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Supreme Court’s ruling on Personal Guarantee provided immunity to the bankers
Banks, armed with a Supreme Court ruling, may seek personal guarantees from tycoons ranging from Venugopal Dhoot to Kapil Wadhawan to collect outstanding loans from delinquent businesses, according to reports on Monday. According to estimates, the top ten personal guarantors have guaranteed debt totalling more than 1.6 lakh crore. Among the major names were former Bhushan Steel and Power founder Sanjay Singhal and his wife Aarti Singhal, who provided personal guarantees worth up to Rs. 24,550 crore in order to get loans from a consortium of banks led by the State Bank of India (SBI). Anil Ambani, the erstwhile proprietor of Reliance Communications, has also provided a personal guarantee for the loan. Former proprietor Wadhawan stands guarantee to loans taken by DHFL, which is in debt to the tune of nearly Rs.90,000 crore, and Dhoot has also offered a personal guarantee to a portion of a 22,000-crore loan to Videocon.
Upholding the validity of the Centre’s Notification dated 15 November 2019, the Apex court ruled that initiation of an insolvency resolution process for a company does not absolve corporate guarantees given by individuals from paying up their dues to financial institutions.
The Supreme Court observed that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor’s liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. However, Supreme Court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability.
The Supreme Court upheld the constitutionality of the Centre’s Notification of 15 November 2019, published in the Official Gazette that had allowed financial institutions to pursue proceedings against personal guarantors, commonly promoters, of stressed companies facing insolvency.
A Division Bench of the Supreme Court comprising of Justices Ravindra Bhat and L. Nageswara Rao delivered the ruling, which will enable banks to file personal bankruptcies against personal guarantors, even though the insolvency of companies is yet to be settled.
Reading out the operative part of the verdict, the bench said that the Centre's notification has been held to be "valid" and "legal."
"The approval of resolution plan relating to the corporate debtor does not operate so as to discharge the liabilities of the personal guarantor. Writ petitions dismissed without cost," Justice Ravindra Bhat said during the hearing.
"In the judgment, we have upheld the Notification," Justice Bhat stated while reading out the conclusion of the judgement which decided as many as 75 petitions pertaining to the validity of the notification.
The Supreme Court ruled in May Judgment that the November 15, 2019 government notification permitting creditors, often financial institutions and banks, to sue personal guarantors under the Insolvency and Bankruptcy Code (IBC) was 'legal and valid.' Following the decision, a senior official of a public sector bank stated that banks are evaluating the extent of engagement of those directors who offered their personal guarantee against the loan. Another banker stated that after an evaluation, banks will apply to the National Company Law Tribunal (NCLT) to invoke personal guarantees as part of the recovery procedure.
According to the official, banks have begun to receive requests from some of the promoters to exclude their personal guarantees from non-performing assets. Some of them are stepping forward to resolve problematic loans in order to protect their own fortune. According to the official, most of the promoters believed that once their case was recognised under IBC, their prior crimes and responsibilities would be lifted. However, the order has caused fear among the promoters and directors who pledged their personal guarantee of losing their personal wealth as part of the resolution process, according to the official, who added that the personal guarantee angle would expedite the resolution process because the guarantor stands to lose the personal property. The creditor-debtor relationship has improved, which will reduce the likelihood of future default.
The term "guarantee" comes from Section 126 of the Indian Contracts Act of 1872. A guarantee contract is formed between the debtor, creditor, and guarantor. If the debtor fails to repay the creditor, the guarantor is obligated to pay the sum. If the personal guarantor fails to pay, the creditor may initiate bankruptcy procedures against him or her. Typically, the promoters of large firms provide personal guarantees to creditors in order to get loans and ensure repayment. The administration has defended the November 2019 announcement expanding bankruptcy procedures to personal guarantors during the hearings. Attorney General K.K. Venugopal contended that enlisting guarantors increased the possibility that they would "arrange" for the payment of the debt to the creditor bank in order to secure a speedy discharge.
The Apex court's order will clear the decks for lenders to recover their remaining debt from personal guarantors following the conclusion of the Corporate Insolvency Resolution Process (CIRP).
India's top business tycoons including Anil Ambani, Venugopal Dhoot, Kapil Wadhawan and Sanjay Singhal had contested the central government's 2019 notification, which widened the ambit of personal insolvency provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) to include the promoters as well.