Introduction

In Lalit Kumar Jain v. Union of India, 2021, the Supreme Court upheld the Insolvency and
Bankruptcy Rules, 2019 (Rules), which were notified by the Ministry of Corporate Affairs on
November 15, 2019, and which bring insolvency and bankruptcy proceedings
towards personal guarantors under the ambit of Insolvency and Bankruptcy Code, 2016.
(Code). The provisions were set to take effect on December 1, 2019, according to the stated
announcement.
The Insolvency and Bankruptcy Rules, 2019 (Rules) and the Insolvency and Bankruptcy
Regulations, 2019 (Regulations) have also come into existence with effect from December 1,
2019, to guarantee that procedures are filed and handled in a timely way. The Rules provide
the framework for commencing an Insolvency Resolution Process (IRP) against personal
guarantors, while the Regulations describe the specifics of the IRP method.
Part III of the Code was made separately applicable to personal guarantors of corporate
creditors by the 2019 Rules. As a result, a creditor might file a Corporate Insolvency
Resolution process (CIRP) against corporate debtors' personal guarantors with the Debt
Recovery Tribunal (DRT). Furthermore, if CIRP is instituted against a corporate debtor
before the National Company Law Tribunal (NCLT), any recovery deliberations initiated
against personal guarantors to corporate debtors under CIRP in any Court or Tribunal would
have to be transferred to the NCLT, and any proceedings requested to be instituted against
personal guarantors to corporate debtors undergoing CIRP would be reassigned to the NCLT.

Who are Personal Guarantors?

A contract of guarantee is a three-way contract between a guarantor, the primary debtor, and
the creditor, according to Section 126 of the Indian Contact Act of 1872 (ICA). The concept
of a guarantee is to have a backup pocket in case the first one runs dry.
The co-extensive character of the guarantor's obligation with that of the primary debtor,
unless otherwise stipulated in the contract, is a key element of the guarantee contract. As a
result, the guarantor's responsibility to make full on payments made on behalf of the primary
debtor emerges as soon as the principle debtor fails to meet its contractual commitments. As a
result, the purpose of obtaining a personal guarantee from a third party is to assure that the
creditor is not have to wait until his remedies against the primary debtor have been exhausted
before exercising his rights against the guarantor.
A personal guarantor according to the Code is defined under Section 5(22) as an individual
"who is the surety in a contract of guarantee to the corporate debtor", based on the ICA's
aforementioned criteria.

Laws governing Personal Guarantors prior to the 2019 Rules

Before the 2019 Rules were notified, Part III of the Code was inapplicable to personal
guarantors to corporate debtors. Creditors had the option of proceeding through:
i. the civil courts underneath the Presidency Towns Insolvency Act, 1909
ii. or the Provincial Insolvency Act, 1920;
 iii. a civil proceeding administering their contractual remedies;
iv. and other legislations including the Securitisation and Reconstruction of Financial
Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act).
Because the laws were outdated and ineffective, there were numerous flaws in their execution
and effectiveness, including, but not limited to, the complete absence of provisions to appoint
a professional, such as a resolution professional, to conduct the insolvency procedure; slow
proceedings due to the lack of tight timelines, and so on. One of the major aspects of the
aforementioned legislation was that the procedure was debtor-centric, with secured and
unsecured creditors playing a minor role.
Though, after the 2019 Rules were notified, creditors were entitled to approach the Debt
Recovery Tribunal (DRT) under Part III of the Code as well, and the NCLT under Part II of
the Code for recovery of debts from personal guarantors.

Implications
Creditors welcomed the notification because it allows them to recover their debts from both
the corporate debtor and the personal guarantor in one forum. Consequently, after a corporate
debtor's CIRP is completed, creditors are now able to pursue the personal guarantor for the
corporate debtor to claim the remaining sums, providing the resolution plan does not
discharge the guarantors' obligation.

Simultaneous Proceedings
According to Section 128 of the ICA, a guarantor's responsibility is coextensive with that of
the primary debtor, which implies that both the corporate debtor and the personal guarantor
are equally and severally liable to repay the creditor's debt.
This contract law premise is also incorporated into the Code. The Supreme Court in State
Bank of India v. V. Ramakrishnan & Ors, 2018 (17 SCC 394), and the National Company
Law Appellate Tribunal (NCLAT) in State Bank of India v. Athena Energy Ventures
Private Limited, 2020 (NCLAT 774), have said that creditors are allowed to initiate
simultaneous proceedings before the NCLT against the corporate debtor and before the
relevant forum against the personal guarantor.
Consequently, while simultaneous actions against the personal guarantor and the corporate
debtor are permissible, they must be brought before the NCLT with the condition that
creditors cannot collect an amount in excess of their entire claim.

Right of Subrogation
According to Section 140 of the ICA, "Where a guaranteed debt has become due, or default
of the principal - debtor to perform a guaranteed duty has been taken place, the surety, upon
payment or performance of all that is liable for, is invested with all the rights which the
creditor had against the principal – debtor."
The aforementioned right of subrogation is a critical concept of guarantee law, since it
ensures the legislation's financial viability. However, as stated by the Supreme Court in Lalit
Kumar and the NCLAT in Lalit Mishra & Ors. v. Sharon Bio Medicine Ltd. & Ors., 2018
(NCLAT 669), the personal guarantor's entitlement to claim the guarantee against the
corporate debtor stops to exist following the creditor's invocation of the guarantee.
This basically renders a personal guarantor helpless if the settlement plan precludes the
personal guarantor's right of subrogation. Thus, the Supreme Court interpreted the guarantee
principle preferentially, finding that the Code, pursuant to Section 238, had superseding
authority over other legislation. As a result, while a personal guarantor's obligation under the
Contract Act is preserved, his corresponding privilege is reduced, which violates recognized
basic principles of law and equity and would equate to the corporate debtor's 'unjust
enrichment.'

Personal Guarantor's Liability to Principal Debt

Sections 133, 134, 135 & 140 of the ICA provides that a guarantor's responsibility is
eliminated if the debtor's debt is likewise discharged. However, the Supreme Court decided in
Lalit Kumar that where a corporate debtor's obligation is discharged by "operation of
law" rather than a contractual arrangement, the guarantor's duty is not discharged.

Suggestions
The Supreme Court's decision, made to assist creditors, has placed personal guarantors in a
risky position. Swiss Ribbons Private Limited v. Union of India, 2019 (4 SCC 17), held that
the Code's goal and purpose are to promote corporate debtor revival and cautioned against
utilizing the Code as a "recovery tool".
However, the current creditor-centric approach, at the expense of core contract and legal
principles, has resulted in just that. By permitting creditors to pursue the personal guarantor
for the recovery of their debts without conferring on the personal guarantor the equivalent
right, the Code has evolved into a tool for creditors' recovery. Additionally, creditors approve
the resolution plan under Section 30 of the Code via the Committee of Creditors (CoC),
which would present the guarantor with little recourse if his contractual rights are terminated.
However, there are a few ways in which the existing stance might be changed to promote
personal guarantors from a commercial standpoint while still preserving the Code's goal and
purpose of corporate debt revival. In cases where a CIRP is initiated at the same time against
the corporate debtor and the personal guarantor, the NCLT may first issue necessary orders to
the corporate debtor against the personal guarantor, allowing him to then provide his claim in
the resolution plan in his newly acquired capacity as a creditor exercising his right of
subrogation. 
In cases where a CIRP is initiated at the same time against the corporate debtor and the
personal guarantor, the NCLT may first issue necessary orders to the corporate debtor against
the personal guarantor, allowing him to then provide his claim in the resolution plan in his
newly acquired capacity as a creditor exercising his right of subrogation.  
Additionally, the Code includes a protection under Section 21(2) that prohibits a related party
financial creditor from participating in the CoC if the personal guarantor is the promoter.
Alternatively, the NCLT might seek to differentiate between personal guarantors who are
promoters of the corporate debtor within CIRP and independent personal guarantors who
have provided a guarantee commercially. By establishing this distinction, promoters who
may have contributed to the corporate debtor's insolvency would be barred from benefiting
from it, while motivating independent guarantors to continue giving guarantees.