The ongoing controversy over Zee TV founder Subhash Chandra’s personal liability under personal guarantees extended by him for loans taken by his Essel Group-linked firms has drawn into the limelight an arcane part of company law: the issue of personal guarantees in the context of credit extended to limited-liability companies, loosely referred to as ‘corporates.’
The ongoing controversy over Zee TV founder Subhash Chandra’s personal liability under personal guarantees extended by him for loans taken by his Essel Group-linked firms has drawn into the limelight an arcane part of company law: the issue of personal guarantees in the context of credit extended to limited-liability companies, loosely referred to as ‘corporates.’
While the final outcome of the case is awaited, given the mind-boggling sums involved (with claims worth thousands of crores admitted), it is sure to put the role of personal guarantees and guarantors under greater scrutiny.
While the final outcome of the case is awaited, given the mind-boggling sums involved (with claims worth thousands of crores admitted), it is sure to put the role of personal guarantees and guarantors under greater scrutiny.
Especially since a special bench of the National Company Law Tribunal has stayed an earlier NCLT order approving Chandra’s ₹6.5 crore repayment plan and also restrained Chandra from selling or transferring property held by him, directly or indirectly, during the matter’s pendency.
Section 5(22) of the Insolvency and Bankruptcy Code (IBC), 2016, defines a ‘personal guarantor’ as an individual who stands surety for a loan taken by a corporate debtor and thus promises to pay or discharge the corporate borrower’s debt in case of default.
Part III of the IBC is clear about the liability of the guarantor. It goes by Section 128 of the Indian Contracts Act of 1872: “The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.”
Further, a creditor can proceed directly against the guarantor to recover dues without first exhausting legal remedies or recovery options against the primary borrower.
The rationale of taking a personal guarantee is to ensure that this person has some skin in the game. As this individual’s personal assets—as distinct from corporate assets—are exposed to liquidation for loan recovery in case the principal borrower defaults, s/he is expected to keep the business solvent.
Moreover, unlike earlier, when creditors could begin insolvency proceedings only against a corporate debtor under the Corporate Insolvency Resolution Process (CIRP) of the IBC, lenders can now also proceed against a guarantor while they pursue an insolvent company.
Should the corporate IBC case be resolved, the guarantor’s liability remains, so that any unrecovered portion can still be recovered from the promoter.
Indeed, to minimize scope for ambiguity, the IBC outlines a separate legal process for handling personal guarantors of corporate debt. While a company’s insolvency is handled via the CIRP, a promoter’s personal insolvency is governed by a distinct framework that is also adjudicated under the same roof—the NCLT.
Over the years, jurisprudence in such cases has evolved substantially. In a landmark ruling—Lalit Kumar Jain vs Union of India (2021) —the Supreme Court of India firmly established that approving a resolution plan or completing the CIRP for a corporate debtor does not discharge a personal or corporate guarantor from legal obligations.
It has since also been established (NCLT, Bengaluru) that proceedings against a personal guarantor under Section 95 of the IBC are independent and do not require a pending CIRP against the corporate debtor. Presumably, this is to guard against guarantors alienating their assets before a CIRP gets underway.
Despite these judgements, the track record of recovery from guarantors has been poor, with most cases stuck in civil-court litigation. The Zee founder’s case being so widely watched across the country shouldn’t surprise anyone.