Personal guarantors in the crosshairs as lenders step up heat to recover dues

Bankruptcy petitions admitted by IBBI had dropped to eight in the three months ended December from 14 in the second and 30 in the first quarters of 2023-24.
Bankruptcy petitions admitted by IBBI had dropped to eight in the three months ended December from 14 in the second and 30 in the first quarters of 2023-24.

Summary

  • The National Company Law Tribunal admitted 81 petitions against personal guarantors between January and March, the highest in seven quarters
  • Total debt involved in petitions against personal guarantors at the end of March was about 1.88 trillion

NEW DELHI : Personal guarantors who are also major shareholders in defaulting companies are facing increased heat from lenders who, armed with a recent Supreme Court ruling, are adding pressure on them to honour their repayment liabilities running into several crores of rupees.

The number of bankruptcy petitions admitted against personal guarantors between January and March was the highest in seven quarters, at 81 cases, show the latest data from Insolvency and Bankruptcy Board of India. 

Bankruptcy petitions admitted by IBBI had dropped to eight in the three months ended December from 14 in the second and 30 in the first quarters of 2023-24.

The sharp increase in the number of petitions admitted against personal guarantors in the latest quarter follows a Supreme Court decision in November when it upheld the constitutionality of Insolvency and Bankruptcy Code provisions dealing with personal guarantors.

More recently, in April, the National Company Law Tribunal admitted Indiabulls Housing Finance’s personal-insolvency plea against Subhash Chandra, chairman emeritus of Zee Entertainment Enterprises Ltd, over guarantees given to a company called Vivek Infracon. 

The high-profile case has turned the spotlight on other business tycoons including Reliance ADA Group chairman Anil Ambani, Videocon chairman Venugopal Dhoot, and Bhushan Power and Steel promoter Sanjay Singal, who also face personal-insolvency proceedings.

Trillions in unpaid debt

IBBI data show that the total debt involved in petitions against personal guarantors at the end of March was about 1.88 trillion. Of this, only 103 crore had been recovered by way of repayment plans under the debt resolution process until end-March.

In comparison, creditors have so far recovered 3.3 trillion from companies under the IBC, representing a 68% haircut against their admitted claims of 10.46 trillion.

The Supreme Court in November ruled that the IBC did not violate constitutional provisions on equality before law and right to life and personal liberty, giving a strong boost to the claims of lenders against personal guarantors.

Also read | Mint Explainer: What the Subhash Chandra case means for personal guarantors

Experts say that although there was no specific stay on the provisions of the law earlier, court orders for maintaining status quo regarding the assets of guarantors had created uncertainty about personal insolvency provisions under the IBC.

Such orders made financial institutions unsure of initiating action against personal guarantors under provisions of the bankruptcy law, they said. In many cases, petitions have been withdrawn by lenders, indicating possible recovery out of court. 

“Ever since the Supreme Court cleared the air and settled once and for all that the personal guarantors provisions are constitutionally valid, banks and financial institutions are now aggressively invoking provisions pertaining to personal guarantors for corporate debtors," said Anjali Jain, partner, insolvency and restructuring practice, at Areness, a law firm.

More than 380 cases against personal guarantors have been admitted in tribunals since 2019, when IBC provisions on personal guarantors took effect. 

A ruthless remedy 

Often, what businesses have on their books is plant and machinery, while high valued real estate assets may be with the personal guarantors. 

Hence, lenders may find it more appropriate in some cases to move against personal guarantors under the IBC so that those high-value assets may also be available for debt resolution. 

When compared with the debt resolution process involving companies, insolvency of personal guarantors is a quicker and more ruthless legal remedy directly covering the personal assets of delinquent promoters and personal guarantors, said Jain.

The Supreme Court’s ruling favouring lenders can now make the probability of resolution or repayment much higher in the coming few months, she added.

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