Due Process Gaps under Section 28A IBC Amendment Bill 2025

[Tejas is a student at Maharashtra National Law University, Mumbai.]

The proposed Section 28A of the Insolvency and Bankruptcy Code (Amendment) Bill 2025 (Bill) tries to resolve a persistent third‑party security problem of the personal or corporate guarantor. In many cases, creditors enforce security under Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act) against guarantor assets, but those assets remain outside the corporate debtor’s corporate insolvency resolution process (CIRP). The new provision allows such assets, once possession is taken, to be dealt in the CIRP itself but subject to the approval of committee of creditors (CoC). The amount realised is first adjusted against the creditor’s claim on the guarantor, and any excess goes back to the guarantor or its insolvency estate.

This section changes the earlier separation between the debtor’s estate and the guarantor’s estate, even though their liability is co-extensive under Section 128 of the Indian Contract Act 1872. The Supreme Court (SC) in SBI v. Ramakrishnan held that Section 14 does not bar actions against the guarantor, and in Essar Steel v. Union of India  and Lalit Kumar Jain v. Union of India, the court held that resolution plans approved under Sections 30–31 can bind guarantors and preserve their liability. But there has been no clear statutory route to attract guarantor’s property into the corporate debtor’s process without putting the guarantor into CIRP or bankruptcy.

Section 28A fills that gap. Yet, in doing so, it raises serious due process concerns for guarantors who are otherwise solvent but whose assets may be used within a process where they have limited participation.

Guarantors and Third-Party Security in the IBC Framework

The basic structure of the code remains familiar with broad definitions for creditor and debt. However, security interest under Section 3(31) has particular significance for Section 28A. At present, provisions on moratorium, asset control, and liquidation estate are confined to the corporate debtor and does not automatically attract guarantor’s property.

Section 60(2) provides that insolvency and bankruptcy proceedings against personal guarantors shall be filed before the NCLT that has jurisdiction over the corporate debtor. In Ramakrishnan, the SC held that the Section 14 moratorium does not extend to personal guarantors and confirmed that creditors may proceed against them simultaneously. However, in Lalit Kumar Jain, the court upheld the 2019 notification that brought personal guarantors within Part III of the Code and emphasised on their close financial connection with the corporate debtor.

In Anuj Jain v. Axis Bank Limited and Phoenix ARC v. Ketulbhai Patel, the SC clarified that a lender holding security over a corporate debtor’s asset for another borrower does not automatically qualify as a financial creditor, though it continues to be treated as a secured creditor. Court in Vistra ITCL v. Dinkar Venkatasubramanian, the SC highlighted a critical gap where third-party security providers, despite holding a valid security interest over a corporate debtor's assets, were not classified as financial or operational creditors, thus excluding them from the CoC and leaving their rights vulnerable. Efforts made by NCLT in PNB v. Vindhya Vasini Industries to fold guarantor assets into the liquidation estate were rejected on appeal by the NCLAT. Finally, Essar Steel and Swiss Ribbons v. Union of India affirm the binding nature of resolution plans and CoC commercial wisdom. This is a position that the amendment bill aims to strengthen through express recognition of the “clean slate” principle and limits on guarantor subrogation rights.

Section 28A: Transferring Assets of Guarantor without Procedural Safeguards

Section 28A is proposed within Chapter II that deals with the CIRP and is supported by a non obstante clause that gives overriding effect over the code and other inconsistent laws. It applies where a creditor of the corporate debtor holds a security interest over an asset owned by a personal or corporate guarantor, and possession of that asset has already been taken under a transfer enabling statute such as the SARFAESI Act. With approval from the committee of creditors, the asset can then be transferred or realised through the corporate debtor’s resolution plan.

Section 28A separates cases based on whether the guarantor is already under an insolvency process. If the guarantor is in CIRP or liquidation, an additional approval is required from the guarantor’s own committee of creditors. The sections mandates that minimum 66% of corporate guarantors CoC should approve and three fourths of the personal guarantors CoC should approve under Part III. In that situation, the value realised from the asset forms part of the guarantor’s insolvency estate and is distributed under the usual waterfall.

If the guarantor is not undergoing insolvency, only the CoC of the corporate debtor needs to approve the inclusion of the asset. The proceeds are first used to satisfy the enforcing creditor’s claim against the guarantor, after adjusting enforcement costs. Any remaining surplus must be returned to the guarantor.

Therefore, Section 28A overturns the ruling made in PNB v. Vindhya Vasini Industries and responds to concerns that third party security often remains stuck during CIRP. However, safeguards for solvent guarantors still need clearer procedural detail.

Three Core Due-Process Gaps under Section 28A

Section 28A is an important addition to the CIRP framework, but its present design raises serious due process concerns at multiple levels.

First, there is no express notice or hearing right for non-insolvent guarantors. Neither Section 28A of the Bill nor the Section 24 of the Insolvency and Bankruptcy Code 2016 requires prior notice to a guarantor before its secured asset is proposed to be transferred under a resolution plan. A guarantor may be allowed to attend CoC meetings only if the CoC chooses to invite it, and even then, he has no voting rights. Yet the CoC decides whether the guarantor’s asset will be realised, at what value, and at what stage. Since approved plans bind guarantors and courts have recognised the wide reach of such plans in Essar Steel and Lalit Kumar Jain, the absence of a guaranteed right to be heard sits uneasily with basic fairness principles.

The second concern is that the guarantor’s other creditors are ignored. Section 28A(3) sets out a narrow distribution rule that includes enforcement costs, payment to the enforcing creditor, and return of surplus to the guarantor. It does not account for other secured or unsecured creditors who may also depend on the same asset. As per the Anuj Jain, such creditors have no representation in the corporate debtor’s CoC which creates a risk that one dominant secured lender and the CoC can effectively exhaust the asset to support the plan.

The third gap is a one-sided binding effect. The clean slate principle approach strengthens resolution outcomes, but it may simultaneously weaken guarantor subrogation and contribution rights by empowering the CoC to lawfully draft a plan that utilizes the guarantor's asset to settle debts while "wiping out" the guarantor's corresponding right to recover that amount from the company. Therefore, producing an imbalanced result. Section 60(2) provides that insolvency and bankruptcy proceedings against personal guarantors shall be filed before the NCLT that has jurisdiction over the corporate debtor.

Bridging the Gap: Proposed Procedural Safeguards

The solution is not to discard Section 28A of the Bill. Its economic rationale is sound, i.e.  where possession of a guarantor’s asset has already been taken under Section 13 of SARFAESI Act and allowing that asset to be integrated into the corporate debtor’s resolution can reduce fragmentation and overcome long standing hurdles. But efficiency in resolution should not come at the expense of basic procedural fairness. 

A few focused safeguards could significantly improve the provision. First, the law should require mandatory notice and a limited right of audience for guarantors and, where reasonably identifiable, their secured creditors before any Section 28A proposal is placed before the CoC. This notice should include basic valuation disclosures and the proposed distribution of proceeds so affected parties can make focused objections.  

Second, adjudicatory standing under Section 60(5) should be clarified so that guarantors and their creditors can challenge Section 28A transfers on narrow procedural grounds such as absence of notice, manifest undervaluation, or violation of inter-creditor arrangements without opening the door to merit review of the CoC’s commercial decisions. 

Third, subordinate regulation should address treatment of subrogation, contribution, and surplus. Any restriction of guarantor’s recovery rights in a resolution plan should be expressly disclosed and justified under a proportionality style standard in exceptional situations.

Conclusion

The proposed Section 28A of the Bill is a practical step toward resolving the long-standing problem of fragmented enforcement of third-party security and directly addresses the deadlock seen in Vistra ITCL. Its objective of improving resolution efficiency is sound. However, efficiency should not override basic fairness standards. By bringing non-insolvent guarantors into the resolution plan’s “clean slate principle” without giving them a meaningful opportunity to be heard, the Bill risks placing an unfair burden on them. To stay consistent with the constitutional fairness principles recognised in Lalit Kumar Jain, the framework should incorporate clear procedural safeguards, particularly mandatory notice and a limited right of audience before Section 28A is applied.