Creditors have managed to recover only 2.16 percent, or Rs 102.78 crore, of their admitted claims from personal guarantors under the Insolvency and Bankruptcy Code (IBC), according to the latest data from the Insolvency and Bankruptcy Board of India (IBBI).
The insolvency resolution process for personal guarantors is seen as a potential mechanism to balance debtor relief with creditor recovery. However, the low recovery rate suggests a systemic issue. There is a growing concern that the current emphasis on approving repayment plans without rigorous scrutiny or enforcement mechanisms may undermine creditor confidence and create a moral hazard.
The IBBI data reveals that out of 383 admitted personal guarantor insolvency processes, 124 have been closed. Of these, 12 were withdrawn, 86 were closed because repayment plans were not submitted or were rejected, and 26 had their repayment plans approved. In the first quarter of 2024, five repayment plans received approval.
Personal guarantors provision
The provision for insolvency resolution of personal guarantors was enabled in November 2019 as part of a phased introduction of individual insolvency laws. Despite this, the recovery rate remains low, prompting calls for stricter assessments, stronger creditor protections, and greater accountability from debtors.
One initial challenge was whether a banker’s agreement with the company and the personal guarantor was inter-linked or separate. In February this year, the IBBI allowed the same insolvency professional to handle the resolution process of a company and its personal guarantor to ensure better harmonization and coordination.
Experts indicate that invoking personal guarantees under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act or the Indian Contract Act has been time-consuming. This allowed personal guarantors to divert, erode, or create encumbrances over their assets, thereby making the process ineffective.
Under the IBC, creditors often face substantial haircuts, sometimes as high as 90 percent. Effective mechanisms for recovery from personal guarantors could significantly benefit creditors, highlighting the need for reforms in the personal guarantor insolvency resolution process to ensure equitable outcomes.
