Founders of sinking companies dragged to tribunals for ₹1 tn

Shareholders and founders who extend personal guarantees to their companies, giving additional comfort to lenders, are increasingly ending up in bankruptcy tribunals, marking a significant development in India’s bankruptcy resolution push.

Official data from the Insolvency and Bankruptcy Board of India (IBBI) showed that personal guarantors representing over ₹1 trillion had been dragged to these tribunals since they were brought under the bankruptcy code in 2019.

Close to 70% of the 1,235 cases of personal guarantors who faced creditor action ended up in tribunals in FY22, even as the economy recovered from the contraction seen in the previous fiscal year.

Of the total ₹1.1 trillion worth of personal guarantees that reached tribunals, FY22 accounts for about ₹63,000 crore.

In the April-June period of FY23, 123 cases of personal guarantors ended up in tribunals, accounting for over ₹5,000 crores, data showed.

Founders of businesses facing creditor action for the personal guarantees given by them is a significant development in the bankruptcy resolution regime.

Personal guarantees give extra comfort to the lender while taking the risk of extending loans. They can also help persuade lenders that the promoter has skin in the enterprise, especially in the case of thinly capitalized companies.

Anoop Rawat, partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas & Co., said that initially, when the Insolvency and Bankruptcy Code (IBC) came into effect, provisions relating to personal guarantors were not operational.

“Subsequently, the provisions got notified, and the Supreme Court also brought clarity by upholding the liability of personal guarantors, irrespective of whether a resolution plan has been approved for the corporate debtor. Also, the trend now in many cases is to pursue personal guarantors parallelly while corporate insolvency resolution process is on.”

As of June, over 5,600 corporations have ended up in the National Company Law Tribunal (NCLT) for bankruptcy resolution, of which two-fifths represent the manufacturing sector and a fifth account for the real estate sector. Construction, retail trade, hotels, electricity and transport account for the rest.

Data also showed that of the cases admitted in tribunals so far for defaults of less than ₹1 crore, 80% were triggered by operational creditors like vendors.

To address such aggressive action by operational creditors and the use of IBC as a recovery tool, the government had raised the minimum payment default for invoking IBC to ₹1 crore in 2020.

Till June end, over 500 cases of corporate distress have found resolution plans under the IBC regime, with creditors realizing about ₹2.35 trillion.

The total claim of creditors in these cases was about ₹7.6 trillion. The fair value of these enterprises when they entered the bankruptcy process was over ₹2 trillion.

The Centre is currently working on a bill to amend the IBC to try and further improve the outcome of procedures in terms of the rescue of companies and recovery of the investments by lenders. The bill is expected to be tabled in the winter session of Parliament.

Official data also showed that till the end of June, 786 petitions had been filed by administrators of insolvent businesses to reverse the dubious past transactions of these entities and recover lost funds.

The amount involved in these transactions, which include fraudulent or under-valued deals, is over ₹2.2 trillion.