The Insolvency and Bankruptcy Board of India (IBBI) has proposed significant changes to strengthen transparency and creditor protection in insolvency proceedings involving personal guarantors to corporate debtors.
Under the proposed framework, the assets of a personal guarantor would be required to undergo independent valuation by registered valuers before creditors consider and approve a repayment plan. The move is intended to provide creditors with a clearer picture of the guarantor's actual asset position and the likely recovery available under alternative scenarios.
The proposal assumes particular significance where a repayment plan involves a substantial haircut for creditors. IBBI is also considering requiring creditors to explain why accepting a repayment plan represents a better outcome than proceeding with bankruptcy, particularly where recoveries under the proposed plan are exceptionally low.
The broader reform package also proposes nil voting rights for related-party creditors of the personal guarantor and separate identification of such creditors by the Resolution Professional. IBBI is additionally seeking greater scrutiny of transactions that may have transferred, concealed or reduced the value of assets otherwise available to creditors.
The proposals have emerged against the backdrop of concerns highlighted by the Subhash Chandra personal guarantor insolvency proceedings, where admitted creditor claims were reported at around ₹22,006.57 crore while the repayment proposed to creditors was only ₹6.25 crore—representing an extraordinarily large haircut.
Key Takeaway: If implemented, the proposed changes would make it considerably harder for a personal guarantor to obtain approval of a repayment plan without an independent assessment of the value of assets available for recovery. The reforms are aimed at ensuring that creditors make an informed decision based on the guarantor's actual financial position and that the personal insolvency framework is not misused to secure disproportionate debt write-offs. CA Sansaar