Unfair balance: Guarantees and the insolvency code

The uncertainty on whether guarantees would attract moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 (code), has ended with the promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (ordinance).

This ordinance, based on recommendations of the Insolvency Reforms Committee (committee), held that contractual principles of guarantee are to be respected even during the moratorium and creditors need not exhaust their remedies against the principal debtor before proceeding against the guarantor.

The fate of guarantors has been hanging in the balance since enactment of the code. The court in Sanjeev Shriya v State Bank of India, decided that the moratorium would apply to sureties since liability of guarantors in such cases had not yet been crystallized; however, in other cases such as Schweitzer Systemtek India Private Limited v Phoenix ARC Private Limited and Alpha and Omega Diagnostics (India) Ltd v Asset Reconstruction Company of India, courts held that guarantees would not fall under the moratorium.

SNG & Partners has offices in Delhi, Mumbai and Singapore. Satish Anand Sharma is a senior associate and a qualified insolvency professional, and Devashree Limaye is an associate.