Personal guarantees amounting to ₹1.8-lakh crore given by promoters of as many as 42 defaulting corporate entities could now be invoked by banks following the Supreme Court order.
This is likely to include Kapil and Dheeraj Wadhwan of DHFL (₹79,344 crore); Videocon promoters Venugopal and Rajkumar Dhoot (₹22,076 crore); Lanco Infratech’s Madhusudhan Rao and family (₹5,253 crore); IVRCL’s Sudhir Reddy (₹7,058 crore); and Jatin Mehta of Winsome Diamonds (₹6,185 crore), according to a PIL filed in the Supreme Court.
Legal experts said that creditors can now initiate concurrent insolvency proceedings against the corporate debtor and the personal guarantors. Abhay Itagi, Principal Associate at law firm MV Kini, said the personal guarantors, invariably promoters, shall be liable for their flawed decisions and hopefully appropriate provisions will be inserted for simultaneous insolvency proceedings against the promoter(s) and the company.
On November 15, 2019, the Government, through a Gazette notification, had made a new provision in the Insolvency and Bankruptcy Code, giving banks the right to move an application for initiation of insolvency proceedings against personal guarantors to corporate debtors.
This was aimed at making promoters accountable for the defaulted loan because the recovery of debt by selling companies through the insolvency process has been low.
But the new provision was challenged by many promoters before different High Courts, claiming that promoters alone should not be held liable for the default on debt repayment.
Banking expert V Viswanathan said that the top court’s decision to uphold the Government’s notification will help banks recover more from stressed accounts. “There is a haircut whether through a resolution plan or liquidation. So, for the balance amount, the banks will now proceed against promoters.”
“Promoters who were not cooperating or trying to reduce the settlement amount by playing dirty tricks will come forward and help creditors get a better price realisation from the corporate assets (otherwise his personal assets will be attached for the balance amount),” Viswanathan said adding that the court ruling will also make promoters wary of extending personal guarantees unless they are confident of the business.
Faisal Sherwani, Partner, L&L Partners, said banks can invoke promoters guarantee even in cases where the company has been sold off under the IBC. This could spell trouble for former promoters of companies like Essar Steel and Bhushan Power.
“The liability of the personal debtor arises from an independent contract and the fate of the company would not ipso facto absolve the surety or personal guarantors,” Sherwani said.