Transfer of Assets of Personal Guarantor: A Recipe for Disaster?
Introduction
The Insolvency and Bankruptcy Code (Amendment) Act, 2026 has introduced Section 28A into the Insolvency and Bankruptcy Code, 2016 (“Code”).
This Section envisages an asset-transfer framework to pool the assets of the personal or corporate guarantors into the Corporate Insolvency Resolution Process (“CIRP”) of the Corporate Debtor (“CD”). However, when examined specifically with respect to the transfer of assets of a Personal Guarantor (“PG”), the framework severely disadvantages and undermines valuable rights not just of the weaker secured creditors but also of the guarantors themselves.
While confining itself solely to the aspect of PGs to a CD, the purpose of this article is threefold: first, to understand the functioning of Section 28A; second, to delineate the three core ‘issues’ which have compromised the efficacy of this framework; and third, to suggest possible reforms to tackle the said issues.
Asset Transfer Framework under Section 28A
Over the years, a popular practice among secured creditors of the CD was to enforce their security against the PG’s assets under Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) or through the Personal Guarantor’s Insolvency Resolution Process (“PGIRP”) under Section 95, which falls under Part III of the Code.
Now, Section 28A allows assets provided as security for CD’s borrowing to be dealt with in the CIRP itself, subject to ‘approval’ of the Committee of Creditors (“CoC”) of the CD. In case the PG himself is undergoing PGIRP or bankruptcy proceedings, and the creditor has forfeited or surrendered his right in relation to the asset, an additional approval by a majority of more than two-thirds in value of creditors is a pre-requisite. Such assets would now be dealt with in the resolution plan as if they were the assets of the CD.
Further, Section 28A requires the CD’s secured creditor to have taken ‘possession’ of PG’s assets, before or during CD’s CIRP, in order for asset-transfer to work. Obviously, this is not possible during PGIRP because it is the resolution professional, not the creditor, who takes possession. Notwithstanding, the only route available for possession by the guarantor’s creditor is under Section 13(4), read with Section 14, of the SARFAESI Act. This means initiating a SARFAESI recovery under Section 13 should ideally be the first step for a creditor seeking to benefit from this asset-transfer framework.
Following this, the creditor can prefer a Section 28A application through the resolution process of the CD to transfer the said asset into the latter’s CIRP. Until now, the framework ostensibly fulfils its purpose. Yet, the next three sections will demonstrate the pitfalls which compromise the workings of this framework.
First Issue: Multiple charges over a common asset
It is an extremely standard practice among creditor banks, in case they choose not to proceed under Section 95 of the Code, to issue notice under Section 13(2) of the SARFAESI Act and initiate recovery proceedings under Section 19 of the Recovery of Debts and Bankruptcy Act before a Debt Recovery Tribunal (“DRT”).
Now, consider a case with multiple creditors of a principal debtor secured by the same asset of the PG. Here, multiple lenders hold a charge over the same asset of the PG.
After having taken possession under Section 13(4) of the SARFAESI Act and at any point before issuance of a sale certificate in relation to an asset, any powerful creditor(s) (with overwhelming voting power in CoC) holding a security interest over it may move a Section 28A application to transfer the particular asset into CD’s CIRP. The real difficulty arises if any smaller creditor holding a security interest over this asset is unwilling to transfer it to the CIRP pool and chooses to enforce the same through the SARFAESI Act.
At this juncture, the creditor(s) wanting transfer can deviously initiate a Section 95 proceeding against the PG, because of which an interim moratorium under Section 96 of the Code will stall all pending SARFAESI recoveries by all other creditor(s). In Sanjay Dhingra v. IDBI Bank Ltd. and Ors., the Delhi High Court held that once the interim moratorium has come into play on account of PGIRP, the creditor bank cannot proceed any further in the proceedings under the SARFAESI Act with respect to the property of the PG even if it has taken possession of the property prior to the commencement of IBC proceedings.
Consequently, all creditor(s) with a charge on this asset will be compelled to pursue their recoveries through the Code now that their asset has been absorbed into the CIRP and their recoveries depend on a prospective resolution plan. The lack of adequate safeguards for secured creditors of a CD who are disinclined to transfer obliterates the very purpose of the asset-transfer framework envisioned as an efficient resolution and recovery mechanism for CD’s creditors.
Second Issue: Transfer without a PGIRP
In practice, guarantor’s personal properties and lease holdings serve as surety for creditor’s loan to the CD. Despite the centrality of these assets to CD’s successful resolution, judicial interpretations have qualified the transferability of such assets into the CIRP. Relying on State Bank of India v. V. Ramakrishnan & Anr., the National Company Law Appellate Tribunal (“NCLAT”) observed in Nitin Chandrakant Naik v. Sanidhya Industries LLP that no resolution plan can directly consume the property of the PG without recourse to appropriate proceedings, provided for under Part III of the Code.
Oddly enough, the contents of Section 28A suggest that even without initiating a PGIRP proceeding, the dominant secured creditor(s) of CD can initiate a transfer of the charged or mortgaged asset of the PG and absorb it into the CIRP pool. In fact, Section 28A(2) provides that “the transfer of an asset referred to in sub-section (1) under a resolution plan shall vest in the transferee all rights in, or in relation to the asset, as if the transfer had been made by the owner of such asset.” This overarching provision effectively grants ownership rights over a mortgaged property of the PG.
The Supreme Court (“SC”), in Narandas Karsondas v. S.A. Kamtam and Anr., had held that mortgagee’s rights are limited, and ownership of a property can be claimed only through judicial intervention. Under Section 67 of the Transfer of Property Act, the only right a mortgagee gets is a right to file a suit for foreclosure. Without a PGIRP and the consequent absence of a moratorium under Section 96, the guarantor assets now face the combined brunt of SARFAESI proceedings and loss through CIRP absorption.
Thus, the language of Section 28A undermines the due process of law as explained in Nitin Chandrakant Naik. It critically disadvantages a guarantor who could be compelled to pursue simultaneous proceedings over assets over which he has virtually lost control.
Third Issue: Loss of subrogation rights and post-CIRP recoveries
In Maharashtra State Electricity Board, Bombay v. Official Liquidator High Court, Ernakulam & Anr., the SC unequivocally held that a surety is not absolved of his liability even if the principal borrower secures a discharge in bankruptcy or liquidation (discharge by operation of law). In Lalit Kumar Jain v. Union of India & Ors., the SC reiterated that approval of a resolution plan does not ipso facto discharge the CD’s personal guarantor from liability under the contract of guarantee, which is a different agreement altogether. Thus, unless the approved resolution plan extinguishes the debt, secured financial creditors are open to take recourse against the guarantor under Part III of the Code or the SARFAESI Act to ensure full satisfaction of their claims.
This leads to a strange outcome. Consider the case where assets of PG were pooled into CIRP, and a resolution plan was subsequently passed. Now, a completely new and disconnected proceeding under any law to compel further recovery from the guarantor having no resources to pay sits uneasily with the basic fairness principle.
An added complexity here is the SC’s decision in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta and Ors., where the Apex Court approved a resolution plan which had a conspicuous anomaly with far-reaching consequences: it gave financial creditors the right to extract remaining dues from the PG by invoking the guarantee while simultaneously divesting the PG of the right of subrogation against the CD under Section 140 of the Indian Contract Act, 1872.
This anomaly was exploited subsequently in Vikas Aggarwal v. Asian Colour Coated Ispat Ltd. and Ors., where the NCLAT held that the PG’s right of subrogation extinguishes in context of the CIRP proceedings.
Given the long line of decisions which have consistently attached finality to a resolution plan, it stands to reason that the guarantor’s paralysis from moving against the principal debtor after losing his assets to CIRP is the most critical pitfall which Section 28A’s asset-transfer framework fails to consider.
The Way Forward
Where efficiency in resolution comes at the cost of basic procedural fairness, such a framework is bound to fail. A transfer of assets initiated at behest of a powerful secured creditor not just tramples the rights of minor creditors but also leaves the guarantor virtually powerless in the exercise of his contractual and substantive rights. Below are some proposed reforms to this framework:
For the first issue, I suggest that a CoC ‘approval’ to transfer a particular asset of the PG must only take effect when 100% of the creditors of the PG (who are also CoC members) with a charge on that asset agree to the transfer. This is irrespective of whether an overall CoC approval is obtained with a 66% majority vote. This way, a PGIRP or SARFAESI proceeding is allowed to continue without coercing minor creditors to pursue recoveries through CIRP, pacifying inter-creditor disputes.
For the second issue, a limited right of audience to the guarantor must be granted, akin to a reply from CD at the Section 7 stage, when the resolution process moves a Section 28A preferred by any creditor. This should allow PGs to disclose any other proceedings, basic valuation disclosures and proposed distribution of proceeds through alternate recovery channels and enable creditors to file focused objections.
For the final issue, by adding a proviso in Section 30(2), the legislature should mandate that resolution plans not extinguish any future claim that might arise against the successful resolution applicant through the PG’s right of subrogation, if any future proceeding is initiated against the PG by any secured creditor of the erstwhile CD.
Conclusion
An undeniably positive feature of the asset-transfer framework under Section 28A is that it promises a consolidated process which could offer a larger asset pool, making bids more attractive and potentially increasing recoveries. For a system often trammelled with delays and haircuts, the pooling of assets holds immense value. Yet, in several places, the framework falters while preserving the rights of smaller creditors and the PGs of the principal debtor. Thus, an overhaul in this framework must be imminent and the only way to ensure its efficient working.
*The author is a Third year law student at Jindal Global Law School, O. P. Jindal Global University.
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