Personal guarantees may aid bad loan resolution

In a notification on November 15, the ministry of corporate affairs (MCA) included personal guarantees on corporate loans under the bankruptcy code effective from December 1. The promoters who have given personal guarantees include Jet Airways fou...

MUMBAI: An amendment made to the Insolvency and Bankruptcy Code (IBC) last week to include personal guarantees issued by corporate promoters will quicken the recovery process, improve chances of bad loan resolution and more importantly give lenders a strong leverage against erring promoters, lawyers and bankers said.

In a notification on November 15, the ministry of corporate affairs (MCA) included personal guarantees on corporate loans under the bankruptcy code effective from December 1. This means that the assets of promoters who gave personal guarantees for loans can be attached along with the insolvency proceedings against the company.

The promoters who have given personal guarantees include Jet Airways founder Naresh Goyal, whose company owes lenders more than Rs 11,000 crore. The Ruia family, which just last week lost its Rs 42,000 crore battle to keep Essar Steel, has also given personal guarantees to banks. Other corporate promoters such as Amtek Auto’s Arvind Dham also had given a personal guarantee to lenders and so had Bhushan Power & Steel chairman Sanjay Singal, who is facing an Enforcement Directorate inquiry for siphoning funds from the company.


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“With this amendment, promoters can be tried along with corporate debtors under the bankruptcy process,” said Aashit Shah, partner at J Sagar Associates. “Before this amendment, individuals could only be tried in the Debt Recovery Tribunal (DRT) under the old Presidency Towns Insolvency Act of 1902. Now with this change, it will speed up resolution and also increase the chances of recovery because promoter assets can also be attached.”

Many corporate promoters were forced to give personal guarantees on loans for their companies after the Reserve Bank of India (RBI) in 2013 made it mandatory for banks to obtain personal guarantees of promoters in all cases of restructuring.

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“A lot of companies that have seen restructuring of loans like Jaypee Associates, Alok Industries, Lanco Infrastructure, Bhushan Power or some airline companies had a personal guarantee from the promoter,” said a former public sector banker. “But these were in limited capacity for smaller value loans. Vijay Mallya, for example, had given a personal guarantee to IDBI Bank on certain loans but that could not be invoked.”

Bankers, however, said attaching promoter assets in the bankruptcy resolution process gives them more of a chance to recover their dues and also prevents promoters from getting away scot free when the company itself is in trouble.

“In many cases, we have seen that the company is being liquidated and the promoter, who has been a major contributor to the current state of affairs, has gone away scot free,” said Pallav Mohapatra, CEO at Central Bank of India. “This amendment will prevent that. More importantly, because promoter assets can now be attached, they will think twice before doing any mischief. Promoters who play with the system will have to think multiple times before trying to do any mischief.”
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