The Supreme Court’s approval of invoking defaulting promoters’ personal guarantees closes a key loophole in bankruptcy law, increasing the likelihood of recovery and acting as a strong deterrent to default bankers and lawyers, according to the court. Banks can now seize personal assets of Anil Ambani of Reliance Group, Kapil Wadhawan of Dewan Housing Finance Ltd, Venugopal Dhoot of Videocon Group and Sanjay Singal of Bhushan Power & Steel, among others, according to a court judgement. The two-judge bench of L Nageswara Rao and S Ravindra Bhat held in an 82-page decision that the approval of a resolution plan does not relieve a personal guarantor (of a corporate debtor) of her or his obligations under the guarantee contract. The writ petitions, transferred cases and transfer petitions were all dismissed without costs by the court.
The court verdict was met with cautious optimism by bankers. “We’ll have to wait and see how much of an impact this judgement or the decision has on recovery,” said State Bank of India (SBI) chairman Dinesh Khara. “We’ll have to look or see through the judgement thoroughly to determine what concrete actions may be taken,” he added. SBI was also one of the respondents and was answerable to the 74 petitions and challenges by promoters regarding personal guarantees invoked.
It has been at the forefront of enlisting the help of promoters of enterprises that have gone bankrupt. It had used Rs 1,200 crore in Ambani’s guarantees for Reliance Communications and Reliance Infratel, both of which had defaulted. Sanjay Singal, the promoter of Bhushan Power & Steel, was also hauled to court to recover Rs 12,276 crore in bank dues for which he was a guarantee. These activities have been contested in court by all of the promoters. According to lawyers and bankers, the order sets a precedent for future bankruptcies recoveries and, more crucially, acts as a deterrent in the future. “This order will bring the bankruptcy act’s exact aim to fruition,” said J Samuel Joseph, deputy managing director of IDBI Bank.
“The lawsuits against this amendment were frivolous and were properly dismissed or cancelled; one cannot say how much of an impact it would have on recoveries from wealthy promoters because personal guarantees are a small part of the outstanding claims on companies, but because the IBC has created a deterrent for wilfull defaulters who may lose their companies, this will be a huge deterrent to prevent defaults for longer.” The SC order, according to lawyers, will improve lenders’ capacity to collect loans. “We also have seen that the resolution process of corporate borrowers has not resulted in full recovery of the debt for the lenders; with this judgement, lenders can now pursue remedies against personal guarantors, resulting in additional recovery for them.” The issue of concurrent proceedings under the IBC against corporate debtor and corporate guarantor is currently before the Supreme Court.
Lawyers predict that as a result of the ruling, promoter attitudes will shift.
“Even after the corporate debtor’s insolvency has been resolved, the court appears or seems to have enabled creditors to recover residual dues from personal guarantors. Lenders may also be able to bring insolvency proceedings against promoters who have failed to meet their obligations. This is an important legal breakthrough that will serve as a deterrent to future defaults”, J. Sagar Associates partner Aashit Shah commented on the situation.
The Supreme Court’s approval has paved the way for bankruptcy suits to be filed against rich promoters who have defaulted.
