When a lender goes after the guarantee rather than the company

Section 2(e) applies the Code to personal guarantors to corporate debtors as a class separate from other individuals and from partnership firms, which are in clauses (f) and (g). A director who signs a guarantee for the company's borrowing is the usual case. The definition in section 5(22) turns on the contract of guarantee to a corporate debtor, so a guarantee for an individual's or a firm's debt does not bring the guarantor into this class.

The notification of 15 November 2019 brought into force section 2(e), section 78 except with regard to the fresh start process, section 79 and sections 94 to 187, only in so far as they relate to personal guarantors to corporate debtors. The fresh start route in sections 80 to 93 was left out for guarantors. Section 78 applies Part III where the default is not less than one thousand rupees, with power to notify a higher minimum of not more than one lakh rupees.

Section 243 of the Code, in its text, repeals the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 and keeps pending proceedings under them alive. The commencement table the Supreme Court set out in Lalit Kumar Jain lists the 15 November 2019 notification for the guarantor provisions and does not list section 243, so a person who is not a guarantor to a company should check whether section 243 and Part III have been notified for him before choosing a forum.

Section 95(1) lets a creditor apply alone, jointly with other creditors, or through a resolution professional. Under section 95(4) the application must carry the debt owed, the debtor's failure to pay within fourteen days of service of the notice of demand, and relevant evidence of default. A copy goes to the debtor under section 95(5). The guarantor can also apply himself under section 94, unless he is an undischarged bankrupt or already in an insolvency or bankruptcy process.

Section 60(1) makes the National Company Law Tribunal the adjudicating authority for corporate debtors and their personal guarantors, by the place of the company's registered office. Section 60(2) requires an application against the guarantor of a company already in a resolution or liquidation process to be filed before the bench that has the company. Section 60(3) transfers to that bench any insolvency resolution, liquidation or bankruptcy proceeding of the guarantor pending in another court or tribunal.

A lender does not have to finish the company's process before suing on the guarantee. Section 128 of the Indian Contract Act, 1872 makes the surety's liability co-extensive with that of the principal debtor, and the Supreme Court held in State Bank of India v. V. Ramakrishnan that the moratorium under section 14 of the Code does not stay action against a personal guarantor.

Section 97 has the Board confirm or nominate a resolution professional. Under section 99(1) that professional examines the application within ten days of appointment and reports to the Tribunal recommending approval or rejection. On a creditor's application, section 99(2) lets the professional ask the guarantor to prove repayment by an electronic transfer, an encashed cheque or a signed acknowledgment from the creditor. Section 99(3) bars the guarantor from disputing a debt registered with an information utility.

Section 100(1) then requires the Tribunal to admit or reject the application within fourteen days of the report. In Dilip B. Jiwrajka v. Union of India the Supreme Court upheld sections 95 to 100 and held that the resolution professional's role is facilitative and recommendatory. The guarantor is heard by the Tribunal at the section 100 stage, where the principles of natural justice apply, and not before the professional is appointed.

If the Tribunal rejects the application on a report that it was made to defraud creditors or the professional, section 100(4) records that the creditor may apply for a bankruptcy order under Chapter IV.

Section 96 starts an interim moratorium on the date the application is filed, in relation to all the debts, and it lasts until admission. During it any pending legal action or proceeding in respect of any debt is deemed stayed and creditors cannot start new ones. On admission, section 101 replaces it with a moratorium that ends after one hundred and eighty days from admission or on the order on the repayment plan under section 114, whichever is earlier. Section 101(2)(c) also stops the guarantor from transferring or encumbering his assets.

In Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth the Supreme Court held that penalties imposed by a consumer commission are regulatory and are not a debt, so execution of those penalties is not stayed by the interim moratorium under section 96. Section 96(3) and section 101(4) also exclude transactions the Central Government notifies.

Section 105 asks the guarantor to prepare, with the resolution professional, a repayment plan proposing a restructuring of his debts or affairs. The plan may let the professional carry on the guarantor's business, realise his assets or administer his funds, and it must give the reasons on which creditors may agree to it and provide for the professional's fee.

Section 111 requires approval by a majority of more than three-fourth in value of the creditors present in person or by proxy and voting at the meeting. Section 114 has the Tribunal approve or reject the plan on the meeting's report, and under section 115 an approved plan binds the creditors named in it and the debtor. Section 110 deals separately with the rights of secured creditors in relation to the plan.

If the Tribunal rejects the plan, section 115(2) entitles the debtor and the creditors to apply for bankruptcy under Chapter IV.

Section 121 allows an application for bankruptcy only after one of three orders: a rejection under section 100(4), a rejection of the repayment plan under section 115(2), or a premature end of the plan under section 118(3). It must be filed within three months of that order.

Section 126 has the Tribunal pass a bankruptcy order within fourteen days of the confirmation or nomination of the bankruptcy trustee. Under section 128 of the Code the estate vests in the trustee and is divided among the creditors, and a creditor cannot act against the bankrupt's property or start a suit without the Tribunal's leave. A secured creditor keeps the right to realise its security, but loses interest after the bankruptcy commencement date if it takes no step to realise within thirty days.

Section 140 of the Code disqualifies a bankrupt from acting as a trustee, from being appointed a public servant, and from election to public office or to a local authority. The disqualifications end when the order is modified or recalled under section 142 or the bankrupt is discharged under section 138.

In Lalit Kumar Jain the Supreme Court held that approval of a resolution plan for the company does not operate to discharge the personal guarantor. The guarantor's liability arises from an independent contract, and a discharge of the principal debtor by operation of law does not absolve the guarantor, which is the rule in section 128 of the Contract Act that the surety's liability is co-extensive with the principal debtor's. The Court also held that the creditor can pursue the guarantor for the balance without offending the rule against double recovery.

Section 140 of the Contract Act gives a surety who pays all that he is liable for every right the creditor had against the principal debtor, and section 141 entitles him to the benefit of every security the creditor held when the guarantee was given. In Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta the Supreme Court held that a resolution plan binds guarantors and may extinguish their rights of subrogation if it provides for that, so the guarantor's recovery against the company is limited to what the approved plan leaves. The resolution plan guide on this site covers how a plan is approved and what it binds.