Position of Guarantors post the Insolvency And Bankruptcy Code (Amendment) Ordinance, 2020

On account of COVID 19 pandemic which has impacted the business, financial markets and economy all over the world, including India, and has thereby created uncertainty and stress for businesses for reasons beyond the control, the Ministry of Law and Justice, Government of India has promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (“said Ordinance”) to mitigate disruptions in business operations caused due to the pandemic following the nationwide lockdown which has added to the disruptions of businesses. The said Ordinance was also promulgated due to inadequate number of resolution applicants to rescue the corporate debtor on account of the pandemic.

Section 10 A inserted in the principal act in effect suspends the initiation of corporate insolvency resolution process under Sections 7, 9 and 10 of the IBC against a corporate debtor, for any default arising on or after 25.03.2020, for a period of 6 months or such further period not exceeding one year from the said date, as may be notified on this behalf. The said provision indicates that the corporate insolvency resolution process against the corporate debtor has been suspended for a period of 6 months, the same maybe extended up to 1 year. However, the said Ordinance does not bar initiation of insolvency proceedings against personal guarantors to corporate debtors. While the corporate debtors are exempted from the same, the corporate insolvency resolution proceedings against the personal guarantors are legally tenable. Although, it has been clarified by the Chairman of IBBI that corporate insolvency resolution process can be initiated against the personal guarantors, however, the same may lead to interpretational issues in the absence of any formal clarification.