Personal Guarantors Insolvency: IBBI Mandates RPs To Submit Reports To Both Creditors And Debtors

In a bid to strengthen the resolution process pertaining to personal guarantors, the Insolvency and Bankruptcy Board of India has mandated resolution professionals to provide a copy of its report containing recommendations to both creditors and debtors.

Under the Insolvency and Bankruptcy Code, a resolution professional is required to submit a report before the adjudicating authority that contains the resolution professional's recommendations for approval or rejection of an insolvency application.

This aids the process of justice, as the adjudicating authority gets a professional opinion regarding the admittance of an insolvency application.

The application can be filed either by a creditor or a debtor, depending on the facts and circumstances of the case.

The IBBI noted that in some instances, RPs do not provide a copy of the report to both the debtor and the creditor, resulting in a lack of equal information access between them.

When a creditor is not served with a copy of the report, there is a possibility that the RP is not able to understand the documents and debt as intended by the creditor or is unable to understand the commercial implications of the same, Manisha Chaudhary, partner at UKCA & Partners LLP, told NDTV Profit.

As a result, the report could contain incorrect deliberations, which could lead to a rejection of the application by the adjudicating authority or if admitted, the debt or documents may not necessarily be inferred in the best manner in favour of the creditors, she said.

If the debtor is excluded from being served with a copy, there is a complete departure from due process by not affording representation to the debtor against whom the proceedings are to be initiated, Chaudhary said.

Therefore, the board has now directed RPs to provide a copy of the report to both the debtor and the creditor in all cases.

This directive will definitely ensure smooth functioning of the matter, because in the absence of a copy of the report, the debtor or the creditor—as the case may be—aggrieved by the recommendation of the RP was unable to make an effective representation against the said recommendation, said Vikas Goel, partner at Singhania & Partners LLP.

It must be noted that the Supreme Court has recently upheld provisions pertaining to insolvency resolution process of personal guarantors.

The top court had held that the role of a resolution professional is limited to making a recommendation to the adjudicating authority regarding the initiation of the insolvency process. The adjudicating authority then has the option to either accept or reject the recommendation made by the resolution professional.

It is implicit in this observation that the debtor and creditor are entitled to a copy of the resolution professional's report, to enable them to present relevant material before the adjudicating authority to assail or support the resolution professional's recommendation, said Gaurav Gupte, partner at Cyril Amarchand Mangaldas.

The IBBI has issued guidelines to this effect so that this practice is made commonplace, he said.