Banks may encounter legal hurdles in invoking personal guarantees

Experts say most promoters don't register assets under their names

Public sector banks moving the National Company Law Tribunal (NCLT) to invoke personal guarantees of promoters of defaulting companies face a tough and highly litigious path as none of the promoters register assets under their names, auditors and lawyers say. 

Some foreign banks hire detectives to gather information on promoters’ assets stashed overseas, but very few Indian banks resort to such measures.

After the Supreme Court paved the way for invoking personal guarantees of corporate debtors in May, several lenders have moved the NCLT to recover dues from defaulters.

For instance, Union Bank of India is moving the NCLT against Kapil Wadhawan, the erstwhile promoter of DHFL, which owes Rs 79,000 crore to a consortium of banks. Similarly, the personal guarantees of Sanjay Singal and Arti Singal, guarantors of Bhushan Power and Steel, have been invoked by State Bank of India for defaulting on loans worth Rs 47,100 crore.

A former banker said it is very tough to invoke personal guarantees in India as court trials drag on for years and lenders lose interest. “There are very few cases in India where personal guarantees resulted in banks recovering any money. Take the case of Vijay Mallya, the banks have recovered part of their dues only this year after years of litigation. There are several accounts that are still in litigation,” said the banker.

The head of corporate lending at a private bank said invoking personal guarantee is yet to be tested. Earlier, its value was next to nil. There will be fear of being declared bankrupt and this may work as a deterrent. That, in turn, will help banks’ power of recovery to an extent. However, there will never be complete recovery as no guarantee can cover the entire exposure. As for alienation of assets (guarantee), “we lenders will have to follow up with patience to trace and make recoveries,” he added.

Lawyers said in cases lenders would be free to invoke personal guarantees in cases where the resolution plans specifically make an exception of allowing them to go against the personal guarantors. “However, in case the resolution plans do not make such an exception, the personal guarantors can argue that the right of the lenders to invoke the guarantee is lost and it stands discharged the minute the lenders accept the resolution plan and payment under it,” said Nirav Shah, partner, DSK Legal.

Interestingly, promoters of several Indian companies had earlier accused their professional managers of fraud and diversion of company funds. But lawyers said they will not get any respite from the Insolvency and Bankruptcy Code (IBC) as lenders will now invoke their personal guarantees. “The invoking of guarantees will prove to be highly beneficial for the lenders and shall also increase the chances of settlement,” said a top lawyer.