Individual bankruptcy: Rules to deal with personal guarantors soon
The rules, once notified, will allow simultaneous proceedings against defaulting companies as well as individuals who have stood as guarantors of the loans at the National Company Law Tribunal.
New government rules for dealing with guarantors of corporate loans to bankrupt companies are likely to provide for selling off individuals’ assets to recover the unpaid dues, top government sources told HT.
The government is likely to notify the rules that will provide for proceedings by the National Company Law Tribunal against individual guarantors.
The rules also propose a repayment plan and a concept of mediation.
The proposed rules have been vetted by an advisory committee headed by Justice Srikrishna.
“There are two types of individuals, those with personal guarantees for corporate loans and those with or without business interests. We are first framing rules for promoters businessmen who are personal guarantors for loans to defaulting companies,” said an official working on framing the rules. He refused to be named as he is not authorised to speak to the media.
The official said the rules once notified will allow simultaneous proceedings against defaulting companies as well as individuals who have stood as guarantors of the loans at NCLT.
“When there is a dedicated court for insolvency proceedings against companies (NCLT), the same court should try the personal guarantors,” said another source.
Experts said that as per standard lending practises in India, lenders insist on personal guarantees of promoters. A simultaneous insolvency proceeding against the personal guarantor and the defaulting company will bring closure for both the borrower and the guarantor.
A working committee and an advisory committee have already presented their reports on individual bankruptcy,and the Insolvency and Bankruptcy Board of India (IBBI) is likely to finalise the rules in its meeting next week, said sources.
While Part III of the Insolvency and Bankruptcy Code, 2016 provides for dealing with bankruptcy of individuals and partnership firms, the rules and regulations under it are yet to be formulated.
In the first phase, the government is looking at dealing with individuals including promoters who are guarantors for loans to bankrupt companies.
Currently, the Insolvency and Bankruptcy Code allows legal sanctity to the turnaround of stressed assets and also their liquidation so that creditors are able to reduce the non-performing assets on their books.
“IBC, 2016 deals with defaulting corporates but individual bankruptcy is still governed by archaic rules of the early 1900s. In India 98% MSMEs are partnership firms, whose insolvency will be dealt with once the rules for individual bankruptcy are notified,” said insolvency expert Sumant Batra.
The second phase will involve rules for bankrupt individuals with or without business interests. This would cover the large SME and MSME sector in India, which employ over 80 million people.