Government to review Insolvency and Bankruptcy Code (IBC)

The government will review the issue of the bar on liquidating the assets of those who have given personal guarantees against loans when it comes to companies undergoing insolvency resolution, officials said. There is already arestriction on similar seizures with regard to guarantees made by corporates.

This stems from a recent ruling of the National Company Law Appellate Tribunal (NCLAT) that the personal assets of guarantors cannot be seized during the moratorium on the disposal of assets that’s in place while the insolvency process is underway.

A 14-member law committee chaired by corporate affairs secretary Injeti Srinivas is currently engaged in identifying changes that need to be made in the Insolvency and Bankruptcy Code (IBC).

“Many issues are being pointed out in IBC,” a senior government official said. “The issue of moratorium has also been brought up and needs to be looked into.”

The tribunal had said in its order that resolution plans approved by the committee of creditors and cleared by the adjudicating authority are not only binding on the corporate debtor but also its employees, members, guarantors and other stakeholders, including the personal guarantor.

“In view of the aforesaid provisions, we hold that the moratorium will not only be applicable to the property of the corporate debtor but also on the personal guarantor,” the tribunal said.

The law committee has identified issues that may impact the efficiency of corporate insolvency resolution and will submit its recommendations this month to finance minister Arun Jaitley, also corporate affairs minister.

“There are some urgent matters which need to be addressed in the code,” the senior official said.

State Bank of India had invoked its right under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, against the personal guarantor for recovery of Rs 6.11 crore from Veesons Energy.

The notice was challenged by Veesons, the corporate debtor, in the Madras High Court. Thereafter, SBI had taken “symbolic possession of the secured assets.” The tribunal’s February 28 order restrained SBI from proceeding against the personal guarantor in the case while the moratorium period granted under the insolvency process was in force.

The latest ruling of the appellate tribunal has come as a setback to lenders who were keen on invoking personal guarantees of promoters in insolvent companies simultaneously with IBC proceedings. In two previous judgments, NCLAT had said that the moratorium will only apply to the properties of the corporate debtor. “This recent NCLAT judgment would give a jolt to such cases and would force the lenders to re-strategise their approach on how to tag the promoter’s assets in order to maximise their recoveries,” an industry expert said.

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