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Bad loans and personal guarantees

On May 21, 2021, the Supreme Court dismissed pleas on 75 petitions challenging the notification including that on 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 Insolvency and Bankruptcy Code, on November 15, 2019 as legal and valid).

The judgment has opened a roadway for the creditors to proceed against guarantors of such defaulting companies to recover debt in case of personal guarantees for securing funds. Significantly, lenders can also proceed against the guarantors at any stage even when the corporate insolvency resolution process of the company is not completed. The issues surrounding such loans is that the influencing industrialists can secure loans without due diligence which leads to non-payment of loans or delayed re-payments.

All ‘aboard’
Personal guarantors may claim that they alone should not be held responsible and that the management board which runs the company should be pursued. However, if there is an individual contract of guarantee then the significant person is liable.

After the hypothecation of Kingfisher Airlines along with its other corporate guarantees, credits and pledged shares, the defunct airline still has a debt of ₹9,000 crore. The promoter, Vijay Mallya, has denied his personal accountability. This gives rise to many questions. Were the collaterals sufficient against the sanction of such huge amounts? Did personal guarantor, Vijay Mallya’s political influence change the functioning of banks internally?

Likewise, SBI is yet to recover more than ₹1,200 crore from Anil Ambani for the loans sanctioned to Reliance Communications and Reliance Infratel. Similarly, Dewan Housing Finance Corporation Ltd (DHFL) and its personal guarantor Kapil Wadhawan have released a settlement offer to NCLT in an appeal to look out for a resolution (Deewan Housing Finance Corporation Ltd Interim ex-parte order, 2020).

In an ongoing appeal, Ex-Director of Gujarat Hydrocarbons and Power SEZ Ltd (Corporate Debtor) had taken a loan of ₹100 crore from SREI Infrastructure Finance Ltd where Assam Company India Ltd was a Corporate Guarantor. The debtor failed to pay the loan amount and interest which led to filing of an application for recovery of debts from the corporate debtor, guarantor (Kanwar Raj Bhagat Vs Gujarat, 2021).

In the matter of Sanjay Lamba Vs Union Bank of India, the total amount in default amount is more than ₹70 crore. The appellant Sanjay Lamba is willing to make a settlement amount of ₹67 crore by May 31, 2021, but was not accepted by the Union Bank of India.

The appellant had taken multiple facilities from the bank between 2011-2012 including cash credit facility, term loan facility, ad-hoc working capital limit etc. The account of the corporate debtor 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 Videocon group companies out of 15 from the proceedings of insolvency. The Chairman and Managing Director of the suspended board of the Videocon Industries mentions about robust plans ahead of debt payments for regaining the market share and image for Videocon.

Manipulative power
Political interference has been a major contributing factor with tycoons and big players managing the system. The IBC has been one of the most significant changes to commercial laws. The strategy boosts regularisation of the insolvency and bankruptcy procedures in India where at least 11 per cent of the loans are ‘bad’. In an event of non-performing assets invading the country’s economy, the IBC provides two channels of recovery for the banks. Until now, the IBC has recovered 42.5-45 per cent of the total bad loans in 2020. Now, the lender can launch parallel proceedings against the guarantor. Earlier, there was no concrete solution for the financial creditors to recover money; it would open ways for the personal guarantors to escape.

The Supreme Court judgment has brought in a relief after long battles against bad loans for the banks. It has also warranted personal guarantors against consequences. After the notification various bankruptcy cases have been filed against businessmen Anil Ambani, Kapil Wadhawan, Atul Punj, Sanjay Singhal and Venugopal Dhoot. The Hindu BusinessLine

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