By Debarshi

Copyright thehindubusinessline

Imagine a situation where a bank lends ₹500 crore to a company. To secure the loan, the company’s promoter furnishes a personal guarantee and mortgages his farmhouse. The company eventually defaults and enters insolvency under the Insolvency and Bankruptcy Code, 2016 (IBC). At the same time, the bank moves under the SARFAESI Act, 2002, to seize the farmhouse. Under the law today, that farmhouse remains outside the company’s resolution process. While the guarantor remains liable and may be pursued, the property is not automatically tied to the rescue of the company.

The IBC (Amendment) Bill, 2025, seeks to alter this scenario. The proposed Section 28A allows creditors, with the approval of the committee of creditors (CoC), to transfer guarantee assets — personal or corporate — into the corporate debtor’s resolution plan. Once transferred, the asset is treated as though the corporate debtor itself had put it on the table. Resolution applicants can then bid for the corporate debtor with that farmhouse bundled in. If the farmhouse fetches more than the guarantor’s liability, the surplus goes back to the guarantor.

On the surface, this seems neat. Why run two separate processes — one against the company, another against the guarantor — when everything can be consolidated? But the simplicity hides a more radical shift. It unsettles how the law of guarantee has worked thus far.

Under contract law, a guarantor’s liability is “co-extensive” with the borrower’s. This means the guarantor can be sued directly, but his contract with the lender is independent. Guarantors stand on their own footing, with their own rights and defences. For instance, if, without the guarantor’s consent, the lender doubles the debtor’s loan exposure, then under contract law, the guarantor stands released and cannot be bound to terms they never agreed to. That safeguard protects guarantors against overreach.

Courts have repeatedly emphasised this independence. In Lalit Kumar Jain v. UoI (2021), the Supreme Court, while upholding the inclusion of personal guarantors under the IBC, stressed that their liability remained distinct. Section 28A chips away at this. By letting guarantor assets flow into the debtor’s resolution, it turns the guarantee contract into an appendage of the debtor’s insolvency, leaving the guarantor with far less control.

This Section is proposed to apply only when a creditor has already taken possession of a guarantor’s asset. During the corporate debtor’s insolvency, that creditor may, with CoC approval, transfer the asset into the corporate debtor’s resolution plan.

The real test

On paper, it appears to have safeguards, including creditor approvals, refund of any surplus, and protection of the guarantor’s own estate. The real test, however, will be in practice. Take, for instance, a guarantor who mortgaged the same warehouse for two different loans. If one creditor brings that warehouse into the corporate debtor’s resolution process, what happens to the other creditor who also depends on it?

Now consider a personal guarantor in bankruptcy with ten creditors. Suppose creditors holding three-fourths in value agree to transfer the guarantor’s property into the corporate debtor’s resolution. In that case, the remaining creditors are left with little say, even though their recovery may shrink in the process. Additionally, the traditional protections available to guarantors, such as being released from liability if loan terms were changed without their consent, could lose much of their meaning once the guarantor’s assets are absorbed into a resolution plan.

Undoubtedly, the amendment may lure anyone with its promise of efficiency. Instead of fragmented enforcement actions that prolong disputes and erode value, a consolidated process could offer a larger and cleaner asset pool, making bids more attractive and potentially increasing recoveries. For a system often trammelled by delays and haircuts, the appeal is real. But efficiency is not without trade-offs. If anyone perceives that their personal assets can be drawn wholesale into a company’s resolution, they may hesitate to provide a guarantee in the first place. In the long run, lenders risk losing one of their most reliable forms of credit support.

Litigation is almost certain. Guarantors may challenge the curtailment of their contractual rights. Creditors left outside the corporate debtor’s CoC may object to being sidelined. The IBC, celebrated for its clarity and predictability thus far, may instead find itself mired in new uncertainty.

This way, the proposed Section 28A, perhaps unintentionally, rewrites the law of guarantee. Unless dealt with caution, it risks trading predictability for expediency.

The writer is an advocate before the Delhi High Court

Published on September 16, 2025