A personal guarantor is a person or an entity that promises payment of another person’s debt, in case the latter fails to pay it off.As a personal guarantor, if your guarantees are invoked, you can take defensive action by voluntarily initiating an insolvency process and attempt to seek resolution with the lenders. Conversely, the lenders can also initiate a resolution application under law to enforce their claims.
By initiating the insolvency proceedings against personal guarantors, there is a greater likelihood that they would “arrange” for the payment of the debt to the creditor bank in order to obtain a quick discharge.
The creditor bank would be prepared to take a haircut or forego the interest amounts so as to enable an equitable settlement of the corporate debt, as well as that of the personal guarantor.
It would result in maximising the value of assets and promoting entrepreneurship.
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A corporate person means:
a) A company as defined under the Companies Act, 2013
b) A Limited Liability Partnership as defined under the Limited Liability Partnership Act, 2008; or
c) Any other person incorporated with limited liability under any law It does not include any Financial Service Provider. However, Financial Service Provider could be notified for the purpose of their insolvency and liquidation proceedings, under section 227 of the Code.
A fast track insolvency resolution is a process wherein the process shall be completed within 90 days from the insolvency commencement date. According to section 55 of the Code, an application under this category can be made by corporate debtor, as notified by the Central Government, falling under below mentioned category:
1. A corporate debtor with assets and income
2. A corporate debtor with such creditor or amount of debts
3. Such other category of corporate person
The waterfall mechanism for distribution of final dividend pursuant to the administration and distribution of estate of a Personal Guarantor is similar to that provided in Section 53 of the Code that governs the liquidation of a corporate debtor.
Accordingly, costs and expenses incurred during the bankruptcy process are paid first followed by payments to secured creditors and the workmen dues for the period of 24 months, in priority to all other debts.
All other debts including unsecured debts are placed at the bottom of waterfall mechanism.
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