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Photo: Mint

Banks set sights on guarantees

  • Lenders chart plan to recover dues from promoters under IBC
  • Notices to promoters who feature in the first such list being prepared by banks may be sent in the first week of Oct

State-run banks are set to invoke the personal guarantees given by as many as 300 promoters for corporate loans following instructions from the finance ministry, two people with direct knowledge of the development said.

Notices to promoters who feature in the first such list being prepared by the banks are likely to be sent in the first week of October, the people cited above said, seeking anonymity.

The move follows a 26 August communication by the finance ministry to state-run banks, asking them to prepare a list of cases where personal guarantees of promoters can be invoked based on the revised Insolvency Resolution Process Rules, 2019, which has empowered lenders to file bankruptcy applications against personal guarantors of corporate loans before the National Company Law Tribunal (NCLT). The rules came into effect on 31 December.

A personal guarantee obligates the guarantor to pay back a business loan if the corporate borrower defaults. In such cases, promoters, typically, provide personal assets as collateral. According to industry estimates, promoters have provided personal guarantees to state-run banks for dues worth 1.85 trillion.

“Banks may consider putting in place a mechanism for monitoring the cases, which may require initiation of individual insolvency processes before the NCLT against personal guarantors to corporate debtors," the ministry said in the letter.

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Sarvesh Kumar Sharma/Mint


Recent instances of invoking personal guarantees include State Bank of India’s move against Reliance Group chairman Anil Ambani and Sanjay Singal, former chairman of Bhushan Power and Steel Ltd.

“SBI, which has the biggest chunk of such cases, is looking at moving against several large promoters of defaulting companies,’’ said one of the two people cited above. “All cases of 50 crore and above where personal insolvency cases can be filed in order to ensure that promoters pay up are under review."

While the government has suspended all fresh bankruptcy cases for six months from 25 March because of the pandemic, bankruptcy courts are allowed to take up cases where defaults have happened earlier.

Legal experts said invoking personal guarantees can be tricky for lenders and entails a lengthy legal process.

“As things stand, banks are in a bit of a quandary due to the recent Supreme Court ruling in which it refused to vacate a stay by Delhi high court on the invocation of personal guarantees against Anil Ambani. Lenders fear more cases may go the same way as courts may provide interim relief to such promoters," said Ajay Shaw, a partner at DSK Legal. “The Delhi high court’s final judgement in the matter will be crucial and will set an important precedent."

In July, the Supreme Court asked the finance ministry why state-run banks have not invoked personal guarantees of big corporate loan defaulters. The bench, headed by Justice Rohinton F. Nariman asked the petitioner to make a representation to the finance ministry within two weeks. The court also ordered the ministry to respond within four weeks of receiving the representation.

On Thursday, the Supreme Court dismissed a plea by SBI to vacate the stay on personal insolvency proceedings against Anil Ambani for recovery of 1,200 crore granted to his firms. The matter will be heard next by the Delhi high court in October.

Some of the cases being considered for personal insolvency include those where lenders have not yet invoked guarantees and where promoters were interfering with the resolution of their companies, said a lawyer advising bankers on these matters.

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