Practical Implications of the PGIRP
The Personal Guarantor Insolvency Resolution Process (PGIRP), as outlined in the Insolvency and Bankruptcy Code (IBC) of 2016, requires completion within 180 days, the maximum duration of the moratorium under Section 101. However, in practice, the process often extends beyond this period. According to data from the Insolvency and Bankruptcy Board of India (IBBI), resolutions typically take over a year. This delay often results in the moratorium lapsing before the repayment plan is presented to the National Company Law Tribunal (NCLT) for approval, leading to several complications.
Disruption of the Code’s Collective Mechanism
One significant consequence of the moratorium’s expiry is that it undermines the collective resolution mechanism that the Code intends to establish. Upon the lapse of the moratorium, creditors can pursue individual recovery actions. This often leads to secured creditors, primarily banks and financial institutions, initiating proceedings under laws such as the SARFAESI Act, 2002, and the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act). Multiple creditors might hold security interests over the same assets, leading to competition among them to secure orders, and consequently, fragmented recovery actions.
This situation adversely affects the personal guarantor (PG), who is meant to regain solvency through debt restructuring. Instead, the PG faces multiple legal proceedings, increasing financial strain and potentially hindering a successful resolution.
Frustration of Repayment Plans and Loss of Stakeholder Confidence
If a Committee of Creditors (CoC) approves a repayment plan and it is pending before the NCLT when the moratorium expires, creditors may enforce claims on the assets included in the plan. As a result, by the time the NCLT considers the plan, critical assets could be depleted, rendering the process futile and eroding stakeholder confidence in the PGIRP framework.
Unequal Recovery Among Creditors
The end of the moratorium also leads to unequal recoveries among creditors, as recoveries depend on the speed of their enforcement proceedings rather than the equitable distribution intended by the IBC. For example, a creditor with a substantial claim may proceed in a higher court like the Delhi High Court, while another with a smaller claim is relegated to a slower-moving district court. This undermines the principle of parity among creditors.
Recommendations for Legislative Amendment
Courts have consistently held that the moratorium under Section 101 cannot exceed 180 days. To address the issues outlined, legislative amendments are necessary. Parliament could empower the NCLT to extend the moratorium on a case-by-case basis, contingent on the PG’s cooperation and progress in the resolution process. This would balance creditors’ rights and prevent misuse of the moratorium.
Interim Measures for Stakeholders
Until legislative changes occur, stakeholders must take steps to maintain the framework’s integrity. The Resolution Professional (RP) should ensure timely completion of processes within the statutory period. The NCLT should be stringent in granting extensions for claim submissions, and creditors and PGs must adhere to timelines and engage cooperatively in the process.
Conclusion
Section 101’s current provisions create a gap between the moratorium’s duration and the time needed for the PGIRP. This gap can lead to fragmented recoveries, frustration of repayment plans, and diminished stakeholder confidence. A legislative amendment empowering NCLT to extend the moratorium could resolve these issues, provided safeguards are in place to prevent misuse. Stakeholders must uphold the framework until such reforms are enacted.
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About the authors: Palash Taing is a Partner, and Shobhna Vijay is an Associate at TLH Advocates & Solicitors.
