who commits a default may apply, either personally or through a resolution professional, to the Adjudicating Authority for initiating the insolvency resolution process, by submitting an application.  In respect of a partnership firm the application shall be filed by all or majority of the partners jointly.  In the application excluded debts shall not be included.  The excluded debts refer to the debt which is not part of either repayment plan or discharged.  A list of excluded assets, for example, are furnished as under-

• Liability to pay fine imposed by a court or tribunal;
• Liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation;
• Liability to pay maintenance to any person under any law for the time being in force;
• Liability in relation to a student loan.

The application may be filed either personally or through a resolution professional. 

A debtor shall not be entitled to make an application under this section if he is-

• an undischarged bankrupt;
• undergoing a fresh start process;
• undergoing an insolvency resolution process; or
• undergoing a bankruptcy process.

A debtor shall not be eligible to apply if an application has been admitted in respect of the debtor during the period of 12 months preceding the date of submission of the application under this section.

Application under Section 95

Section 95 provides for the financial creditor to file an application before the Adjudicating Authority to initiate insolvency resolution process against a personal guarantor.  A creditor may apply either by himself, or jointly with other creditors, or through a resolution professional to the Adjudicating Authority for initiating an insolvency resolution process by submitting an application.  A creditor may apply  in relation to any partnership debt owed to him for initiating an insolvency resolution process against any one or more partners of the firm or the firm. 

The application shall be accompanied with details and documents relating to-

• the debts owed by the debtor to the creditor or creditors submitting the application for insolvency resolution process as on the date of application;
•  the failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand; and
• relevant evidence of such default or non-repayment of debt.

The creditor shall send a copy of the application to the debtor.

Interim moratorium

When an application is filed under either section 94 or section 95 an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application.   during the interim-moratorium period any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed.   The creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.  In case of a firm the interim-moratorium shall operate against all the partners of the firm as on the date of the application.

The interim moratorium shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

Resolution Professional

If the application is filed through the Resolution Professional, the Adjudicating Authority may direct the Board to confirm whether there is any disciplinary action is pending against such Resolution Professional within 7 days.  The Board shall within such time shall, in writing either confirming the appointment of Resolution Professional or reject the appointment.  If the Resolution Professional is rejected the Board shall nominate another Resolution Professional for the insolvency resolution process.

If the application is not filed through the Resolution Professional the Adjudicating Authority shall direct the Board, within seven days of the filing of such application, to nominate a resolution professional for the insolvency resolution process.  The Board shall nominate a resolution professional within ten days of receiving such direction.    A resolution professional appointed by the Adjudicating Authority shall be provided a copy of the application for insolvency resolution process.

Replacement of Resolution Professional

If the debtor or financial creditor, who files the application,  is of the opinion that the resolution professional appointed is required to be replaced, he may apply to the Adjudicating Authority for the replacement of such resolution professional.  The Adjudicating Authority shall, within 7  days of the receipt of the application, make a reference to the Board for replacement of the resolution professional.   The Board shall, within 10 days of the receipt of a reference from the Adjudicating Authority, recommend the name of the resolution professional to the Adjudicating Authority against whom no disciplinary proceedings are pending.

The creditors may apply to the Adjudicating Authority for replacement of the resolution professional where it has been decided in the meeting of the creditors, to replace the resolution professional with a new resolution professional for implementation of the repayment plan.  Where the Adjudicating Authority admits an application made, it shall direct the Board to confirm that there are no disciplinary proceedings pending against the proposed resolution professional. The Board shall send a communication within 10  days of receipt of the direction from the Adjudicating Authority either confirming appointment of the nominated resolution professional or rejecting appointment of the nominated resolution professional and recommend a new resolution professional.  The Adjudicating Authority shall pass an order appointing a new resolution professional.  The Adjudicating Authority may direct the replaced Resolution Professional to share all information with the new resolution professional in respect of the insolvency resolution process and  to co-operate with the new resolution professional in such matters as may be required.

Report by Resolution Professional

The resolution professional shall examine the application within 10 days of his appointment, and submit a report to the Adjudicating Authority recommending for approval or rejection of the application.  In case the  application has been filed under section 95, the resolution professional may require the debtor to prove repayment of the debt claimed as unpaid by the creditor by furnishing-

• evidence of electronic transfer of the unpaid amount from the bank account of the debtor;
• evidence of encashment of a cheque issued by the debtor; or
• a signed acknowledgement by the creditor accepting receipt of dues.

If the debt for which an application has been filed by a creditor is registered with the information utility, the debtor shall not be entitled to dispute the validity of such debt.

The resolution professional may seek such further information or explanation as may be required from the debtor or the creditor or any other person.  Such person shall provide such information within 7 days of the request.  The Resolution Professional shall examine the application and he has to ascertain whether the application satisfies the requirements under Section 94 or 95 and the applicant has provided information and given explanation sought by the resolution professional.  The Resolution may recommend acceptance or rejection of the application in his report, recording the reasons for the same.

The resolution professional shall give a copy of the report to the debtor or the creditor, as the case may be.  The Board issued a circular dated 12.02.2024 advising the Resolution Professional to provide a copy of the report to both debtor and creditor in all cases which will ensure that the debtor and the creditor are well-informed about the evaluation and recommendations made by the Resolution Professional, thereby promoting transparency and informed decision-making.

Admission of rejection of application

The Adjudicating Authority shall, within 14 days from the date of submission of the report, pass an order either admitting or rejecting the application in section 94 or 95.  If the application is admitted the Adjudicating Authority may, on the request of the resolution professional, issue instructions for the purpose of conducting negotiations between the debtor and creditors and for arriving at a repayment plan.

The Adjudicating Authority shall provide a copy of the order along with the report of the resolution professional to the creditors within 7 days from the date of the said order.  If the application was made with the intention to defraud his creditors or the resolution professional, the order shall record that the creditor is entitled to file for a bankruptcy order under Chapter IV.

Moratorium

On the admission of the application a moratorium shall commence in relation to all the debts and shall cease to have effect at the end of the period of 180 days beginning with the date of admission of the application or on the date the Adjudicating Authority passes an order on the repayment plan under section 114, whichever is earlier.  During this period-

• any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed;
•  the creditors shall not initiate any legal action or legal proceedings in respect of any debt; and
• the debtor shall not transfer, alienate, encumber or dispose of any of his assets or his legal rights or beneficial interest therein.

If the application is filed against a firm then moratorium will be applicable to all the partners of the firm.