Promoters of loan defaulting companies to soon face crackdown by lenders

With apex court's backing, banks to speed up enforcing personal guarantees

Promoters of loan defaulting companies will soon face increased pressure to repay as banks get ready to invoke their personal guarantees. 

The Supreme Court asked the finance ministry on Tuesday to respond to a public interest petition seeking disciplinary action against public sector banks for not invoking personal guarantees of promoters and directors of firms defaulting to large loans. 

The ministry is expected to come out with a circular on the matter soon. "Banks will now be forced to invoke personal guarantees and will not treat promoters with kid gloves," said a banker.

Promoters of firms such as Jaypee, Alok Industries, Lanco, Videocon, and Bhushan Steel, to name a few, had given personal guarantees to avail of large loans. 

Several former promoters — including Naresh Goyal of Jet Airways, Arvind Dham of Amtek Auto, and Sanjay Singal of Bhushan Power & Steel — had also given personal guarantees. Vijay Mallya, former promoter of now-defunct Kingfisher Airlines, had done the same. 

On June 12, the State Bank of India (SBI) invoked personal guarantees of Anil Ambani in NCLT Mumbai after Reliance Communications was sent to the court for debt resolution last year. 

The matter is pending in the NCLT and is likely to become a test case for recovery of loans. 

SBI's action came after Chinese banks won an award in London court against Ambani after enforcing his guarantees in the UK court. 

According to senior public sector bankers, personal guarantees are invoked as a standard procedure in most of the defaulting cases. But the process loses its impact soon after. 

"This is the weakness of the system. Even after decrees are issued in the debt recovery tribunal (DRT), how does a lender enforce the decree remains question. For this, lenders have to depend on executive arm that is the government," said a banker.

"As soon as the loan is recalled, all available securities including personal guarantees are enforced. After lenders file a recovery suit, the DRT may issue decree but that, too, after long spell. Even after that, decree loses its value as recoveries rarely happen from personal guarantees," the banker said.

Another top executive with a private bank said: "Personal guarantees are useful in the sense that it is used as a threat for recovery of loans. A guarantor comes forward to pay up in some cases. So, it has some deterrent value."

In November, an amendment to the insolvency code of 2016 was made to include the personal guarantees of promoters to quicken the recovery process. 

On an average, banks are recovering only 45 per cent of their dues from the bankrupt companies. 

After the apex court’s prodding, analysts said banks would be forced to take action in cases that were referred to the NCLT before the coronavirus pandemic, which led to a national lockdown and suspension of the Insolvency and Bankruptcy Code (IBC) for six months. Provisions in the IBC relating to personal guarantors to defaulting companies came into force on December 1, 2019. 

According to the information collated by Insolvency and Bankruptcy Board of India, three applications have been filed under these provisions before the appellate authority till March end. 

While the government decided to suspend initiation of new IBC cases, suspension of insolvency process against personal guarantors to a company hasn’t been announced. 

“Accordingly, if directors or promoters of a company have provided personal guarantees to its lenders, they may still be taken to the insolvency court under Part III of the IBC,” said Sonam Chandwani, managing partner, KS Legal & Associates.

The present embargo does not extend to legal recourses accorded under Sarfaesi Act and Negotiable Instruments Act, and creditors can take possession and sell immovable properties under Sarfaesi or file a criminal complaint for dishonoured cheques for recovery of outstanding money and to put the defaulter behind bars, Chandwani said.

In the past, bankers said, even after the companies were sold to new owners, former promoters created legal complications and delayed settlement of loans. 

“This was necessary as several promoters just walked free after not paying their dues. But this will now change,” another banker said.

(With inputs from Abhijit Lele)