What happens to your Personal Guarantee when the Company goes into Insolvency?
The effects of insolvency can extend far beyond balance sheets and board-rooms. Ever wondered, what happens to your personal guarantee when a company goes into insolvency?
To understand the legal position of a personal guarantor, it is important to keep in mind the core relative aspect which is the Corporate Insolvency Resolution Proceedings (CIRP). Once CIRP is initiated, there are generally two possible outcomes: firstly- the revival or #resolution of the corporate debtor (company); and secondly- the liquidation of the corporate debtor.
In both circumstances, the liability of the personal guarantor is not automatically absolved. This is because the liability of the personal guarantor is co-extensive with that of the principal debtor.
This eventually brings up another important question - if the liability of the personal guarantor continues, to what extent does that liability apply?
The answer largely depends upon the outcome of the CIRP. If the CIRP results in a full settlement of the debt, leaving no enforceable liability behind, the personal guarantee generally absolves, having no surviving liability. The position in such a situation is relatively straightforward.
However, complexities arise where the resolution results in only a partial-settlement. In such cases, the reduction in the debt through a haircut or partial settlement does not automatically release the Personal Guarantor from his liability. The liability survives to the extent of the unpaid portion of the principal debt. The Supreme Court has further strengthened this position through its judicial pronouncements.
An important aspect here is that, the liability of a personal guarantor is not necessarily limited to the principal debt amount alone. It may also extend to interest payable on the principal debt amount, if otherwise provided in the contract of guarantee. Though, there’s a common assumption among the personal guarantors that the initiation of CIRP automatically extends them the benefit of moratorium. However, IBC provides this legal space to corporate debtors only, personal guarantors do not fall under this protective umbrella.
It has now become an upward trend in India that, soon as the CIRP is commenced for a Corporate Debtor, the Creditors simultaneously pursue a remedy against the Personal Guarantors. In such a scenario, it is only a prompt action that would help safeguard the interests of Guarantor.
What to do next?
✅Consult an Insolvency Attorney as soon as possible;
✅Get the contract of Personal Guarantee reviewed to understand the extent of liability that could come on your shoulders as a guarantor; and
✅Assessing the exact nature and quantum of the outstanding debt, including the principal amount, interest, and any additional obligations under guarantee.
✒️ Written by: Aishwarya Udasi
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