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Explained: Why is the issue of personal guarantors under IBC in SC?

The apex court will now hear on December 2 the pleas challenging the Insolvency and Bankruptcy Code provisions relating to initiation of insolvency proceedings against personal guarantors.

Written by Aashish Aryan , Edited by Explained Desk | New Delhi |
Updated: November 2, 2020 6:52:26 pm
insolvency and bankruptcy code, bank insolvency issue, IBC bank issue, personal guarantors insolvency, supreme court ibc issueThe Supreme Court on Friday transferred to itself all the petitions challenging the Insolvency and Bankruptcy Code (IBC) provisions relating to initiation of insolvency proceedings against personal guarantors.

The Supreme Court on Friday transferred to itself all the petitions challenging the Insolvency and Bankruptcy Code (IBC) provisions relating to initiation of insolvency proceedings against personal guarantors. It will now hear these cases on December 2.

What is a personal guarantee?

To secure loans easily and effectively and to showcase their intent to repay bank dues on time, the promoters of some of the big business houses submit a personal guarantee to the lenders. It is sort of like an assurance from the owner or the owners of the company that the monies borrowed by their company for various purposes shall be re-payed on time as per the agreed schedule.

It is different from the collateral that firms give to banks to take loans, as Indian corporate laws say that individuals such as promoters are different from businesses and the two are very separate entities. A personal guarantee is most likely to be furnished by a promoter or promoter entity when the banks demand for collateral which equals the risk they are taking by lending to the firm, which may not be doing so well.

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So why is the issue of personal guarantee and guarantors in the Supreme Court?

With the recovery proceedings under the IBC not moving at the pace that it should, the government had always wanted to make promoters of loan defaulters, wilful or otherwise, accountable for their actions when they were at the helm of companies that are now undergoing insolvency resolution.

In December 2019, the government came out with a new provision that empowered banks to move an application for initiation of insolvency against personal guarantors to corporate debtors. In cases of most big companies that were in the Reserve Bank of India’s list for being big defaulters, the actions of erstwhile promoters have been under the lens of the government as well as its probe agencies.

Therefore, in order to ensure that maximum recovery could be made for lenders along with the resolution of debt of companies, the Finance Ministry nudged banks to also pursue personal insolvency cases against promoters who had furnished personal guarantees for the loans taken by their firms, which later was not re-payed as per the agreed schedule. 📣 Express Explained is now on Telegram

The new provision, however, was challenged by as many as 19 promoters before different high courts, claiming that it was always a management board that ran the company and, therefore, the promoters alone should not be held liable for the default on debt repayment.

What are the issues under challenge in these cases?

One of the major contentions is that if insolvency tribunals start accepting the plea of banks on personal insolvency, it could lead to the initiation of insolvency twice for the same debt. Though the National Company Law Appellate Tribunal (NCLAT) has, in the past, held that corporate insolvency can not be initiated twice for the same set of default, banks have argued that apart from getting the appropriate bids for debt-laden companies, owners who have been declared to be wilful defaulters should also be held liable and their personal guarantees be invoked.

For example, in the case of Bhushan Power and Steel, the former promoter of the company Sanjay Singhal and his wife Aarti Singhal had furnished personal guarantees worth up to Rs 24,550 crore to take loans from a consortium of bank led by State Bank of India (SBI). The group later defaulted on loans worth Rs 48,000 crore. In September this year, SBI invoked the personal guarantees submitted by Sanjay Singhal.

Similarly, the banks have also moved personal insolvency application against Anil Ambani after two companies promoted by him failed to pay dues on Rs 1,200 crore that they had borrowed from SBI. Ambani had given personal guarantees against these loans.

What happens to promoters or personal guarantors after these insolvency petitions?

Like corporate insolvency processes, a businessperson, be it the promoter or the personal guarantor, is free to start with a clean slate after a personal insolvency case against them is over. The lenders will be eligible to recover their dues only from the collateral deposited or personal assets belonging to that person. However, any or all assets mentioned in the list provided at the time of sanctioning of the loan, even if transferred to someone else, can also be attached and sold.

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First published on: 31-10-2020 at 06:00:03 pm
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