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How Personal Guarantees Work Under India’s Insolvency Code
A personal guarantee is a promise to repay a company’s debt if the company does not pay.
The person making the promise is called the guarantor.
A lender can usually ask the guarantor for payment without first trying every option against the company.
This promise is not the same as giving the lender a house or other property as security.
The guarantor’s ability to pay depends on the assets and resources available to them.
India’s Insolvency and Bankruptcy Code gives creditors and guarantors a formal process for dealing with unpaid debts.
The process may involve a repayment plan or bankruptcy if resolution fails.
There is no fixed percentage by which a guarantor’s debt is automatically reduced.
Hiding assets or moving them to avoid payment can lead to legal and possibly criminal action.
The National Company Law Tribunal stayed a Rs 6.25-crore settlement involving Essel Group founder Subhash Chandra’s personal guarantees.
A personal guarantee requires a guarantor to meet a borrower’s obligation if the borrower defaults.
Unless the contract says otherwise, a guarantor’s liability is joint and several with the principal debtor’s liability.
Creditors may proceed against the borrower, guarantor, or both, without first exhausting remedies against the borrower.
The Insolvency and Bankruptcy Code provides a structured resolution process, but sets no standard haircut for personal guarantors.
- Who
- The National Company Law Tribunal, Essel Group founder Subhash Chandra, creditors, corporate borrowers, and personal guarantors.
- What
- The tribunal stayed a Rs 6.25-crore settlement of insolvency proceedings involving Subhash Chandra’s personal guarantees; the article explains guarantors’ rights and liabilities under Indian law.
- Where
- Within India’s insolvency and contract-law framework.
- When
- Why
- To explain how creditors can enforce personal guarantees and how the Insolvency and Bankruptcy Code handles personal-guarantor insolvency.
Key facts
- Tribunal action
- The National Company Law Tribunal stayed a Rs 6.25-crore settlement.
- Person involved
- The matter involves Essel Group founder Subhash Chandra.
- Legal framework
- Personal guarantees are governed by the Indian Contract Act and the Insolvency and Bankruptcy Code.
- Liability standard
- Under Section 128 of the Contract Act, liability is generally co-extensive, joint, and several with that of the principal debtor.
- Creditor options
- A creditor may proceed against the borrower, the guarantor, or both simultaneously.
- Asset status
- A personal guarantee is a personal covenant, not asset-backed security such as a mortgage or pledge.
- Haircut
- The Insolvency and Bankruptcy Code prescribes no standard haircut for personal guarantors.
Sources
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