Written by Khushi Patel and Dev Goyal.

Introduction

When a ship sinks, the captain goes down with the vessel while its passengers escape in lifeboats. However, India’s current insolvency framework seems to have inverted this maritime tradition.

Corporate debtors who steer their enterprises onto financial rocks are often rescued by the ‘clean slate’ lifeboats of the Insolvency Bankruptcy Code (“IBC”), while personal guarantors remain chained to the sinking vessel, expected to go down with a ship they never commanded.

This article contends that the IBC (Amendment) Bill 2025, while enhancing creditor recoveries, dangerously erodes the contractual and legal safeguards for personal guarantors by prioritizing process efficiency over fairness, ultimately transforming guarantees into high-risk instruments with chilling effects on entrepreneurship, credit flows, and doctrinal coherence in Indian insolvency law.

Understanding the Policies at Conflict

Presently, there exists a jurisprudential tension between two well-established legal doctrines, resulting in friction between a fundamental principle of contract law and the objectives of modern insolvency policy.

1. Classical Subrogation Rights

Section 140 of the Indian Contract Act 1872 enshrined the doctrine of subrogation, allowing guarantors to “step into the shoes” of creditors upon discharge of the principal debtor’s obligation, which helped maintain balance in guarantee relationships. While guarantors provided security to creditors, they retained meaningful recourse against the primary obligor through inherited securities, remedies, and priority rights.

2. The Clean Slate Evolution

The “clean slate” principle, laid down by the Supreme Court in Committee Of Creditors Of Essar Steel v. Satish Kumar Gupta (2020) , and recently re-affirmed in Vaibhav Goel v. Deputy Commissioner (2025), states that successful resolution plans create complete legal separation between pre and post-resolution corporate entities, extinguishing all pre-resolution claims not specifically preserved.

The core tension between subrogation and the clean slate principle  arises when resolution plans extinguish creditors’ claims against corporate debtors while personal guarantors lose subrogation rights yet remain fully liable. This results in the formation of a ‘liability trap’ where guarantors face continuing obligations with no actual recourse.

It is pertinent to note that the Apex Court’s recent judgment in BRS Ventures v. SREI Infrastructure (2024) supports this fallacy by reinforcing the notion that subrogation presupposes the continued existence of a principal debtor,., an assumption that breaks down when corporate insolvency extinguishes underlying obligations. The judgment effectively renders guarantors from protected secondary obligators into vulnerable primary targets with no recovery mechanism against the principal debtor.

Dissecting the IBC (Amendment) Bill, 2025 – The Guarantor Provisions

The recently introduced IBC (Amendment Bill, 2025), has proposed, through the insertion of a new Section 28A, a quicker route to deal with guarantor assets when a company is in insolvency, wherein a lender who has already taken possession of a guarantor’s asset under existing law can sell that asset under the company’s resolution process with the committee of Creditor’s approval. The proceeds will first cover necessary costs, then reduce the guarantor’s debt, and any surplus returns to the guarantor. Even though the intent is to achieve an efficient insolvency process, this creates “double exposure” for guarantors, who are now vulnerable to both the company’s Corporate Insolvency Resolution Plan (“CIRP”), and potential personal guarantor insolvency.

The Bill also proposes to amend Section 14 of the IBC, and narrow the scope of applicability of certain interim moratoriums that would otherwise stop actions against personal guarantors. This may lead to a scenario where creditors are able to proceed at the same time against the corporate debtor and its personal guarantors. Compared with standalone individual debtors (who are not tied to a corporate case), personal guarantors linked to corporates could encounter tighter timelines and fewer pauses. This leads to an unfortunate trade-off, with improved efficiency for the insolvency process, coming at the expense of a guarantor’s basic contractual right.

Critical Analysis: The Unintended Consequences

As a result of this policy shift, financial institutions may begin treating guarantees not as secondary safeguards but as their primary means of recovery. The Amendment Bill’s provisions would allow lenders to pursue multiple enforcement avenues, thereby transferring recovery risk from the corporate debtor to individual guarantors. This shift is likely to produce ripple effects across credit markets.

This shift is likely to produce ripple effects across credit markets. As guarantors grow increasingly reluctant to pledge personal assets, lenders may respond by raising loan costs or demanding additional collateral. Consequently, personal guarantors are likely to become increasingly hesitant about providing guarantees. This butterfly effect may impact the credit markets in significant ways. Loan pricing could begin incorporating guarantor uncertainty as a heightened risk factor, with lenders potentially demanding higher premiums or additional collateral.  Over time, such practices could narrow access to formal credit, allowing only entrepreneurs with significant personal wealth to secure financing. The result is a form of credit rationing that discourages start-ups and first-generation promoters, ultimately stifling the culture of innovation that insolvency reform was meant to foster.

This trend has direct implications for India’s ease of doing business. The original IBC was celebrated for boosting India’s global ranking by offering a predictable resolution process but predictability depends on a fair balance between creditor rights and entrepreneurial protection. The new regime proposes to align business failure more closely to personal liability of the guarantors thereby dissuading potential entrepreneurs from formal credit. The risk-taking culture essential for growth is thereby weakened, undermining the very foundations of India’s business environment.

The Supreme Court’s ruling in BRS Ventures v. SREI Infrastructure (2024) illustrates this shift by affirming that insolvency proceedings may run simultaneously against both debtor and guarantor while maintaining the separate legal identity of subsidiaries. Although this settled important legal questions, it effectively entrenched a creditor-centric approach and left guarantors with diminished subrogation rights, further exposing them to disproportionate liability.

The difference in the status of corporate and individual guarantors deepens this imbalance. Corporate guarantors, being entities themselves, may access CIRP and benefit from moratoria but individual guarantors who are often family members pledging personal property, have significantly lesser protections and risk losing personal assets without procedural safeguards.

Long-term systemic risks arise when creditors, who are assured of recovery through guarantor assets, have less incentive to conduct rigorous due diligence, thereby creating moral hazard and eroding financial discipline. In practice, smaller banks and NBFCs, particularly in Tier-2 and Tier-3 could be more likely to rely on personal guarantees as a primary recovery mechanism. These  tendencies may inadvertently restrict credit flow in regions that are already underserved, thereby running counter to broader policy objectives of equitable regional development and financial inclusion.

Moreover, foreign investments may also face the brunt when dealing with a regime that exposes guarantors to virtually unlimited liability while extinguishing their rights of recourse risk being perceived as overly creditor-driven. This might deter foreign entrepreneurs from tying their personal assets to Indian ventures and may also discourage global private equity and venture capital players from backing businesses that depend on such guarantees. The result could dampen India’s booming investment climate at a time when it seeks to cement its position as a global hub for capital inflows.

The unintended consequence, therefore, is clear. The “clean slate” designed for corporate debtors risks becoming a blank cheque for creditors, leaving guarantors disproportionately exposed. Unless recalibrated, this trajectory could compromise credit access, social fairness, foreign investment, and the doctrinal coherence of India’s insolvency regime.

Policy Recommendations

A balanced approach is necessary to ensure that guarantors do not become the unintended casualties of insolvency reform. Firstly, it is necessary that proportionality be aligned to the liability of the guarantors by capping exposure to the benefit derived or actual outstanding debt. Moreover, a cooling off period before simultaneous proceedings against debtor and guarantor would protect due process, while providing stronger rights, representation and a fair hearing to safeguard guarantors before their assets are liquidated.

Beyond immediate safeguards, structural changes are required. Regulators should promote alternatives to personal guarantees such as asset-based lending, credit insurance, cash-flow backed and rescue financing models successfully adopted in jurisdictions like the EU and Singapore to diversify credit risk. Crucially, statutory recognition of subrogation rights must, in some form, be preserved even after a resolution plan is approved, thereby enabling guarantors to retain limited avenues of recovery against debtors. In the long term, new ideas can make the system less dependent on guarantors’ personal property. For example, if banks and lenders use credit insurance pools, the risk of default would be shared by many parties instead of falling only on guarantors. Moreover, although creditor based committees exist in restructuring regimes, guarantor representation is scarce and therefore if guarantors were given at least a small role in such committees, their concerns and risks would be more likely to be taken into account, rather than being entirely ignored.

Conclusion and Way Forward

India’s insolvency framework stands at a crossroads where efficiency gains risk undermining entrepreneurial confidence. The Amendment Bill’s guarantor provisions, while aimed at enhancing creditor recovery, threaten to create a system where corporate rehabilitation comes at the expense of individual financial devastation. The maritime analogy that opened this analysis remains apt: captains should not escape while those who merely vouched for their voyage bear the ultimate cost.

A recalibrated approach must preserve the clean slate doctrine’s benefits while restoring meaningful protections for guarantors. This requires not choosing between creditor rights and guarantor fairness, but crafting a framework where both can coexist. India’s insolvency success depends on maintaining this delicate balance, ensuring that the promise of a fresh start extends beyond corporate boardrooms to the individuals who made that start possible.