The Supreme Court
‘s endorsement of invoking personal guarantee’s of defaulting promoters fills an important loophole in the bankrutpcy law which will increase the chances of recovery and act as a solid deterent against default bankers and lawyers said.
The courts order clears the way for banks to attach personal assets of Reliance Group
‘s Anil Ambani
, Dewan Housing Finance Ltd’s Kapil Wadhawan
, Videocon Group
‘s Venugopal Dhoot
and Bhushan Power & Steel’s Sanjay Singal among others.
In a 82 page order the two judge bench of L Nageswara Rao and S Ravindra Bhat held that the approval of a resolution plan does not discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. The court dismissed the writ petitions, transferred cases and transfer petitions without costs.
Bankers welcomed the court decision with caution.
“We will have to wait and watch to see how much impact this judgement will have on recovery. We will go through the judgement carefully to see what specific actions cam be taken. It will be debated and deliberated with joint committees of banks,” said State Bank of India (SBI) chairman Dinesh Khara.
SBI was also one of the respondents to the 74 petitions and challenges by promoters on invocation of personal guarantees. It has been in the forefront of invoking guarantees of promoters of defaulting companies. It had invoked Rs 1200 crore of guarantees given by Ambani for defaulting companies Reliance Communications and Reliance Infratel.
In January ET had reported SBI had also approached the Mumbai bench of the NCLT to initiate guarantees by the Videocon Indsutries’ Dhoot brothers totalling Rs 11,500 crore.
It had also taken Bhushan Power & Steel promoter Sanjay Singal to court to recover Rs 12,276 crore dues to the bank for which he was guarantor. All these promoters had challenged these actions in court.
Lawyers and bankers were said the order sets a precedence for future recoveries in bankrutpcy cases and more importantly act as a deterent in the future.
“This order will realise the exact intent of the bankrutpcy act,” said J Samuel Joseph, deputy managing director IDBI Bank.
“The litigations against this amendment were frivilious and are rightly dismissed. One does not know how much impact it will have to recoveries from wealthy promoters because personal guarantees are a small part of the outstanding claims on companies, but as the IBC
has created a deterent for wilfull defaulters who could lose their companies, this will be a huge deterent to prevent defaults for fear of losing their personal assets,” Joseph said.
Lawyers said the SC order will enhance lenders’ ability to recover loans.
“We have seen that resolution process of corporate borrowers has not resulted in recovery of full amount of debt for the lenders. With this judgement lenders can now pursue remedies against the personal guarantors resulting in further recovery for them. The issue with regard to simultaneous proceedings under IBC against corporate debtor and corporate guarantor is pending before the Supreme Court. The personal guarantors judgment in essence has also decided the issue with respect to corporate guarantors as well. Once that is decided it will complete the full circle of recovery under IBC both for personal and corporate guarantors,” said Bishwajit Dubey, partner Cyril Amarchand Mangaldas.
Lawyers said promoter attitudes will change aftrt this judgement.
“Prima facie the court has allowed creditors to recover residual dues from personal guarantors even after the insolvency resolution of the corporate debtor. Lenders may also be able to directly initiate insolvency proceedings against promoters who have defaulted on their guarantees. This is a significant development in the law and will act as a deterent against future defaults,” said Aashit Shah, partner at J. Sagar Associates.
Bankers are also hoping that the apex court’s order clarifies important points like permission to attach personal assets of promoters even after a company has gone into liquidation.
The go ahead from the highest court has cleared all decks to file bankruptcy cases against defaulting billionaire promoters.