IBBI proposes tighter safeguards for personal guarantors in insolvency cases
The Insolvency and Bankruptcy Board of India (IBBI) has proposed tighter safeguards in the insolvency resolution process for personal guarantors to corporate debtors, including barring related parties from voting on repayment plans, mandatory valuation of guarantors’ assets and scrutiny of transactions that could have reduced recoveries for creditors.
The proposals are aimed at bringing the insolvency framework for personal guarantors closer to the safeguards available to creditors in the corporate insolvency resolution process (CIRP). The IBBI said a review of the existing framework showed that several safeguards available in corporate insolvency proceedings had no equivalent in the resolution process for personal guarantors.
Under the first proposal, a creditor who is a “related party” of the personal guarantor would be assigned a nil voting share while deciding on the repayment plan. The resolution professional would also have to separately identify such creditors in the list of creditors.
The move seeks to address a gap in the existing rules, under which an associate of a personal guarantor cannot vote but the definition of “associate” is narrower than “related party”. This allows certain connected entities to potentially vote on a repayment plan that determines the extent to which the guarantor is discharged from his debts.
Scrutiny of past transactions
The IBBI has also proposed making resolution professionals examine whether the personal guarantor had entered into potentially harmful transactions before insolvency. These would include undervalued transactions, transactions intended to defraud creditors, preferential transactions and extortionate credit transactions.
The findings, along with supporting details, would have to be placed before creditors before they vote on the repayment plan. The resolution professional would also be empowered to take action against such transactions, with creditor approval, at the resolution stage rather than waiting until a bankruptcy order is passed.
The IBBI said such scrutiny was necessary because these transactions could directly affect the value available to creditors and whether the guarantor had made a full and honest disclosure of his affairs.
Independent valuation
In another significant proposal, the regulator wants registered valuers to assess the assets of personal guarantors during the resolution process.
Currently, the regulations do not provide for valuation of a guarantor’s assets at this stage. The proposed framework would require a registered valuer to determine the fair value and realisable value of the guarantor’s assets before the repayment plan is placed before creditors.
The valuation report would then be presented to creditors along with the repayment plan, giving them an independent basis to assess the adequacy of the proposed security, the viability of the plan and the recovery that could potentially be obtained through bankruptcy.
Reasons behind creditors’ decisions
The regulator has further proposed that creditors record not just how they voted on a repayment plan but also the reasons for their decision.
The minutes of the creditors’ meeting would have to capture factors such as the amount of admitted claims, proposed repayment, duration and certainty of payments, the guarantor’s assets and liabilities, income and future repayment capacity, and any conduct or transaction affecting recovery.
Where the proposed repayment is significantly lower than the admitted claims or the estimated realisable value of the guarantor’s assets, creditors would have to specifically record why they considered the repayment plan a better option than initiating bankruptcy proceedings.
The IBBI has invited public comments on the proposals till October 3, 2026, after which it proposes to frame regulations under the Insolvency and Bankruptcy Code.
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