SC decision on Anil Ambani guarantee to decide fate of other promoters

Banks plan to invoke personal guarantees in 40 cases

Several Indian promoters  are under the apprehension that their personal guarantees may be invoked by banks after they defaulted on loans. 

The banks have already prepared a list of guarantors following a nudge from the Finance Ministry. The Supreme Court (SC) will start hearing the Anil Ambani vs State Bank of India (SBI) case from next week  whether to invoke personal guarantees given by Ambani to SBI or not. The decision in the case will set the ball rolling for other promoters.

We take a look at what this case means for the banks and for the Indian promoters.

Why is SBI  invoking Anil Ambani’s personal guarantees?

As of March this year, two Ambani-owned companies — Reliance Communications and Reliance Infratel — owed Rs 1,707 crore to SBI. Both credit facilities were personally guaranteed by Ambani. In November 2019, the central government issued a notification rendering the Insolvency and Bankruptcy Code (IBC) proceedings against personal guarantors to corporate debtors. A demand notice was issued to Ambani in February this year. After the National Company Law Tribunal’s (NCLT’s) Mumbai Bench appointed a resolution professional to initiate  process against Ambani, he moved Delhi High Court which granted a stay. 

SBI has now moved SC asking the court to vacate the stay. Ambani has appealed against the provisions of the IBC on personal guarantees. Both companies had defaulted on loans to the tune of Rs 45,000 crore. The NCLT will decide the fate of both the firms and their sale to the highest bidder.
 

What is a personal guarantee?

The person who gives guarantee is called ‘surety’ for the loan taken by another party. A personal guarantee is a promise, given by an individual to ensure that a third party fulfills its obligations to the banks. If the third party fails to do so, then that individual will be liable to fulfill those obligations. When a personal guarantee is invoked, this could mean the personal assets of the guarantor can be attached by the banks to make sure that its loans are repaid.

Will the personal guarantees given by other promoters get impacted?

According to SBI, there are number of writ petitions being filed before the Delhi High Court by several personal guarantors of defaulters and received a stay. SBI says instead of moving the National Company Law Appellate Tribunal (NCLAT), Ambani moved Delhi High Court. 

There are 40 top defaulter cases where SBI and other banks are planning to invoke personal guarantees and the fate of Ambani case in the SC will set a precedent for other cases too. The other prominent cases include Lanco, Amtek Auto, Bhushan Power, and Bhushan Steel where the promoter had given their personal guarantees.

Why is this case so important for the Indian banks? 

The SC will not only seal the fate of the promoters but also of several public sector banks (PSBs). The PSBs have lost billions of dollars, as several companies were referred to the NCLT for debt resolution under the IBC. The personal guarantees given by the promoters is one of the tools in the hands of the banks to recover debt.