INDIA Trends and Developments Contributed by: Shardul Shroff, Misha, Aishwarya Satija and Kritika Poddar, Shardul Amarchand Mangaldas & Co
and its personal guarantor could not be separated and selling them together would lead to value maximisa - tion. It thus directed the liquidator to give possession of the corporate debtor’s land to its financial creditor so it could be sold with the personal guarantor’s land under the Securitisation and Reconstruction of Finan - cial Assets and Enforcement of Security Interest Act, 2002 (the “SARFAESI Act”). Proportionate proceeds from such sale would be given to the liquidator for inclusion in the liquidation estate. Similarly, the NCLAT permitted a joint sale of assets of the corporate debtor undergoing a liquidation proceeding and its personal guarantor in Ayan Mallick v Pratim Bayal (Company Appeal (AT) (Insolvency) No 456 of 2022, Order dated 13 May 2022). Thus, joint realisation of a corporate debtor’s and its guarantor’s assets have been permit - ted on the grounds that the guarantor’s assets were essential to the corporate debtor, or so integral that they could not be separated, and that such consolida - tion would lead to value maximisation. It is in this context that the proposed amendments with respect to the pooling of guarantor’s assets have been proposed in the Bill. The Bill provides four condi - tions that need to be satisfied. • First, the guarantor’s asset that is to be transferred must be secured. • Second, the secured creditor should have taken possession of the asset by enforcing its security interest under a law that permits it to transfer the asset. • Third, the secured creditor and the corporate debtor’s CoC must consent to the transfer of the asset during the corporate debtor’s CIRP. • Fourth, consent of the creditors of the guarantor would also be required if the guarantor is undergo - ing an insolvency resolution, liquidation or bank - ruptcy process under the IBC. Such consent would be required from at least 66% of the voting share of the CoC of the corporate guarantor, or 75% of the value of creditors for a personal guarantor. Where the guarantor is undergoing a liquidation or bankruptcy process, such creditor consent would not be required if the secured creditor opts to real - ise its security interest outside the process.
Where the above conditions are met, the guarantor’s asset may be transferred to the corporate debtor’s CIRP. Proceeds from such transfer will be adjusted towards the amount of debt owed by the guarantor and the surplus, if any, will be paid to the guarantor. However, where the guarantor is undergoing a pro - cess under the IBC as provided in the fourth condi - tion, the proceeds from the transfer will be made a part of such process. This approach will enable better value realisation. For example, in real estate transac - tions, guarantees are often provided to secure loans and companies often operate through joint ventures. Moreover, allowing the liquidation of the guarantor’s assets will help realise the secured creditor’s debt and hence reduce the corporate debtor’s outstand - ing debt. Considerations relevant to the proposed amendment Several corporate groups rely on intra-group guaran - tees, cross-collateralisation, and common financing structures. Thus, in practice, corporate guarantors may often be companies that belong to the same group as the corporate debtor. Interlinkages in opera - tions of group members may lead to higher realisations if their assets are dealt with together in insolvency scenarios. Consequently, the proposed amendment may be employed to enable realisation of assets of group companies together where such members have provided guarantees for each other. This provi - sion would work in tandem with the group insolvency framework proposed in the Bill in such cases. This not only provides creditors with another avenue to co- ordinate insolvency proceedings of group companies but also allows the sale of their assets together if only one company from the group is undergoing a CIRP. Notably, however, the proposed amendment leaves several details to be specified through subordinate legislation. For instance, the stage at which the secured creditor would be considered to have tak - en over possession and to have the right to transfer title to the secured asset has not been specified. The effect of pending legal challenges to these actions of the secured creditor is also unclear. Further, the manner of seeking consent of secured creditors in instances where there are multiple charge holders may need clarification. Therefore, the exact requirements for transferring a guarantor’s assets into the CIRP of
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