The Supreme Court (SC) on May 21 dismissed pleas by various promoter guarantors against lenders launching insolvency proceedings against promoter guarantors.
The Supreme Court bench of Justices L Nageswara Rao and and Ravindra Bhat upheld the November 15, 2019 notification issued under the Insolvency and Bankruptcy Code (IBC).
The notification had permitted lenders to invoke personal insolvency proceedings against promoter guarantors of companies facing Corporate Insolvency Resolution Process (CIRP). The judgment decided on 75 petitions that challenged the notification.
The move is a setback for promoter guarantors such as Anil Ambani, Sanjay Singhal, Venugopal Dhoot.
Petitions challenging the notification were transferred from high courts to the apex court in October 2020. The SC had reserved its judgment in the matter in March 2021.
A personal guarantee enables banks to claim even the personal assets of the guarantor promoter if the firm fails to pay back the money. This is essentially the purpose of the personal guarantee.
The SC dismissal of the petition is significant since banks in many cases have struggled invoke personal guarantees in the event of a loan default.
The SC move will make promoters more accountable for the loans drawn by their companies. To help banks take on powerful promoters who furnish their guarantees to banks, in December 2019, the government let banks move an application for IBC against personal guarantors to corporate debtors.
Big promoters typically convince lenders to sanction high value loans citing their personal guarantee. But, ultimately, when the loan is defaulted, the same promoters drag the lenders to court rooms when banks try to invoke the personal guarantee.
One big example is the Kingfisher-Vijay Mallya case. Banks gave around Rs9,000 crores to Vijay Mallya-owned Kingfisher Airlines on the back of the personal guarantee given by the promoter (Mallya) and certain collaterals. But when Kingfisher failed to pay back the loan, banks tagged the account as NPA (non-performing assets) in 2012. Since then, banks have been trying to recover the money.Banks have invoked the personal guarantee furnished Mallya later as there was nothing much to recover from other collaterals submitted by Mallya such Kingfisher brand and certain real estate assets. There are many other cases like this where personal guarantees against the promoters have been invoked.