Insolvency regulator mulls tighter safeguards for personal guarantee insolvency
India’s insolvency regulator is proposing tighter safeguards for personal guarantor cases, including zero voting rights for related-party creditors, independent asset valuations and scrutiny of questionable transactions. Creditors may also have to explain why a repayment plan offers a better outcome than bankruptcy, particularly when recoveries are low.
The Insolvency and Bankruptcy Board of India (IBBI) is contemplating the implementation of stricter safeguards for insolvency proceedings involving personal guarantors of corporate debtors. In a discussion paper, the regulator has requested public feedback on amendments to existing regulations pertaining to related-party voting, questionable transactions, asset valuation, and the recorded deliberations of creditors.
According to the paper, the regulator aims to harmonize safeguards for personal guarantors with those applicable to corporate insolvency resolution processes.
One of the proposed changes entails assigning a 'Nil' voting share to any related party of the guarantor. Additionally, the list of creditors prepared by the resolution professional should explicitly indicate whether a creditor is a related party of the guarantor. Currently, the legal definition of an associate remains relatively narrow, which allows certain connected creditors to vote despite having close ties with the personal guarantor. The IBBI believes that the proposed amendment will eliminate such discrepancies.
Another proposal entails conducting a thorough examination of preferential, undervalued, fraudulent, and extortionate credit transactions by guarantors. Resolution professionals would analyze these transactions, present detailed findings, and take appropriate action using powers comparable to those available during bankruptcy proceedings. This stringent review process would enable creditors to ascertain if assets were misappropriated, concealed, or transferred improperly.
Furthermore, the regulator plans to introduce an independent valuation of the guarantor's assets during the insolvency resolution process. A registered valuer would determine fair and realisable values of the assets, which would then be included in the repayment plan presented to creditors for consideration. This additional valuation information would assist creditors in comparing the proposed payments with potential recoveries they could obtain through bankruptcy proceedings.
Lastly, creditors are required to provide a comprehensive explanation of their commercial assessment of every repayment plan. Meeting minutes will document the deliberations and reasons supporting decisions to approve, reject, or modify repayment plans. Creditors must consider various factors, including admitted claims, proposed payments, timelines, assets, liabilities, repayment capacity, transaction history, future income, feasibility, and payment certainty.
Moreover, when the proposed recoveries remain significantly lower than admitted claims, creditors must justify why the repayment plan offers better commercial outcomes compared to bankruptcy. The IBBI anticipates that these amendments will enhance transparency, accountability, and informed decision-making among creditors.
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