'CIRP threshold against personal guarantors should be raised'

The threshold for Corporate Insolvency Resolution Process (CIRP) against personal guarantors to corporate debtors should be increased, according to the sector experts.

The current default threshold for initiation of insolvency proceeding against personal guarantors is Rs 1,000.

An article by former SEBI Chairman UK Sinha and Delhi-based lawyer Saparya Sood in a recent annual publication by the IBBI, "Insolvency and Bankruptcy Regime in India-A Narrative", suggested several changes measures for the post-pandemic scenario, including raising the threshold for CIRP proceedings against guarantors and flexibility to withdraw cases under IBC after admission.

It noted that while the limit for default on debt to initiate CIRP against corporate debtors has been increased from Rs one lakh to Rs one crore, the threshold for default to initiate CIRP against personal guarantor remains unchanged so far.

The Central government notified Part III of the IBC which deals with the insolvency and bankruptcy of individuals and partnership firms in so far as it applies to personal guarantors of a debtor with effect from December 1, 2020.

"As companies default on their debt obligations, it is only logical that so will the PGs (personal guarantor). The threshold for initiating insolvency proceedings against PGs must also be revised upwards of the current threshold," the article said.

Sinha and Sood further noted that currently under the IBC, the Adjudicating Authority may allow the withdrawal of the CIRP on an application made with the approval of 90 per cent voting share of the committee of creditors.

They said that prescribing a lower threshold to approve withdrawal post admission of CIRP under section 12A may be considered for a limited period of time -- till the companies are expected to deal with the economic effects of the pandemic.

Till December 2019, 135 withdrawals have taken place under Section 12A of the IBC. However, in light of the Covid-19 pandemic, there is a need to push more cases of settlement and encourage withdrawal of CIRP under section 12A, they said.

They were also of the view that it is extremely important that in these difficult times companies which are viable, and which have not violated any law are assisted in their survival and growth.

"This requires that an active mechanism be put in place to resolve cases through timely restructuring and rehabilitation of stressed accounts much before these companies reach the insolvency stage," the article said.

Sinha is also the Chairman of the Committee on Group Insolvency set up by IBBI.