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Can a creditor initiate bankruptcy & insolvency proceedings against a guarantor?

Answer By law4u team

No, a creditor cannot initiate bankruptcy/insolvency proceedings against a guarantor under the Insolvency and Bankruptcy Code (IBC). The IBC only provides for the initiation of bankruptcy/insolvency proceedings against a corporate debtor (company) or an individual debtor. A guarantor is a person who guarantees the payment of a debt or the fulfillment of an obligation by another person (the principal debtor). If the principal debtor defaults on the debt or obligation, the creditor can initiate recovery proceedings against the guarantor to recover the amount owed. However, the recovery proceedings against a guarantor are governed by the provisions of the Indian Contract Act and the Limitation Act, and not by the IBC. The creditor may file a civil suit against the guarantor to recover the amount owed, and may also initiate proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) if the debt is secured by collateral. In summary, a creditor cannot initiate bankruptcy/insolvency proceedings against a guarantor under the IBC. The recovery proceedings against a guarantor are governed by the provisions of the Indian Contract Act and the Limitation Act, and the creditor may file a civil suit or initiate proceedings under the SARFAESI Act to recover the amount owed.

Answer By Anik

Dear client, Yes, under the Indian legal framework the creditors can initiate a bankruptcy and insolvency proceedings against a guarantor under the insolvency and bankruptcy code, 2016. Further supreme of court India clarified the power of the creditors to proceed against both corporate debtor and the guarantor simultaneously. The legal provisions governing guarantors in Insolvency Section 5(22) of the IBC – defines a personal guarantor as an individual who has given the guarantee on behalf of the corporate debtor. Section 60(2) of the IBC - allows the creditors to initiate an insolvency proceeding against a personal guarantor before the national company law tribunal (NCLT). Section 128 of Indian contract act, 1872 – it states that the liability of the guarantor is co- extensive with that of the borrower unless it is specifically stated otherwise. The process for initiating insolvency against the guarantor: Filing of applications- a financial creditor or an operational creditor can file an application under the section 95 of IBC to initiate the insolvency proceedings against the personal guarantor. The application is filed before the national company law tribunal (NCLT) that has the jurisdiction over the corporate debtor. Appointment of resolution professional – the NCLT will appoint interim resolution professional to examine the case. The resolution professional will submit the report before the NCLT on whether the application should be accepted or rejected. Moratorium period – once the insolvency application is accepted the moratorium period is applied under section 96 of IBC which prevents the creditors from taking legal action against the guarantor. Resolution plan – if the resolution plan by the resolution professional is accepted then the guarantor may enter into a repayment plan. If no plan is approved, then the NCLT may declare the guarantor bankrupt under the section 125 of IBC. I hope this answer helps. In case of future queries please feel free to contact us. Thank you

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