Bad debts and personal guarantees

On May 21, 2021, the Supreme Court dismissed pleadings on 75 petitions challenging the notification, including that concerning Anil Ambani, Sanjay Singhal, Venugopal Dhoot, Kapil Wadhawan and 45 other industrialists. (The Supreme Court had declared the notification issued by the Union government under the Insolvency and Bankruptcy Code on November 15, 2019 as legal and valid).

The judgment paved the way for creditors to sue the guarantors of these failing companies to collect debt in the event of personal guarantees for securing funds. Significantly, lenders can also sue guarantors at any stage, even when the company’s insolvency resolution process is not complete. The problems with these loans are that influential industrialists can obtain loans without due diligence, which leads to defaulted loans or delayed repayments.

All ‘on board’

Personal guarantors may argue that they should not be held responsible alone and that the board of directors that runs the business should be sued. However, if there is an individual guarantee contract, the significant person is responsible.

After the Kingfisher Airlines mortgage along with its other corporate guarantees, loans and pledged shares, the defunct airline still has ₹ 9,000 crore in debt. The promoter, Vijay Mallya, has denied personal responsibility. This raises many questions. Were the guarantees sufficient against the sanction of such enormous amounts? The personal guarantor, the political influence of Vijay Mallya, he modified the functioning of the banks internally?

Likewise, SBI has yet to recover more than ₹ 1,200 crore from Anil Ambani for sanctioned loans to Reliance Communications and Reliance Infratel. Likewise, Dewan Housing Finance Corporation Ltd (DHFL) and its personal guarantor Kapil Wadhawan issued a settlement offer to NCLT in a call to seek resolution (Deewan Housing Finance Corporation Ltd Interim ex-parte order, 2020).

In an ongoing appeal, the former director of Gujarat Hydrocarbons and Power SEZ Ltd (corporate debtor) took out a loan of ₹ 100 crore from SREI Infrastructure Finance Ltd, where Assam Company India Ltd was a guarantor company. The debtor has not paid the amount of the loan and the interest which led to the filing of a request for the recovery of debts with the debtor company, guarantor (Kanwar Raj Bhagat vs. Gujarat, 2021).

In terms of Sanjay Lamba v Union Bank of India, the default total amount is over ₹ 70 crore. Appellant Sanjay Lamba is ready to make a settlement of ₹ 67 crore by May 31, 2021, but has not been accepted by Union Bank of India.

The appellant had taken out several facilities with the bank between 2011 and 2012, including a cash credit facility, term loan facility, ad hoc working capital limit, etc. The account of the debtor company was classified as a non-performing asset in 2016.

The famous Videocon insolvency case had offered to pay ₹ 30,000 crore to settle the debt and release 13 out of 15 Videocon group companies from the insolvency proceedings. Videocon Industries’ suspended board chairman and CEO talks about solid plans ahead of debt repayment to regain Videocon market share and image.

Manipulating power

Political interference has been a major contributing factor with the tycoons and big players running the system. The IBC was one of the most significant changes to business laws. The strategy stimulates the regularization of insolvency and bankruptcy proceedings in India, where at least 11 percent of loans are “bad”. In the event of a flood of non-performing assets in the country’s economy, the IBC offers two recovery channels for banks. So far, the IBC has recovered 42.5-45% of total bad debts in 2020. Now the lender can initiate parallel proceedings against the guarantor. Previously, there was no concrete solution for financial creditors to get the money back; this would allow the personal guarantors to escape.

The Supreme Court ruling brought relief after long battles against bad debts for banks. He also guaranteed personal guarantors against the consequences. After the notification, various bankruptcy proceedings were filed against businessmen Anil Ambani, Kapil Wadhawan, Atul Punj, Sanjay Singhal and Venugopal Dhoot.

(The author is Managing Partner & CEO, Surana & Surana, International Attorneys)

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