[Aarya is a student at Dr Ram Manohar Lohiya National Law University.]
The Insolvency and Bankruptcy Code 2016 (IBC) was introduced to consolidate and amend the web of laws relating to resolution of insolvencies of corporations and individuals. Part III of the IBC lays down the insolvency resolution process for personal guarantors (PGIRP), which was notified in 2019. Personal guarantors (PG) have a coterminous liability with that of primary debtor and IRP can be initiated against them also, irrespective of whether the creditor proceeds against the debtor. This post seeks to examine the scenario where the fate of the PGIRP must be ascertained after the demise of the PG against whom the application was filed. It also analyses the scope of these proceedings by understanding whether the legal heirs of the PG, who has died, can be arrayed as parties. Lastly, the author offers suggestions to clarify the insolvency law on this aspect.
Defining Personal Guarantors
Section 5(22) of the IBC defines PG as an ‘individual who is the surety in a contract of guarantee to a corporate debtor’. Rule 3(e) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules 2019 (Rules) defines guarantor as ‘debtor who is a personal guarantor to a corporate debtor and in respect of whom guarantee has been invoked by the creditor and remains unpaid in full or part’.
In both these statutory definitions, legal heirs of the PG are not included within their ambit. Thus, the axiomatic conclusion of proceeding against legal heirs is not legislatively substantiated. In contrast to this, banks are entitled to proceed against the legal heirs of the guarantor after his demise under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. However, these proceedings are different from the IBC proceedings mainly because of the application of the moratorium qua the debtor/guarantor, as the case may be. Thus, it is crucial to examine the judicial pronouncements offering guidance in impleading legal heirs of the PG after his demise in the realm of IBC.
Fate of PGIRP after the Demise of Personal Guarantor
It is difficult to assert with certainty the fate of the IRP proceedings in case of death of the PG. This is largely due to two reasons, lack of any authoritative pronouncement by the National Company Law Appellate Tribunal and contrasting position taken by different benches of National Company Law Tribunal (NCLT). However, in most of the cases involving such peculiar scenario, the NCLT has decided that the PGIRP proceedings would abate after the death of the PG. One such oft-cited order was delivered by NCLT Delhi in Alchemist Asset Reconstructions Company v. Deepak Puri. There is another order from NCLT Kolkata in Bank of Baroda, Stressed Asset Management Branch v Divya Jalan, which is cited with approval by various other NCLTs to conclude that the IRP proceedings must be closed after the death of the PG because otherwise it would offend the legislative scheme of IBC.
In Ashok Kumar Bansal order, a petition was filed under Section 95 for initiation of IRP against the PG before the NCLT Delhi. It was submitted that the PG has passed away and death certificate substantiating the same was placed before the bench. NCLT, after citing Alchemist Asset and Divya Jalan orders, came to the conclusion that the proceedings must be closed because the definition of PG does not include ‘legal heirs’. In Ravindra Kumar Sharda, the question of law was whether the IRP can be initiated against the legal heirs of the deceased PG. NCLT Delhi answered in negative by following the Divya Jalan and Alchemist Asset orders. In the matter of JM Financial Asset Reconstruction Company Limited, NCLT Kochi found that proceedings under IBC against the PG are not recovery proceedings and thus after the demise of the PG, it must be closed.
However, in contrast to the afore-quoted pronouncements, the NCLT Mumbai in Invent Assets Securitization and Reconstruction Private Limited v. Popatlal K Jain allowed impleading the legal heirs of the deceased PG because of the continuing guarantee clause that specifically made the legal heirs of the PG liable for repayment. It can be argued that the tribunal followed the terms of the contract, by which the parties are bound but this conclusion is not legally tenable due to reasons given in the follow paragraph.
A similar clause was also present in the Divya Jalan case which entitled the creditors to proceed against the legal heirs after the demise of PG. As stated earlier also, the definition of guarantor provided in IBC does not include legal heir within its ambit. The tribunal found this clause inconsistent with IBC and by virtue of Section 238 of the IBC, provisions of IBC will override such inconsistent legal instrument. Thus, even when the guarantee agreement allow for proceeding against legal heirs for the outstanding liabilities, it cannot be asserted that legal heirs must be impleaded in an IRP proceeding.
Taking Reference from UNCITRAL: Towards an Effective and Efficient Insolvency Law
The UNCITRAL legislative guide on insolvency law lays down the key objectives of an effective and efficient insolvency law. One of the primary objectives laid out in the UNCITRAL Guide includes ensuring that the insolvency law clearly indicate provisions of laws which may be affected by its conduct. These laws even include matrimonial and family laws, which are essentially matters relating to inheritance and succession of property. It also emphasizes that in case the debtor is an individual, certain assets are excluded from the estate to protect the personal rights and those of its family members. Although, this guide does not explicitly employ the term ‘guarantor’, but the chapter on application and commencement acknowledges the varying and inclusive definition of ‘debtor’ that may be adopted by different nations based on different approaches followed by them.
IBC does not address the procedural issues that may arise in case of demise of the PG amidst the insolvency proceedings. Taking reference from the UNCITRAL guide, the author attempts to suggest changes that may be incorporated in the IBC.
Firstly, the legislature should clarify the procedural walkthrough in case of a demise of a PG. The UNCITRAL guide accords importance to personal rights of an individual debtor and advocates for lucid explanation of treatment of certain assets of the legal person. IRP for PGs envisages an added interim moratorium, which is applicable from the date of making the Section 94/95 application till the date of admission by the adjudicating authority. Thus, the insolvency law must clearly and unambiguously lay down the procedure.
Secondly, the definition of PG may be amended to completely exclude legal heirs from its ambit. Due to the legislative void, the NCLTs have interpreted the law to declare that the IRP proceedings abate after the demise of the PG. Almost all the orders of NCLTs barring Divya Jalan and Asset Alchemist, follow a mechanical approach of quoting the text from these two orders without any addition to the interpretation of the law. There is no judicial pronouncement offered by NCLAT or any other court of law. Thus, there is a need for clear legislative stance on this aspect.
Lastly, the legislature may also indicate the operation of laws relating to succession / inheritance in case ancestral or coparcenary property of the PG is involved.
Conclusion
Part III of the IBC came into operation from 2019. Accounting from that period, more than 3,000 IRP applications have been filed against PGs till date. The peculiar scenario of the demise of the PG presents various challenges and opportunities for the legislature in reaching towards an efficient & effective insolvency law. There is a need for clarification from the legislature on this aspect. Reference has been made to UNCITRAL legislative guide to suggest changes in the Indian insolvency law to address the peculiar challenges faced in PGIRP.
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