IBBI Proposes Reforms to Strengthen Insolvency Framework for Personal Guarantors

Context

The Insolvency and Bankruptcy Board of India (IBBI) has proposed four changes to strengthen the insolvency process for personal guarantors to corporate debtors, with greater creditor protection and transparency. The move follows concerns over the Subhash Chandra repayment plan, where creditors were offered a very small amount compared with their admitted claims.

About Personal Guarantors

1. A personal guarantor is an individual who guarantees repayment of a company’s debt if the company defaults.
2. Insolvency of personal guarantors is governed by the Insolvency and Bankruptcy Code (IBC), 2016, aiming at timely resolution and better recovery for creditors.

Insolvency and Bankruptcy Board of India (IBBI)

1. Established: 1 October 2016 under the Insolvency and Bankruptcy Code (IBC), 2016.
2. Nature: A statutory regulator created by an Act of Parliament responsible for implementing and regulating India’s insolvency framework.
3. Parent Ministry: Operates under the Ministry of Corporate Affairs.
4. Composition:

• Chairperson: appointed by the Central Government,
• Ex-officio Members: Three members from the Central Government (representing the Ministry of Finance, Ministry of Corporate Affairs, and Ministry of Law) and one member nominated by the Reserve Bank of India (RBI).
• Other Members: Five additional members appointed by the Central Government, with at least three serving as whole-time members.

1. Key Role: Regulates Insolvency Professionals (IPs), Insolvency Professional Agencies (IPAs) and Information Utilities (IUs) and oversees insolvency and liquidation processes.
2. Objective: Ensure time-bound insolvency resolution, value maximisation and protection of stakeholders’ interests.
3. Unique Feature: It regulates both insolvency professionals and insolvency processes, making it a distinctive regulator in India.

Key Proposals by IBBI

1. Bar Related Parties from Voting:

• Related-party creditors of a personal guarantor would be barred from voting on the repayment plan, replacing the narrower “associate” restriction.
• This aims to prevent conflicts of interest and undue influence.

2. Scrutiny of Avoidance Transactions:

• The Resolution Professional (RP) would examine preferential, undervalued and extortionate credit transactions before the repayment plan is put to vote.
• This would help detect asset diversion and loss of value early.

3. Independent Asset Valuation:

• The RP would appoint a registered valuer to assess the guarantor’s fair value and realisable value.
• The valuation would help creditors compare the repayment plan with possible recovery through bankruptcy.

4. Record Creditors’ Rationale

• Creditors’ meeting minutes would record deliberations, objections and reasons for accepting or rejecting the plan.
• Where repayment is substantially below claims or asset value, creditors must explain why the plan is preferable to bankruptcy.

Significance

1. Creditor Protection: Limits undue influence by connected entities and strengthens recovery safeguards.
2. Transparency: Independent asset valuation and recorded deliberations provide a clearer basis for decisions.
3. Better Due Diligence: Early scrutiny can identify asset diversion and value-reducing transactions.
4. Informed Decisions: Helps creditors compare repayment offers with potential recovery through bankruptcy.
5. Accountability: Requires creditors to document the commercial rationale behind their decisions.
6. Alignment with CIRP: Brings key corporate insolvency safeguards into the personal-guarantor framework.

Way Forward

1. Effective Implementation: Ensure uniform application of valuation, transaction scrutiny and voting safeguards.
2. Institutional Capacity: Build the expertise of Resolution Professionals, valuers and adjudicating authorities to handle complex cases.
3. Balanced Resolution: Ensure repayment plans are based on realistic recovery prospects while protecting creditors’ interests.
4. Greater Transparency: Strengthen disclosure and documentation to promote accountability and value maximisation.

Additional Information: Insolvency and Bankruptcy Code (IBC), 2016

1. It provides a unified, time-bound framework for resolving insolvency through resolution or liquidation.
2. Regulator: Insolvency and Bankruptcy Board of India (IBBI); overall administration is under the Ministry of Corporate Affairs (MCA).
3. Adjudication: National Company Law Tribunal (NCLT)/ National Company Law Appellate Tribunal (NCLAT) handle companies and LLPs, while Debt Recovery Tribunal (DRT)/ Debt Recovery Appellate Tribunal (DRAT) handle individuals and partnership firms.
4. It follows a creditor-in-control model through the Committee of Creditors (CoC) instead of debtor control.
5. Key objectives: speedy resolution, maximum asset value, creditor protection, business revival and stronger credit discipline

FAQs

Q1. What is a personal guarantor under the IBC?
Ans. A personal guarantor is an individual who guarantees repayment of a corporate debtor’s debt. The guarantor may become liable when the corporate debtor defaults.

Q2. Why is the “related party” criterion important?
Ans. It is broader than the existing “associate” criterion and can cover entities having significant connections or influence with the guarantor, reducing potential conflicts of interest.

Q3. What are avoidance transactions?
Ans. They include transactions such as preferential, undervalued and extortionate credit transactions that may unfairly reduce the value available to creditors.