Insolvency proceedings against personal guarantors; govt asks PSU banks to monitor such bad loans

In the month of December 2019, the rule related to the initiation of the insolvency process against the personal guarantor to corporate borrowers came into effect.

Personal guarantors of corporate debtors may also face insolvency proceedings now as the Ministry of Finance has asked PSU banks to monitor cases where individuals have guaranteed corporate loans. Even as the provision to initiate IBC proceedings against personal guarantors of corporate debtors has not been used so far, it is there in the code and may be used. Banks may also consider setting up an IT system to collate data regarding personal guarantors to corporate debtors in all such cases for the requisite follow up and consequential action, PTI reported citing the advisory by the Department of Financial Services. 

In the month of December 2019, the rule related to the initiation of the insolvency process against the personal guarantor to corporate borrowers came into effect, which empowered creditors to file insolvency applications against personal guarantors to corporate debtors under the IBC. In multiple cases so far, the corporate debtor took loan which was guaranteed by another corporate or person, now the proceedings may be initiated against the same as well for a better resolution under the IBC. The IBC Code 2016 defines individuals into three categories viz personal guarantors to corporate debtors, partnership firms and proprietorship firms, and other individuals.

Meanwhile, the Insolvency and Bankruptcy Code, 2016 (Code) envisaged the appointment of an authorised representative (AR) by the Adjudicating Authority to represent financial creditors in a class, like allottees under a real estate project, in the committee of creditors. For this purpose, the regulations require the interim resolution professional to offer a choice of three Insolvency Professionals (IP) in the public announcement, and the creditors in a class to choose one of them to act as their authorised representative.

According to the amendment, the three IPs offered by the interim resolution professional must be from the state or Union Territory, which has the highest number of creditors in the class as per records of the corporate debtor. The board aimed at facilitating ease of coordination and communication between the AR and the creditors in the class represented.