Exploring The Rights and Liabilities of Personal Guarantors Under IBC

Personal guarantors are individuals who provide a guarantee for the repayment of a loan taken by a company or another individual. The personal guarantee makes the guarantor personally liable for the debt in the event of a default by the borrower. The Insolvency and Bankruptcy Code (IBC) of India has recently been amended to include personal guarantors under its ambit. In this blog post, we will explore the rights and liabilities of personal guarantors under the IBC.

Rights of Personal Guarantors

Notice of Demand: Under Section 60(2) of the IBC, a personal guarantor has the right to receive a notice of demand from the creditor before initiating insolvency proceedings against the guarantor. The notice of demand must specify the amount of the debt owed by the borrower and the period of default.

Representation in Insolvency Proceedings: Personal guarantors have the right to be represented by a legal practitioner or authorized representative in the insolvency proceedings initiated against them. The guarantor can also file objections to the claims made by the creditors.

Right to Set-off: Personal guarantors have the right to set off any amounts owed to them by the borrower against the debt owed by the borrower. The right to set off can be exercised before or after the initiation of insolvency proceedings.

Right to Contest Insolvency Proceedings: Personal guarantors have the right to contest insolvency proceedings initiated against them. The guarantor can challenge the validity of the notice of demand or the amount of the debt claimed by the creditor.

Liabilities of Personal Guarantors

Personal Liability for Debt: The primary liability of personal guarantors is to repay the debt owed by the borrower. In the event of a default by the borrower, the creditor can initiate recovery proceedings against the personal guarantor to recover the debt owed.

Liability for Interest and Costs: Personal guarantors are also liable to pay any interest or costs incurred by the creditor in the recovery of the debt. The interest and costs are calculated from the date of default until the debt is repaid.

Loss of Assets: In the event of insolvency proceedings, personal guarantors may be required to surrender their assets to the creditor to recover the debt owed. The loss of assets can have a significant impact on the guarantor's financial stability.

Liability for Fraudulent Transactions: Personal guarantors may also be held liable for fraudulent transactions carried out by the borrower. If the borrower has engaged in fraudulent activities, the guarantor may be held responsible for the same and may be required to compensate the creditor for any losses incurred.

Guarantee for the repayment of a loan taken by a company

Personal guarantors provide a guarantee for the repayment of a loan taken by a company or an individual. In the event of a default, the creditor can initiate recovery proceedings against the personal guarantor. Personal guarantors are also subject to the Insolvency and Bankruptcy Code (IBC) of India, which provides for their rights and liabilities in the insolvency proceedings.

One significant liability that personal guarantors may face is for fraudulent transactions carried out by the borrower. If the borrower has engaged in fraudulent activities, the personal guarantor may be held responsible for the same and may be required to compensate the creditor for any losses incurred.

Under the IBC, fraudulent transactions are defined as transactions that are entered into with the intent to defraud creditors or for any fraudulent purpose. Such transactions can include the transfer of assets to another party to avoid repayment of the debt or the diversion of funds for personal gain.

The creditor can initiate proceedings against the personal guarantor

If the borrower has engaged in fraudulent activities, the creditor can initiate proceedings against the personal guarantor for recovery of the debt owed. The personal guarantor may be held liable for the entire amount of the debt, along with any interest and costs incurred by the creditor in the recovery process.

Personal guarantors must be aware of the potential for fraudulent activities by the borrower and take steps to protect themselves. They should carefully review the loan agreement and ensure that the borrower has provided accurate and complete information. Personal guarantors should also monitor the borrower's financial activities and report any suspicious activities to the creditor.

If the personal guarantor is aware of fraudulent activities by the borrower, they should immediately notify the creditor and take steps to limit their liability. Personal guarantors can also seek legal advice to understand their rights and liabilities in such cases.

Conclusion

In conclusion, personal guarantors play a critical role in the loan-taking process, and their liabilities are significant. The inclusion of personal guarantors under the IBC has provided them with certain rights and protections, such as the right to receive notice of demand and representation in insolvency proceedings. However, personal guarantors must also be aware of their liabilities, including personal liability for the debt, liability for interest and costs, loss of assets, and liability for fraudulent transactions. It is essential for personal guarantors to understand their rights and liabilities under the IBC and seek professional advice to protect their interests.