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IBBI seeks to tighten the noose around guarantors of bankrupt firms

June 25, 2024


The insolvency regulator has proposed that the resolution plan submitted by an investor won’t extinguish the creditors’ right to proceed against loan guarantors to the stressed firm and enforce realization of guarantees governed through various agreements. The move, suggested in a discussion paper by the Insolvency and Bankruptcy Board of India (IBBI), will make it difficult for personal guarantors of defaulting firms to escape liabilities. The regulator has decided to follow the Supreme Court verdict in the case of Lalit Kumar Jain vs Union of India. The apex court had ruled that the approval of a resolution plan of a bankrupt firm does not automatically release its guarantors from their liability. The Supreme Court had passed the order to address a common question of law that had arisen from various petitions filed by promoters of defaulting companies, including Bhushan Power and Steel and Reliance Communications.

MSME asset valuationThe regulator has suggested that for the resolution of a stressed firm up to Rs 1,000 crore and those classified as micro, small and medium enterprises, only one registered valuer (instead of the current two or, in some cases, three) can be roped in to assess their fair and the liquidation values. This is aimed at reducing the time taken for resolution and the costs involving not-so-big bankrupt companies, according to the discussion paper. However, keeping in view the complexities so involved, if Committee of Creditors so decides to have two valuers, it has to record the reasons for the same before resolution professional takes steps for such appointments.

Valuation report

To streamline the process, the IBBI has suggested that the regulations be tweaked to specify that the resolution professional assign a registered valuer to carry out the valuations of the stressed firm as a whole. The RV (registered valuer) may conduct the valuation as per rule 8(2) of the Valuation Rules taking inputs for other asset classes or get the valuation for an asset class conducted from another registered valuer, if required. At present, while the IBBI (Insolvency Resolution Process for Corporate Process) Regulations point towards the appointment of separate registered valuer in each asset class, the Valuation Rules point toward valuation to be carried out by a single valuer as a whole. The latest proposal aims to remove any such confusion over this issue. The regulator has asked stakeholders to submit their comments on the proposals in the discussion paper by July 10.

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