Banks explore the possibility of invoking the personal promotion guarantee

NEW DELHI : Armed with a Supreme Court order, banks can invoke personal guarantees from tycoons ranging from Venugopal Dhoot to Kapil Wadhawan to collect overdue loans from their overdue businesses, sources said Monday.

According to one estimate, the top 10 personal guarantors have guaranteed debt of more than 1.6 lakh crore. Among the big names, former promoters of Bhushan Steel and Power Sanjay Singhal and his wife Aarti Singhal had provided personal guarantees of up to 24,550 crore to take out loans from a consortium of banks led by the State Bank of India (SBI).

Former Reliance Communications promoter Anil Ambani also gave a personal guarantee against the loan taken out. Former promoter Wadhawan guarantees the loans taken out by DHFL, which is sitting on a debt of around 90,000 crore, while Dhoot also gave a personal guarantee to part of Loan of 22,000 crore to Videocon.

In May, the Supreme Court ruled that the government notification of November 15, 2019 authorizing creditors, usually financial institutions and banks, to oppose personal guarantors under the Insolvency and Bankruptcy Code (IBC) was “legal and valid”.

After the judgment, a senior official at a public sector bank said banks were assessing the level of involvement of directors who pledged their personal guarantees against the loan.

After assessment, said another banker, the banks would move the National Company Law Tribunal (NCLT) for invoking a personal guarantee as part of the collection process.

The official said banks have started receiving calls from some of the developers to exclude non-performing assets from their personal collateral. Some of them show up to resolve bad debts in order to save their personal wealth.

Most promoters believed that once their case is admitted under IBC, their past sins and obligations cease, the official said.

However, the ordinance sparked fear among promoters and administrators who pledged their personal collateral to lose their personal wealth as part of the resolution process, the official said, adding that the personal collateral angle would speed up the process. resolution process because the guarantor risks losing personal property.

The creditor-debtor relationship is one step ahead and this will minimize the risk of default in the future.

The concept of ‘guarantee’ is derived from section 126 of the Indian Contracts Act, 1872. A guarantee contract is made between the debtor, the obligee and the guarantor. If the debtor does not repay the debt to the creditor, the surety is responsible for paying the amount. The creditor reserves the right to initiate bankruptcy proceedings against the personal guarantor if the latter does not pay. Usually, promoters of large companies submit personal guarantees to creditors to secure loans and ensure repayment.

During the hearings, the government justified the notification of November 2019 extending the bankruptcy procedure to personal guarantors. Attorney General KK Venugopal argued that by using guarantors there was a greater likelihood that they would “arrange” for the payment of the debt to the creditor bank in order to obtain prompt discharge.

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