The Insolvency and Bankruptcy Board of India (IBBI) has revised its regulations to allow the same resolution professional (RP) to handle the insolvency process of a company and its personal guarantor. This amendment aims to enhance harmonisation and improve coordination between the two processes.
Why this change?
The IBBI introduced the Bankruptcy Process for Personal Guarantors to Corporate Debtors, Regulations 2019, which came into effect from January 31, 2024. These regulations enabled creditors to initiate insolvency proceedings against personal guarantors of corporate debtors who defaulted on their loans.
However, the regulations also restricted the appointment of the same RP for both the company and the personal guarantor, unless they were related parties. This created a situation where two different RPs had to manage two parallel insolvency processes involving the same set of creditors and assets.
This posed several challenges, such as:
- Lack of coordination and communication between the RPs
- Duplication of efforts and costs
- Potential conflicts of interest and disputes
- Delay in resolution and recovery
To address these issues, the IBBI has now amended the regulations to allow the same RP to handle both the company and the personal guarantor insolvency, subject to certain conditions. These include:
- The RP should be independent of both the company and the personal guarantor
- The RP should disclose any conflict of interest or prior relationship with either party
- The RP should obtain the approval of the Adjudicating Authority (AA) before taking up both assignments
What are the benefits?
The IBBI expects that this amendment will bring several benefits, such as:
- Improved efficiency and effectiveness of the insolvency process
- Reduced time and cost for creditors and debtors
- Enhanced transparency and accountability of the RP
- Better alignment of interests and incentives among all stakeholders
- Increased chances of successful resolution and maximisation of value
What are the challenges?
While the amendment is a welcome step, it also poses some challenges that need to be addressed, such as:
- Ensuring that the RP maintains impartiality and fairness towards both parties
- Balancing the interests and expectations of different classes of creditors
- Managing the complexities and risks involved in dealing with multiple assets and liabilities
- Resolving any legal or operational issues that may arise due to the dual role of the RP
Conclusion
The IBBI’s new rule is a progressive move that aims to simplify and streamline the insolvency process for companies and their personal guarantors. It reflects the regulator’s responsiveness and adaptability to the evolving needs and challenges of the insolvency ecosystem. It also demonstrates its commitment to fostering a culture of trust and cooperation among all participants in the insolvency process.