The Supreme Court has upheld a Indian government notification to invoke personal guarantees of the promoters whose companies defaulted to bank loans. The Supreme Court ruling will now allow banks to file personal bankruptcies against several top Indian promoters whose companies have been sent to the NCLT (National Company Law Tribunal) for debt resolution.
The IBC was enacted in 2016 and by 2017 end at least 52 companies including Videocon Industries, Bhushan Steel, Punj Lloyd, Essar Steel were sent to the NCLT for defaulting on bank loans. Lawyers said the personal guarantees given by the promoters of these companies will be invoked. Several promoters had moved high courts across India when banks were invoking the personal guarantees. The Supreme Court later transferred all the cases to itself following petitions from Indian lenders.
The Indian government had amended the IBC in November 2019 and gave powers to lenders to invoke personal guarantees of the defaulters. In fact, promoters of several Indian companies then accused their professional managers of fraud and diversion of company funds. But lawyers said they will not get any respite from the insolvency and bankruptcy code (IBC) as lenders will now invoke their personal guarantees. “While personal guarantees come under the contract law, the litigation against former employees will come under the criminal law. A promoter can’t link the two,” said a lawyer.
Lawyers said the judgment provides the much needed teeth to the lenders as far as recovery actions with respect to personal guarantees are concerned. “In fact, this will enable the lenders to pursue simultaneous action against the corporate debtor and the personal guarantors, thereby ensuring that the promoters being the provider of personal guarantees have to deal with their own insolvency and not become an impediment/roadblock in the insolvency proceeding of the corporate debtor. This will now cause promoters in the capacity of personal guarantors to try and agree on a settlement with the lenders whether under the repayment plan or by way of a one-time settlement under a private treaty basis and also undertake not to be an impediment in the resolution of the corporate debtor,” said Ajay Shaw, Partner, DSK Legal.
Misha, Partner at Shardul Amarchand Mangaldas & Co said the Supreme Court has upheld the government notification, bringing into effect the provisions in relation to personal insolvency in respect to personal guarantors to corporate debtors. “The constitutional validity of notification of such provisions only to one category of individuals i.e. personal guarantors was challenged before the Supreme Court by way of several writ petitions. The Supreme Court while pronouncing its decision upholding the validity of the said notification, also held that upon approval of a resolution plan for a corporate debtor, the liability of the personal guarantor for the balance does not get extinguished. This will help settling the jurisprudence finally on simultaneous initiation and proceeding with insolvency resolution process against principal borrower and guarantors or co-guarantors/co-obligtors as well.”
The verdict is a boost for lenders as it allows them to seek recovery of dues from guarantors of loans even while bankruptcy processes against the companies are pending. This could potentially speed up efforts by lenders trying to clear one of the world’s worst piles of bad loans, reported Bloomberg.
(With inputs from Ruchika Chitravanshi)