Industry
Personal guarantors face bankruptcy action over ₹11,990 crore in June quarter
Summary
- Lenders in all seek to recover more than ₹2 trillion from personal guarantors since December 2019, when they were brought under the Insolvency and Bankruptcy Code.
New Delhi: Bankruptcy cases against personal guarantors of businesses continue to pile up.
Lenders moved against 156 of them in the quarter ended June to recover over ₹10,563 crore, while 31 personal guarantors accounting for ₹1,433 crore in defaults by companies approached bankruptcy tribunals on their own for debt resolution, according to data available with Insolvency and Bankruptcy Board of India (IBBI).
Lenders in all seek to recover more than ₹2 trillion from personal guarantors since December 2019, when they were brought under the Insolvency and Bankruptcy Code (IBC). Of these, 3,134 cases are in bankruptcy tribunals (National Company Law Tribunal) while 50 are pending in Debt Recovery Tribunals (DRT), showed data from the IBBI.
Often, high-value assets like real estate are held by major shareholders, rather than being in the books of the business. That prompts lenders to move against them to recover dues when assets of the defaulting company are found insufficient for debt resolution.
Read more: Coffee Day share price nosedives 19% after NCLT initiates bankruptcy proceedings
In FY24, 696 persons ended up in bankruptcy tribunals and 27 in debt recovery tribunals as the companies they stood guarantors for defaulted on repayment of ₹28,222 crore of debt.
Recovery, however, is a sluggish. Only 468 cases were admitted in tribunals and several have been withdrawn, either before or after admission. In 26, repayment plans were cleared by tribunals, with creditors realizing nearly ₹103 crore or a little over 2% of their admitted claims.
In spite of clarifications by the Supreme Court and a government notification regarding National Company Law Tribunal’s jurisdiction, the involvement of both NCLT and DRT in corporate guarantors’ personal insolvency matters has led to confusion, said Mukesh Chand, senior counsel at law firm Economic Laws Practice. Many personal guarantors file applications to benefit from the interim moratorium that halts recovery actions, often as a stalling tactic rather than a genuine attempt to resolve insolvency, Chand said.
Just filing a petition in the NCLT is enough for the moratorium to kick in as it does not require admission.
“These factors, coupled with the NCLTs' burden of cases and lenders' unclear approach to the new framework, contribute to the slow resolution process, Chand said. “To improve outcomes, there is a need for streamlined processes, clearer lender guidelines and measures to curb strategic filings that misuse the interim moratorium."
Read more: Reliance Capital administrator seeks implementation of IIHL's resolution plan
According to Yogendra Aldak, partner at law firm Lakshmikumaran and Sridharan, adjudication was affected as norms governing insolvency of personal guarantors to corporate debtors have for long been under challenge. But a series of Supreme court judgments settling the legal position on this aspect has had a positive effect in the June quarter, with the data showing 187 applications getting filed and 55 getting accepted, he said.
“While the recovery rate at 2% is not optimal, IBC is primarily not a recovery mechanism," said Aldak. Besides, it is pertinent to note that the liability of personal guarantors is "coextensive" with that of the corporate debtor and the claims against the defaulting company which fall through are recovered from the personal guarantors. Therefore, the overall recovery by creditors will be more than the 2% indicated in isolation, Aldak said.
In November 2023, the Supreme Court had upheld the bankruptcy code provisions dealing with personal guarantors, rejecting the challenge mounted by guarantors.
In the June quarter, tribunals cleared debt resolution plans for 58 corporations.
