IBBI Proposes Stricter Rules For Personal Guarantor Insolvency To Strengthen Resolution Process

New Delhi, Sep 14 (KNN) The Insolvency and Bankruptcy Board of India (IBBI) has proposed tighter safeguards for insolvency proceedings involving personal guarantors to corporate debtors, including removing voting rights of related-party creditors, mandatory valuation of guarantors' assets and greater scrutiny of transactions that could reduce recoveries for lenders.

In a discussion paper issued on September 12, the regulator proposed amendments to the insolvency resolution process for personal guarantors, seeking stakeholder comments by October 3.

Related Parties to Lose Voting Rights

IBBI has proposed that related parties of a personal guarantor be assigned a ‘nil’ voting share in creditors' deliberations on a repayment plan.

At present, an ‘associate’ of a personal guarantor is barred from voting. The proposed change would broaden the restriction by requiring resolution professionals (RPs) to identify related-party creditors under Section 5(24A) of the Insolvency and Bankruptcy Code and separately flag them in the creditor list.

IBBI said the change would address gaps arising from the narrower definition of an associate and prevent connected creditors from influencing the approval of repayment plans.

Mandatory Valuation of Guarantor Assets

The regulator has proposed making valuation of the personal guarantor's assets mandatory. RPs would appoint a registered valuer to determine the fair value and realisable value of the guarantor's assets.

The valuation report would be placed before creditors along with the repayment plan, enabling them to compare the proposed recovery with the potential recovery through bankruptcy and make a more informed assessment.

Creditors to Record Rationale for Repayment Plans

IBBI has proposed that RPs record creditors' deliberations and reasons for their decisions on repayment plans in the minutes of creditors' meetings.

Where the repayment offered is significantly lower than the admitted claims or estimated realisable value of the guarantor's assets, creditors would have to specifically record the commercial rationale for considering the repayment plan a better alternative to initiating bankruptcy proceedings.

Scrutiny of Avoidance Transactions

The proposals also seek greater scrutiny of preferential, undervalued, fraudulent and extortionate credit transactions, collectively referred to as PUFE transactions.

RPs would examine whether the personal guarantor was involved in such transactions and provide relevant information to creditors before they vote on a repayment plan. 

IBBI has also proposed allowing action against such transactions during the insolvency resolution process, with creditors' approval, rather than waiting until the bankruptcy stage.

The move could enable recovery of assets or funds diverted through such transactions before creditors decide on a repayment plan.

The proposals seek to ensure creditors have adequate information on guarantors’ assets, related parties and potentially avoidable transactions before deciding on repayment or bankruptcy.

(KNN Bureau)