IBBI’s Proposal and Resolution Plans
Context:
The Insolvency and Bankruptcy Board of India (IBBI) proposes to clarify that the submission or approval of a resolution plan for a corporate debtor under the IBC does not automatically release guarantors from their liability to repay the debt.
Relevance:
GS-03 (Economy)
Key Highlights:
- Amendment of CIRP Regulations: IBBI seeks to amend its Corporate Insolvency Resolution Process (CIRP) regulations to ensure creditors can still enforce their rights against personal guarantors despite the submission of a resolution plan.
- Legislative Clarity: Experts believe that IBBI’s proposal will provide legislative clarity, strengthen creditors’ position, and boost recoveries from personal guarantors.
- Supreme Court Precedent: The proposal follows the Supreme Court’s approach in the Lalit Kumar Jain vs Union of India case, which upheld that approving a resolution plan does not absolve personal guarantors of their liabilities.
- Boost for Creditors: Hari Hara Mishra, CEO of the Association of ARCs in India, stated that the proposal would significantly improve recovery from the enforcement of guarantees, benefiting creditors.
- Contractual Obligations: The proposal reinforces the importance of contractual obligations, which are crucial for a robust credit culture. Sumit Khanna from Deloitte India noted that prohibiting the extinguishing of guarantees in resolution plans strengthens creditors’ positions, making the recovery process more efficient.
Corporate Insolvency Resolution Process:
- The Corporate Insolvency Resolution Process (CIRP) is a mechanism for creditors to recover debts when a company becomes insolvent.
- It is initiated by a financial creditor, operational creditor, or the company itself.
- CIRP aims to revive the company through steps like raising new funds or finding a buyer.
- Under the Insolvency and Bankruptcy Code (IBC) 2016, CIRP must be completed within 330 days, including any time spent on litigation.
