KFA Lenders Invoke Mallya's Personal Guarantee

In a rare act of aggression, lenders to Kingfisher Airlines have invoked the personal guarantee offered by promoter Vijay Mallya. I say rare, because in this country bankers have hardly ever taken action against non-performing business promoters. Kingfisher Airlines that has been out of operation since October last year owes over 17 bank lenders approximately Rs 7000 crores. Of that, bankers claim they have collateral worth Rs 6350 crores, not counting the Kingfisher brand.  Last month, after having waited long and hard for Kingfisher to service its loans, banks sold some UB group shares that were pledged against the loans but that yielded them just about 550 crores. This week CNBC TV18 banking correspondent Gopika Gopakumar reported that banks have invoked Vijay Mallya’s personal guarantee and a corporate guarantee offered by UB holdings, the group holding company. It seems at the time of offering a personal guarantee Mallya's networth was Rs 1500 crores, whereas UB holding’s shares in group companies were worth Rs 8316 crores. So do bankers finally stand a good chance of recovering their money or rather depositors’ money? To discuss that I am joined by Pramod Rao, Partner Indus Law and Former General Counsel of ICICI Bank and H Jayesh of Juris Corp both men well versed in matters of non-performing promoters and recovery proceedings.

Doshi: What does it mean to invoke a personal guarantee? I do not think I have seen it in the last 10-15 years that I have reported in this country and definitely not against a high -profile promoter. What does the process entail? Will it now mean that all of Vijay Mallya’s personal assets have to be sold to pay up these banks?
Rao: I would say personal guarantees are demanded by banks from many corporate houses. I am saying it is not unique to have personal guarantees. We have seen corporate guarantees getting invoked. In one of the structured lending which was done by Morgan Stanley to Unitech Group, they had invoked the Unitech guarantee just about a couple of years back which was successfully done in many respects. To me it is a right step that the banks have taken. They are getting all of what I would call are personal effects including unpledged shares which Vijay Mallya probably has or holds through his group investment companies to actually come on the table as much as the rest of the collateral as the banks have. So I would look at it as a pretty smart strategy to force all that issue on the table.
Doshi: Is this then going to be the brahmastra that banks hold to be able to get Mallya to cough up? We are talking around Rs 6,000 crore. They made about Rs 550 crore through the sale of shares. Let us assume fixed assets like helicopters, real estate, the Bombay house, the Goa property- all that amounts to another Rs 500 crore; you have got Rs 1,000 crore of recovery, another Rs 6,000 crore to go. Is this going to help them bridge that gap?
Jayesh: I do not think so. A personal guarantee by itself does not mean much. It is what you do against the guarantor which will really make a difference. The odd thing is, unlike a company if it does not pay the debt you go and wind up, you cannot take an individual into insolvency merely because he is not paying his debts. There are other factors which have to kick in before you can actually file insolvency.
Doshi: What more do you need to kick in in a situation like this? The airline is out of operation and he has not serviced loans forever?
Jayesh: I agree, but this is the absurd thing about India that the law of insolvency, as it applies to our corporates, does not apply to an individual to the same extent in the context of when you can take that person to insolvency. So you have to demonstrate that Mr. Mallya has actually deliberately frittered away assets or shifted assets away to avoid paying to the creditors and what not, which are pretty stiff conditions to satisfy an Indian court and can take 10 years.
Rao: If I had to step back, I would put it slightly differently. I would say that insolvency is probably the final step should there be insufficient assets in his own hands to be able to pay off the debt which is because of the guarantee, so I would say we are far away from that. Clearly what will happen is twofold thing. One is, that there are a set of shares which Vijay Mallya owns- all of which are not pledged. I ran through the disclosures at least on the National Stock Exchange (NSE) site and it appears that at least about half if not third is still unpledged. All of that comprise indeed his personal assets whether held through group companies or directly which will be available in case of the invocation of guarantee.
Doshi: Could this include what he may have just sold to Diageo?
Rao: It could possibly be, in which case the cash could equally be what is then lying or available for the creditors to look to.
Jayesh: Why I disagree is that you have a personal guarantee, but you need some piece of paper to move against the assets. When you move the court or the Debt Recovery Tribunal (DRT) saying that I have invoked the guarantee, not paying up, give me a protection order- the time it takes itself to give a protection order which is basically the guarantor cannot now move away assets create third party rights etc., by that time they would have moved away the assets, they would have created third party rights. What does the breach of contract in India result in? Damages which is nothing and 20 years down the line. You used a word brahmastra and when you talk of that the real brahmastra is different which what I have been tracking is only recently the public sector banks have started using- some of the private banks and foreign banks have been using- which is wilful defaulter. You cannot do wilful defaulter against Mr. Mallya directly, but you could against Kingfisher on the basis that they enter into significant related party transactions and it would be amazing what turns out there and that constituted siphoning of assets, because the RBI norms for siphoning of funds includes transactions entered for various considerations. So if I buy something which is worth Rs 100, but I pay Rs 500 for it that is siphoning of funds.
Doshi: You are now alleging transactions that we do not have any proof of.
Jayesh: I am not alleging anything like that. I am giving you the basis.
Doshi: So if they can prove all this, then they can make a case for wilful defaulter.
Jayesh: The consequences are very severe.
Doshi: But that is if they can make a case for it- that is a bit of a chance.
Jayesh: That is the point. Let us get the records straight. We are not saying that they have done certain things. On the contrary what are the real weapons available which you could explore using.
Doshi: But in these given circumstances, let us assume that no such transaction has taken place because we do not know of it, in which case can you make the case for a wilful default and if you cannot, then is that an option available on the table? Then you have only a couple of options- you sell the collaterals that you can and you invoke the guarantees that you have which is the personal guarantee and the corporate guarantee, right? To do that, they seem to have sent two notices, one is the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) notice and apparently they are going to move the DRT in a few days from now- this is again source based information that we have. What is the purpose of two notices, why do you need this, which bank or Tribunal is going to look at the invocation of a personal guarantee?
Rao: If I have to just step back, lenders normally take a bunch of securities. So lenders like to have as much security as is possible. Wherever it is actually assets, physical assets, even aircrafts and so on so forth- those are mortgaged to the banks. I would assume Kingfisher assets are indeed mortgaged to the set of 17 banks that you mentioned. Those can be subject matter of SARFAESI action which is to say that the physical custody of those assets can be taken and auctioned off without the intervention of the courts.
Doshi: But that has nothing to do with the personal guarantee.
Rao: That is a collateral guarantee.
Doshi: What is the role or the connection between invoking a personal guarantee and SARFAESI and DRT?
Rao: The way I would put it is two-fold. One is guarantees can be of two types, one is secured guarantees, other is unsecured. More often than not people take unsecured guarantees.
Doshi: But in this case given the history, it would be a secured guarantee?
Rao: Most likely, I cannot speak with knowledge.
Jayesh: Having secured guarantee is more likely an unsecured guarantee because (interrupted)
Doshi: UB Holdings guarantee is a secured guarantee?
Jayesh: Normally the promoters do give a personal guarantee; yes but rarely a secured personal guarantee.
Doshi: So, the SARFAESI notice must be for the collateral that they had otherwise.. (interrupted)
Rao: Yes.
Doshi: Not connected to the guarantee.
Rao: Not connected to the guarantee unless the guarantee is secured guarantee in which case the assets that are securing the guarantee can be subject matter of SARFAESI. On the personal guarantee, assuming it is unsecured, Mr Mallya has two choices on getting that notice. One is to step forward and say and disgorge himself for what he does have to be able to honor the guarantee- that is one option that he has.
Doshi: Disgorge means to sell his assets and honor the guarantee?
Rao: Exactly. The other option is indeed for him to contest to say that proceed against the balance assets, proceed against other securities that have been posted look to me last. However, usually the guarantee text is such that it allows the lender to say that it need not exhaust all the other available collateral and they can proceed against the guarantor himself.
So the second option Mr Mallya would have is to probably make an inventory and disclose and reach a settlement to say that here is a schedule over which I will dispose off these assets.
To my mind, the way I look at it is the lenders have in a way given a grace to both Mr Mallya and to UB Holdings by saying that we are invoking guarantee. So you are now going to choose, which assets to dispose off to satisfy our guarantee. Should you feel to do that, we have the DRT action, which will get lined up while I agree that DRTs do take time in the process..(interrupted)
Doshi: So the DRT is if you fail to sell your assets and repay our money, then we use the DRT route to get the court to seize your assets, auction them and return the money to us. Where does personal insolvency come into this?
Rao: Only if it is inability and after exhaustion of all the personal assets there is still an overhang of debt, which is unsatisfied- that is when you can take a person to insolvency. There I quite agree, the insolvency regime is such that it is quite cumbersome and onerous in a way to…(interrupted)
Doshi: Also outside of punishing the borrower, does it go any length in achieving recovery because what does the insolvency do?
Jayesh: The threat of insolvency can be quite drastic. Just as wilful defaulter has quite significant consequences, shutting you out from the banking credit market.
Doshi: But the threat of insolvency is one axe that you can hang over his head?
Jayesh: Exactly, that is the point.
Doshi: But the more routine process would be to use SARFAESI to be able to get your hands on all the assets that are otherwise with you or pledged with you as collateral or part of his personal guarantee if it is a secured one, use the DRT if he fails in being able to cough up those assets to fructify his personal guarantee so to speak. If he fails in doing all of this then you can maybe pick the route of either wilful defaulter or insolvency whichever suits the moment.
Jayesh: My question is what is the disincentive in India today for a promoter not to pay out? There are all the incentives possible not to pay up because you can use your funds and assets for other ventures.
Doshi: I do not have answers, I have only questions.
Rao: Indeed my sympathies lie with the lenders. To my mind, the minute they have parted with funds at the time of disbursement, usually all they have is a piece of paper to back up the fact that they need to get their money back.
Doshi: Let me ask the Rs 6,000 crore question. Are they going to get any substantial part of that money back?
Rao: I would think that given all of the unpledged holdings that Mr Mallya does have, the corporate assets which UB Holdings has had …(interrupted)
Doshi: Whether he cooperates in coughing up those assets or not, banks have a fairly good chance of getting their hands on those assets?
Rao: That is right. That is my prognosis at least.
Doshi: As well as the corporate guarantee of UB Holdings, let us not leave that out because if UB Holdings is…(interrupted)
Jayesh: Yes. So that is a value- go, file a winding up petition against UB Holdings and then threaten to bring the house of cards down.
Doshi: Jayesh should know because winding up petitions is his forte, I can tell you that, he has done very effectively against some big time promoters in the past.
Jayesh: Shyam Benegal’s Kalyug, Victor Bannerjee is a promoter there who has his guarantee suddenly invoked and he calls up the bank and says, who has ever heard of personal guarantees being invoked? The answer he gets from the bankers, “Saab kya kare, upar se order hai”. That movie is 30 years old, isn’t that the state of things when it comes to big promoters in India.
Doshi: Where do you see this case go from here, are we going to look at several years of this kind of legal maneuvering before we see any substantial recovery?
Rao: I think clearly to me there is too much limelight around it for maneuvering to happen in the courtroom. The judges are going to be far more acutely aware of the public interest and the public depositors’ money as you said, which is at stake. So to me, I do not see too much of leeway that the courts will grant but at the same time yes, the process does take time.
Doshi: How long would it take for them to get their hands on Mr Mallya’s assets having invoked a personal guarantee?
Rao: I would say knowing the state of affairs that the DRT is today probably anywhere close to nine-eighteen months.
Doshi: Minimum?
Rao: Yes.