SC to lenders’ aid
The apex court’s ruling gives teeth to the banks’ recovery process against the defaulters
The financial lenders have got relief with the Supreme Court upholding a Government notification for invoking personal guarantees of promoters whose companies have defaulted on bank loans. The banks can now file for personal bankruptcies against promoters whose companies are facing debt resolution from the National Company Law Tribunal (NCLT). The Government enacted the Insolvency and Bankruptcy Code in 2016 to deal with the inability of banks to get back defaulting loans. Within a few months, over 50 companies ended up with the NCLT and personal guarantees given by the defaulting promoters were sought to be invoked. At that point, several promoters moved the High Courts and finally the Supreme Court transferred the cases to itself. In 2019, the Government amended the Code by bringing in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019. The notification empowered the lenders to invoke the defaulters’ personal guarantees. The apex court clubbed all the 70-odd petitions that challenged the “personal guarantors” clause of the notification. The Supreme Court not only upheld the constitutional validity of the notification, it also held that even after a resolution formula is worked out for the corporate debtor, the personal guarantor continues to be liable for any balance amount remaining. This ensures that the liability of the personal guarantor does not end even after a resolution formula is worked out for the corporate debtor and proceedings can be initiated against the promoter and personal guarantor and co-guarantors, if any, as well.
The Supreme Court’s decision has now provided teeth to the banks’ recovery processes. They can pursue both the personal guarantors and the corporate debtors simultaneously. The banks or other lenders can directly invoke the personal guarantees of the promoters even as the bankruptcy proceedings against the promoters’ companies go ahead. In technical parlance, the promoters who give personal guarantees will have to deal with their insolvency on their own, even by selling their private assets, if they have to, and will not hamper the insolvency cases against the corporate debtors. The promoters will now be made to reach a settlement with the banks in the form of a one-time settlement or a repayment plan and give an undertaking that they will not impede the resolution process of the corporate debtor. It gives a fillip to the banks’ attempts to clean up the huge amount of bad loans without writing them off as NPAs. The apex court dismissed without costs all the petitions by, among others, Anil Ambani of R-Com, Sanjay Singhal of Bhushan Power and Steel, Videocon’s Venugopal Dhoot and Kapil Wadhawan of Dewan Housing Finance Limited, all of whom have stood personal guarantees for loans and were then found defaulting. The decision plugs a major loophole in the bankruptcy law and acts as a powerful deterrent against the defaulters.
Source: The Pioneer
