Only 2% Personal Guarantee Claims Recovered under IBC so far: IBBI

The provision for insolvency resolution of personal guarantors was enabled in November 2019 by the IBBI.
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As per the latest data from the Insolvency and Bankruptcy Board of India ( IBBI ) the creditors have recovered 2.16 per cent, or Rs 102.78 crore, of their admitted claims from personal guarantors under the Insolvency and Bankruptcy Code ( IBC ). The IBBI data shows of the 383 admitted personal guarantors’ insolvency processes, 124 have been closed. Among these 12 have been withdrawn, 86 have been closed because repayment plans were not submitted or rejected, and for 26 the repayment plan has got approval.

The provision for insolvency resolution of personal guarantors was enabled in November 2019 by the IBBI. The rules in this regard were brought in as part of a phased introduction of individual insolvency laws.

An initial challenge of the process was whether a banker’s agreement with the company and the personal guarantor was interlinked or separate. This year the IBBI allowed the same insolvency professional for the resolution process of a company as well as its guarantor for better harmonisation and effective coordination.

It was criticised that providing avenues for debtors to rehabilitate themselves financially is understandable, but the dismal 2.16 per cent recovery rate indicates a systemic flaw. The legal experts are pointing to emphasise that approving repayment plans without scrutiny or enforcement mechanisms risks undermining creditor confidence and perpetuating a moral hazard.

Experts had stated their concern that invoking personal guarantees under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act or the Indian Contract Act was time-consuming, allowing personal guarantors to divert, erode, or create encumbrances over their assets, thereby making the process ineffective.

The IBBI has amended the provision regarding the meetings of the committee of creditors to make them mandatory in insolvency matters pertaining to personal guarantors.

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