Bankruptcy will not void personal guarantees: Supreme Court

NEW DELHI/MUMBAI: Banks can look forward to improved recovery prospects from promoters of defaulting companies who have provided personal guarantees for corporate loans. The Supreme Court on Friday upheld the government notification of November 2019, which allowed banks to enforce the personal guarantee of the promoter if lenders are not able to fully recover their dues after the insolvency resolution process.
Among the defaulting corporate houses that are referred for insolvency proceedings, there are a host of promoters ranging from Sanjay Singhal of Bhushan Power & Steel to Anil Ambani, Venugopal Dhoot, Atul Punj and the Ruias of Essar, who have provided a personal guarantee to their loans.
For these promoters. who have already lost control over their companies due to the initiation of corporate insolvency resolution, the notification was the last thing they expected. This prompted several of them — including Singhal, Ambani and Punj — to challenge the legality of the circular. But like most issues related to the Insolvency & Bankruptcy Code (IBC), the Supreme Court held that even this notification was legally valid.

“What it does is that it allows the creditors to recover based on these guarantees in case the corporate insolvency process does not generate enough funds to cover the claims filed by them,” explained an officer at the Insolvency & Bankruptcy Board of India.
So, if a lender has a claim of, say, Rs 100 crore, and can recover only Rs 70 crore through the insolvency process, they can initiate action either in the National Company Law Tribunal, if the case is still going on, or move the Debt Recovery Tribunal to recover the rest by invoking the personal guarantees of the promoter.
“This judgment will pave the way for banks to initiate proceedings against the corporate debtor and personal guarantors of corporate debtors under IBC and to recover the amount from personal guarantees despite the debt of the corporate debtor being resolved in accordance with resolution plans. Thus, even if the loan to the corporate debtor is restructured or settled or written off, the liability against the personal guarantor will continue,” said L Viswanathan, partner at law firm Cyril Amarchand Mangaldas.
While SBI told the Supreme Court that it had invoked guarantees in 16 cases to recover close to Rs 20,000 crore, the bank’s chairman Dinesh Khara was guarded in his response, saying the lender would examine the nuances of the order before taking a course of action. “This will help settle the jurisprudence finally on simultaneous initiation and proceeding with insolvency resolution process against principal borrower and guarantors or co-guarantors/co-obligors as well,” said Misha, partner at law firm Shardul Amarchand Mangaldas.
While guarantees were doled out with ease earlier, the decision of lenders to invoke Vijay Mallya’s to recover dues from Kingfisher Airlines along with the new bankruptcy law had forced companies to be selective. “Today, companies are often reluctant to give even sponsor undertaking although we are seeking corporate guarantees because it shows the entity’s commitment,” said a banker, adding that often lenders dilute the condition.

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