Dhoot case: How bankruptcy is declared, what happens next

Why in News

The National Company Law Tribunal (NCLT) declared Venugopal Dhoot bankrupt in proceedings concerning his role as a personal guarantor for corporate loans.

Prelims Pointers

• The Insolvency and Bankruptcy Code (IBC), 2016 provides a framework for resolving insolvency and administering bankruptcy.
• Insolvency is an inability to pay debts when due.
• Bankruptcy is a formal legal process for administering an individual’s estate to meet creditor claims.
• A personal guarantor undertakes to meet a borrower’s liability if the borrower defaults. The company and its guarantor are distinct legal persons.
• The institutions perform different functions.
  1. NCLT adjudicates corporate insolvency and proceedings involving personal guarantors to corporate debtors.
  2. The Insolvency and Bankruptcy Board of India (IBBI) regulates the insolvency ecosystem, including insolvency professionals.
  3. A bankruptcy trustee administers the bankruptcy estate and distributes proceeds according to the Code.

Prelims Traps

• “IBBI is the tribunal that declares a corporate debtor’s personal guarantor bankrupt.” This is incorrect. NCLT adjudicates these proceedings. IBBI is the regulator.
• “A company’s insolvency automatically makes its guarantor bankrupt.” This is incorrect. The guarantor’s bankruptcy requires separate legal proceedings and an order.