Personal guarantors liable for corporate debt
Source : PIB
GS III : Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Why in News ?

The apex court on Friday upheld the central government’s November 2019 notification issued under the Insolvency and Bankruptcy Code (IBC) as “legal and valid”.

Key Facts

• What is it ?
  • Lenders can initiate insolvency proceedings against promoters, managing directors and chairpersons who have signed personal guarantees on corporate loans in case the borrowers default.
  • The bench dismissed a clutch of 75 petitions challenging the 2019 notification.
  • Section 1(3) of the IBC code allows the central government to notify different provisions of the code at different dates, to allow its implementation bit by bit.
• It will allow the lenders to recover their remaining debt from personal guarantors following the conclusion of the Corporate Insolvency Resolution Process (CIRP).
  • That means Personal Guarantors Liable For Corporate Debt if any.
• Central Government Notification 2019 :
  • Central Government brought personal guarantors to companies facing insolvency proceedings under the purview of the Insolvency and Bankruptcy Code (IBC).
  • These rules and regulations lay down the process for initiating insolvency resolution and bankruptcy proceedings against personal guarantors to corporate debtors, inviting claims from creditors, withdrawal of such applications, etc.

About the Insolvency and Bankruptcy Code (IBC)

• The IBC was enacted in 2016, replacing a host of laws, with the aim to streamline and speed up the resolution process of failed businesses.
• The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.
• The Code creates various institutions to facilitate resolution of insolvency.
• Insolvency Professionals :
  • A specialised cadre of licensed professionals is proposed to be created.
  • These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.
• Insolvency Professional Agencies :
  • The insolvency professionals will be registered with insolvency professional agencies.
  • The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.
• Information Utilities :
  • Creditors will report financial information of the debt owed to them by the debtor.
  • Such information will include records of debt, liabilities and defaults.
• Adjudicating authorities :
  • The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals.
  • The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.
• Insolvency and Bankruptcy Board :
  • The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code.
  • The Board will consist of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law.
• Decision to resolve insolvency :
  • A committee consisting of the financial creditors who lent money to the debtor will be formed by the insolvency professional.
• Liquidation : If the debtor goes into liquidation, an insolvency professional administers the liquidation process.

Daily Current Affairs : Click Here