The background
Promoters and directors who gave personal guarantees for company loans are now routinely pursued under Part III of the Insolvency and Bankruptcy Code, 2016, which was brought into force for personal guarantors to corporate debtors by the notification of 15 November 2019. The Supreme Court upheld the notification in Lalit Kumar Jain v. Union of India (2021) and the constitutional validity of the process in Dilip B. Jiwrajka v. Union of India (2023). The proceedings are before the NCLT that has jurisdiction over the corporate debtor.
Three things make Section 95 different from ordinary recovery: the moratorium begins on the day of filing, the process is run by a resolution professional rather than by the court alone, and the end point, if a repayment plan fails, is the guarantor’s bankruptcy.
Step by step
1. Demand notice. The creditor serves a demand on the guarantor for the guaranteed debt (Rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, in Form B) — at least 14 days before the application.
2. Application under Section 95. Filed by the creditor (or by the guarantor under Section 94), with the guarantee deed, the record of default, the amount claimed and the details of the corporate debtor’s insolvency. It may propose a resolution professional.
3. Interim moratorium — Section 96. From the date of filing, all pending legal actions in respect of the debt are deemed stayed and no fresh action may be initiated in respect of that debt. This protects the guarantor from parallel recovery, but also freezes the guarantor’s own proceedings concerning the debt.
4. Resolution professional — Sections 97 and 99. The NCLT appoints an RP within seven days of the application. The RP examines the application, may call for information from the guarantor and the creditor, and must submit a report within 10 days recommending admission or rejection. The guarantor’s response to the RP — with documents — is the first and often the most important opportunity to raise limitation, discharge of the guarantee, disputes about the amount, or that the debt has been paid or settled.
5. Admission or rejection — Section 100. The NCLT decides within 14 days of the report. Jiwrajka clarifies that the RP’s role is facilitative and the NCLT applies its own mind, hearing the guarantor before admission.
6. Moratorium and public notice — Sections 101 and 102. On admission, a moratorium runs for 180 days (or until the repayment plan is approved or rejected), a public notice invites claims from creditors, and the RP prepares a list of creditors.
7. Repayment plan — Sections 105 to 114. The guarantor, with the RP, prepares a repayment plan — which may propose payment over time, sale of assets, or a composition — to be approved by creditors holding three-fourths in value at a meeting, and then by the NCLT. Once approved, it binds all creditors and the guarantor.
8. If the plan fails. If no plan is submitted, or it is rejected or breached, the creditor or the guarantor may apply for the guarantor’s bankruptcy under Chapter IV, leading to a bankruptcy trustee, the vesting of assets and discharge on completion.
Defences and points to examine
- Limitation. Three years from the date of default, extended by acknowledgment or part payment; the corporate debtor’s admission does not by itself extend limitation against the guarantor.
- Discharge of the guarantee. Variation of the loan terms without the guarantor’s consent (Section 133 of the Contract Act), release of the principal debtor or of co-guarantors, loss of security by the creditor’s neglect (Section 141), or the terms of the guarantee itself.
- The amount. Whether the claim is the guaranteed amount or the entire outstanding; whether recoveries from the corporate debtor’s resolution or liquidation have been credited; interest and charges beyond the guarantee.
- Assignment. Where the debt has been assigned to an asset reconstruction company, the assignment and its scope.
- Procedural compliance — the demand notice, its service, the period, and the details in the application.
Documents to organise
- The guarantee deed(s) and any amendments; the sanction letter and loan agreement; security documents
- Account statements of the corporate debtor; the record of default from the information utility
- The demand notice under Rule 7 and the Section 95 application with annexures
- Correspondence about restructuring, settlement or OTS
- The corporate debtor’s CIRP record — admission order, claims filed, resolution plan or liquidation order, and the treatment of the creditor’s claim
- The guarantor’s own statement of assets and liabilities, income, and dependants (needed for any repayment plan)
Frequently asked questions
Does the moratorium in the company’s CIRP protect me as guarantor?
No. The Section 14 moratorium protects the corporate debtor only; a creditor may proceed against the guarantor under SARFAESI, the RDB Act and Section 95 IBC even while the company’s insolvency is pending, and may pursue the guarantor after a resolution plan is approved if the plan does not extinguish the guarantee.
Can the bank proceed under Section 95 and SARFAESI at the same time?
The interim moratorium under Section 96 stays legal actions in respect of the debt once the Section 95 application is filed; before that, parallel actions are common. Whether a particular SARFAESI measure is stayed depends on its stage and is often contested.
What happens to my house and personal assets?
During the resolution process the assets are not sold; they are dealt with under the repayment plan the guarantor proposes. If the plan fails and bankruptcy follows, the assets vest in the bankruptcy trustee, subject to the excluded assets listed in the Code (including personal effects and, within limits, a dwelling unit).
Can I settle with the bank after the application is filed?
Yes, and settlement is often the most practical outcome — through the repayment plan mechanism, or by a settlement and withdrawal of the application with the NCLT’s permission.
Talk about your matter
This article is general information. Your position depends on your documents and dates — call or WhatsApp to arrange a consultation.