What is the role of a Resolution Professional in a company’s insolvency process?
In the event, a company defaults in paying its debts, loans or credits for a beyond a stipulated/reasonable period of time, the company in debt or the lenders to whom such debts are owed may file an application before the National Company Law Tribunal (NCLT) to admit such a defaulting company into the Corporate Insolvency Resolution Process (CIRP). The CIRP is dealt with under Sections 7 and 10 of the Insolvency and Bankruptcy Code, 2016. This process is initiated for the purpose of facilitating the repayment of the company’s debts. If the NCLT admits such a company into the CIRP, a resolution professional is appointed to look over the company’s finances and to essentially take over the company’s operations to ensure repayment of the company’s debts.
Who is a personal guarantor under the IBC Proceedings?
A personal guarantor is a person who provides an assurance to the lender that the company which has borrowed the amounts from such lender, will be repaying the debt that is owed. The Personal Guarantor further provides an assurance to the lender that in the event, the borrower company fails to repay the debt, the personal guarantor shall ensure that the debt is repaid by way of his personal assets which can be taken over by the lenders in order to recover the borrower company’s debts.
Would enforcing guarantees on the Personal Guarantors through the Resolution Professionals be violative of the principles of natural justice?
In 2019, Sections 95 – 100 were introduced through amendments into the IBC that enabled the lenders or the Resolution Professional of a company to move applications under the IBC to enforce personal guarantees. To explain, if a company has been admitted into the insolvency resolution process and its promoter had given a personal guarantee to its lenders, the lenders, either on their own or through the resolution professional, can move an insolvency plea against the promoter. The NCLT will then appoint another resolution professional to represent the personal guarantor. The Resolution Professional will collate all the available information related to the loan given to the company, the amount in default, and the role of the personal guarantor and mention them in its report to the NCLT. The NCLT will analyze the report, and determine whether the Personal Guarantor must be admitted into the insolvency process or not. In the event, the Personal Guarantor is admitted into the process, his assets will be attached by the Resolution Professional for recovery of the loan.
In the recent case of Surendra B. Jiwrajika and Anr. vs. Omkara Assets Reconstruction Pvt. Ltd.,these provisions were challenged as being violative of Article 14 of the Constitution of India. It was argued that through the added procedure of enforcing personal guarantees, the personal guarantor would have no opportunity to present his case before a resolution professional was appointed by the NCLT, thereby violating the principles of natural justice guaranteed by the Constitution of India. It was further argued that the resolution professional’s report would decide the personal guarantor’s ability to repay the lender, allowing such a right to be abused. The judgment by the Supreme Court upheld the constitutional validity of the challenged IBC provisions. It was held that there cannot be a single conception of natural justice that is applied to all types of law. These principles would vary depending on the situation. It was further held that the role of a resolution professional is only to facilitate the NCLT to form an opinion on the case and not decide on whether the personal guarantor should be admitted to the insolvency process or not. It was also clarified that the NCLT is not restricted to the report by the resolution professional, it may also form its own opinion of the case. These provisions also serve to ensure that a personal guarantor cannot escape from their obligation to the lenders.
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