Personal guarantees of defaulters are allowed by the Supreme Court in the case of bad loans

Even if bankruptcy proceedings against the firms are pending, the Verdict allows lenders to pursue payment from guarantors of loans.

The Indian government’s notification to invoke personal guarantees of promoters whose companies defaulted on bank loans was upheld by the Supreme Court. Banks will now be able to file personal bankruptcies against some top Indian promoters whose companies have been referred to the NCLT (National Company Law Tribunal) for debt settlement as a result of the Supreme Court decision.

The IBC was enacted in 2016, and by the end of 2017, at least 52 companies had been sent to the NCLT for defaulting on bank loans, including Videocon Industries, Bhushan Steel, Punj Lloyd, and Essar Steel. Personal assurances provided by the promoters of these companies would be used, according to lawyers. When banks invoked personal guarantees, many promoters took their cases to high courts across India. Following appeals from Indian lenders, the Supreme Court took over all of the proceedings.

In November 2019, the Indian government amended the IBC, allowing lenders to demand personal guarantees from defaulters. Several Indian companies’ promoters, in reality, accused their competent managers of fraud and misappropriation of company funds. However, lawyers claim that the insolvency and bankruptcy code (IBC) will not provide any relief because lenders will now invoke personal guarantees. “While personal guarantees are covered by employment law, lawsuits against former workers would be handled by the criminal justice system. “A promoter can’t connect the two,” a lawyer explained.

According to lawyers, the judgement gives lenders the much-needed teeth when it comes to restitution proceedings involving personal guarantees. “In fact, this will enable the lenders to pursue simultaneous action against the corporate debtor and the personal guarantors, thereby ensuring that the promoters being the provider of personal guarantees have to deal with their own insolvency and not become an impediment/roadblock in the insolvency proceeding of the corporate debtor. This will now cause promoters in the capacity of personal guarantors to try and agree on a settlement with the lenders whether under the repayment plan or by way of a one-time settlement under a private treaty basis and also undertake not to be an impediment in the resolution of the corporate debtor,” said Ajay Shaw, Partner, DSK Legal.

The decision is good news for lenders because it allows them to pursue payment from loan guarantors even though bankruptcy proceedings against the firms are still pending. This could potentially speed up attempts by lenders to clear one of the world’s largest piles of bad loans.

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