Personal Guarantor Insolvency Under IBC 2016: Section 95 Process

Part III of the Insolvency and Bankruptcy Code (IBC) 2016, dealing with insolvency of individuals and partnership firms, was notified in November 2019 specifically for personal guarantors to corporate debtors. This enabled banks and financial creditors to pursue the personal guarantors of defaulting companies simultaneously with or after CIRP.

Scope of Part III IBC (Personal Guarantors)

While IBC Part III covers insolvency of all individuals, the provisions were first made applicable only to personal guarantors to corporate debtors (not to all individuals). The forum is the Debt Recovery Tribunal (DRT), not NCLT.

Section 95 — Application by Creditor

A creditor (financial or operational) can apply to the DRT against a personal guarantor when:

• A minimum default amount exists (as prescribed — Rs.1,000 currently)
• The creditor has demanded payment from the guarantor (demand notice issued)
• The guarantor has not repaid within 14 days of demand

Process Flow

1. Section 95 Application: Creditor files application with DRT. DRT appoints a Resolution Professional (IP) within 14 days.
2. Section 96 Interim Moratorium: From date of application — no proceedings for debts, no sale of assets under security interest enforcement
3. RP Investigation (Section 97-98): RP examines the guarantor's finances, assets, debts, and prepares a report within 10 days
4. DRT Admission (Section 100): DRT examines RP's report — admits or rejects the application within 14 days
5. Moratorium on Admission (Section 101): Full moratorium — no civil proceedings for recovery against guarantor; no enforcement of security interest
6. Repayment Plan (Section 99): RP and guarantor prepare a repayment plan (schedule of payments from future income/asset realization)
7. CoC Approval of Repayment Plan: Creditors vote — 75% majority to accept or reject
8. If Accepted: Plan implemented; guarantor discharged on completion
9. If Rejected or Default: DRT passes bankruptcy order under Section 126

Bankruptcy Order (Section 126-135)

If no plan is accepted or the guarantor defaults on an approved plan:

• DRT passes bankruptcy order
• Estate of the guarantor is vested in the Bankruptcy Trustee
• Trustee liquidates assets and distributes proceeds to creditors in prescribed order
• Guarantor receives discharge after all assets are distributed (Section 138) — fresh start

Interaction with Corporate CIRP

• Personal guarantor proceedings can be initiated simultaneously with or independent of the corporate CIRP
• SC in Lalit Kumar Jain v Union of India (2021): Personal guarantor liability survives even after resolution plan of corporate debtor approved — the guarantee is not extinguished by corporate resolution
• This means banks can pursue guarantors even after recovering a portion from CIRP resolution

Protected Assets for Personal Guarantors

The RP/Trustee cannot liquidate certain assets of the guarantor:

• Tools of trade and professional instruments necessary for earning livelihood
• Property exempt under any law (provident fund, gratuity)
• Assets beyond claims ratio as prescribed by IBBI

Recent Developments (2024-25)

• Multiple NCLT/DRT benches handling personal guarantor cases in banking sector
• SC clarified DRT jurisdiction over personal guarantors vs NCLT — no overlap with corporate CIRP
• IBBI prescribed detailed regulations for personal guarantor insolvency under Insolvency and Bankruptcy Board (Personal Guarantors) Regulations 2019