When the Insolvency and Bankruptcy Code, 2016 was amended in 2019 to bring personal guarantors of corporate debtors within its fold, it triggered a wave of anxiety among promoters, directors and individuals who had signed personal guarantees as a routine condition of credit facilities. The question everyone was asking: can the bank now come for my personal assets?
The short answer, after the Supreme Court's landmark ruling in Lalit Kumar Jain v. Union of India (2021), is: yes — and the mechanism is more robust than many anticipated.
Part III of the IBC, dealing with insolvency and bankruptcy of individuals and partnership firms, was notified in stages. Sections 78 to 187, covering personal guarantors to corporate debtors, came into force on 1 December 2019 through a notification. The insertion was challenged before various High Courts on constitutional grounds — primarily that Parliament had exceeded its competence and that the provisions violated Articles 14 and 19 of the Constitution.
The Supreme Court, in a Constitution Bench decision in Lalit Kumar Jain, upheld the constitutional validity of the provisions. The court held that Parliament was competent to legislate on insolvency of personal guarantors under Entry 9 of List III (Concurrent List), and that the provisions did not offend any fundamental right.
A creditor (almost always a financial institution) can file an application against a personal guarantor before the Debt Recovery Tribunal (DRT) — not the NCLT. This is a point of frequent confusion: corporate insolvency runs through the NCLT; personal guarantor insolvency runs through the DRT.
The process once triggered:
One of the most important and surprising aspects of the current law — confirmed in Lalit Kumar Jain — is that a personal guarantor is not discharged from their liability merely because the corporate debtor has undergone CIRP and had a Resolution Plan approved.
"The approval of a resolution plan does not ipso facto discharge a personal guarantor of a corporate debtor of her/his liabilities under the contract of guarantee."
— Lalit Kumar Jain v. Union of India, (2021) 9 SCC 321
This is a departure from common law principle that a creditor accepting a composition with the principal debtor discharges the surety. The IBC overrides that principle. A guarantor who assumed personal guarantee obligations may find themselves liable for the entire debt even after the company has been resolved.
This has real consequences for anyone who has signed — or is being asked to sign — a personal guarantee:
Subsequent to Lalit Kumar Jain, the courts have been working through the finer questions. The Supreme Court in State Bank of India v. Krishnakumar Venkataramanashetty (2023) addressed the question of whether moratorium under Section 96 (personal guarantor moratorium) applies to enforcement actions by secured creditors against assets of the guarantor. The position remains that the moratorium is personal — it protects the guarantor from legal proceedings but does not automatically stay enforcement against their assets.
There is also an open question regarding the interaction between personal guarantor insolvency proceedings and recovery proceedings under SARFAESI and the Recovery of Debts and Bankruptcy Act. DRTs, which handle both streams, have taken varying positions on which proceeding should take precedence. This is an area of active litigation.
Personal guarantor insolvency under the IBC is now a live and well-used tool for financial creditors. Promoters and directors of companies that have been through CIRP, or companies currently under financial stress, should take immediate legal advice on their personal guarantee exposure. The time to act is before proceedings are initiated — options narrow significantly once an application is filed.