Corporate Insolvency Personal Guarantor Liability
Corporate Insolvency – Personal Guarantor Liability under IBC
1. Who is a Personal Guarantor?
A personal guarantor is an individual who guarantees the debt of a corporate debtor.
Usually:
Promoters
Directors
Key managerial persons
Defined through Sections 5(22), 60 & Part III of IBC.
2. Legal Framework
Personal guarantor insolvency is governed by:
Part III of IBC
Sections 95–101 (insolvency process)
Section 60(2) – Proceedings against personal guarantor of a corporate debtor lie before same NCLT handling CIRP.
3. Nature of Liability
Under Indian Contract Act, Section 128:
Liability of guarantor is co-extensive with principal debtor.
Meaning:
Creditor can proceed against guarantor even without exhausting remedies against corporate debtor.
4. Impact of Corporate Insolvency on Guarantor
| Issue | Legal Position |
|---|---|
| Moratorium under Section 14 | Does not extend to guarantor |
| Approval of resolution plan | Does not automatically discharge guarantor |
| Separate insolvency possible | Yes, under Part III |
5. Process Against Personal Guarantor
Creditor files application under Section 95
Interim moratorium applies
Resolution Professional appointed
Repayment plan considered
Bankruptcy may follow
6. Why IBC Targets Personal Guarantors
Prevents misuse of limited liability
Improves credit discipline
Enhances recovery prospects
7. Landmark Case Laws
1. Lalit Kumar Jain v. Union of India (SC, 2021)
Upheld validity of provisions applying IBC to personal guarantors; clarified that discharge of corporate debtor does not automatically discharge guarantor.
2. SBI v. V. Ramakrishnan (SC, 2018)
Section 14 moratorium does not protect personal guarantors.
3. Maharashtra State Electricity Board v. Official Liquidator (SC)
Reiterated principle of co-extensive liability of guarantors.
4. Essar Steel v. Satish Kumar Gupta (SC, 2019)
Observed that resolution plan approval binds guarantors but does not absolve their liability unless plan provides.
5. State Bank of India v. Athena Energy Ventures (NCLAT)
Held that insolvency proceedings against corporate debtor and guarantor can run simultaneously.
6. Phoenix ARC Pvt. Ltd. v. Vishwa Bharati Vidya Mandir (SC)
Discussed guarantor liability and creditor’s rights.
7. Industrial Investment Bank of India v. Biswanath Jhunjhunwala (SC)
Creditor can proceed against guarantor without first exhausting remedies against borrower.
8. Defences Available to Guarantor
Limited defences:
Fraud in guarantee
Material alteration of contract
Guarantee discharged by law
But resolution of corporate debtor is not a defence.
9. Consequences for Personal Guarantors
Insolvency proceedings before NCLT
Asset attachment
Bankruptcy order
Restriction on business activities
Conclusion
IBC establishes that:
✔ Personal guarantors remain liable despite corporate resolution
✔ Moratorium does not shield them
✔ Creditors can pursue parallel remedies
The law strengthens creditor rights and prevents promoters from escaping liability through corporate insolvency.
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