Significance of SC Ruling on Personal Guarantors for Corporate Loans

Synopsis – The Apex Court has dismissed all challenges to the liability of personal guarantors for corporate loans under the insolvency code.

Introduction

The Supreme Court upheld a government notification of 2019 issued under the Indian Insolvency and Bankruptcy Code (IBC).

• This allows banks to initiate insolvency proceedings against personal guarantors who are usually promoters and top officials of debt-laden companies.
• Also, approval of a resolution plan for the corporate debtor does not end the personal guarantor’s liability.

Central Government’s 2019 notification – It made personal guarantors a separate category of individuals. They can be approached for recovery for defaults. They can do it under the IBC as part of the insolvency proceedings against defaulting corporate entities.

This gives additional powers to lenders [financial institutions or banks] under IBC, to recover their money.

• In response to the 2019 notification– There were more than 40 petitions filled, where petitioners had challenged the validity and operationalization of the central notification.
• However, the SC dismissed all the petitions stating that the government right.

Significance of Ruling

• Firstly, the SC judgment will boost recovery efforts of banks involving piles of bad loans.
  • This will enable banks to take simultaneous action against corporate debtors and personal guarantors.
  • As a result, the promoters [as the provider of personal guarantees] have to deal with their own insolvencies and not become an impediment/roadblock to the insolvency proceedings of the corporate debtor.
• Secondly, by roping in guarantors, there is a greater chance that they would “arrange” for the payment of the debt to the creditor bank to save themselves.
• Thirdly, as guarantors can be approached even if an insolvency proceeding is ongoing, Banks can enhance recovery. Because most banks agree to ‘haircuts’ when negotiating a resolution plan with a new promoter for the defaulting company.

Way forward-

The judgment provided the much-needed teeth to banks and financial institution far as recovery action with respect to personal guarantees was concerned.

Source-The Hindu