Individual insolvency misuse by personal guarantors in govt cross hairs

Draft IBC amendments propose to remove 'perverse incentives'

The Ministry of Corporate Affairs (MCA) has taken a strict view of the misuse of individual insolvency by some personal guarantors, proposing that they not be allowed any moratorium period when they file for insolvency, in the latest draft amendments to the Insolvency and Bankruptcy Code (IBC). 

 

The MCA has said that the move has been suggested to remove perverse incentives of applying for individual insolvency. There were concerns regarding the misuse of initiation of the individual insolvency resolution process by personal guarantors to take advantage of the interim moratorium, it said.

 

The moratorium under Section 96 of the IBC provides that upon the filing of an application, all legal actions or proceedings pending in respect of the debt concerned shall remain stayed, and creditors shall not initiate any legal action or proceeding in respect of such debt. 

 

To address fraudulent transactions by insolvent individuals, the MCA has proposed to address these transactions in a manner consistent with similar provisions applicable to the corporate insolvency resolution process (CIRP). Currently, there is no such provision in the individual insolvency law. 

 

The MCA has proposed appointing a common resolution professional for better coordination between the insolvency resolution of individual insolvency of personal guarantors and the corporate insolvency where the personal guarantor has extended a guarantee. The avoidance action proceedings against personal guarantors in such processes will also be exempt from moratorium. 

 

“The meeting of creditors should be necessary in the case of personal guarantors as such cases are complex in comparison to other cases of individual insolvencies,” the government has proposed.

 

Currently, the resolution professional recommends calling a meeting of creditors, if necessary.  

 

If a repayment plan is not submitted by an individual debtor within the stipulated period, the MCA has proposed that the resolution professional will submit a report intimating the adjudicating authority of such non-submission and the adjudicating authority shall terminate the insolvency resolution process.

 

Thereafter, the MCA proposed that the creditors may be granted the right to file for bankruptcy of the debtor, in the Code. 

 

Operational creditors get relief 

 

In a move that will provide relief to the operational creditors, the government has proposed to amend the IBC to treat all unsecured creditors equally for the distribution of proceeds during liquidation. These would include unsecured financial creditors, operational creditors, and any government or authority, but not workmen and employees who will continue to enjoy greater priority, along with secured creditors. 

 

Creditors providing interim finance during the CIRP may be allowed to participate in the meetings of the committee of creditors (CoC) as non-voting members to keep themselves informed about the proceedings under the Code.

 

Recasting liquidation process

 

The government has proposed to amend the IBC to allow the direct dissolution of the company if the CoC believes that conducting the liquidation process may not be feasible or beneficial to stakeholders. 

 

“The adjudicating authority should allow the dissolution of the corporate debtor in such cases where it thinks it is just and reasonable to do so,” said the MCA.

 

To eliminate duplication of activities between the CIRP and the liquidation process, the MCA has suggested that the Code be amended to do away with activities like inviting fresh claims, and instead maintain a list of creditors during the liquidation process.