Global Economy

ET Explains: What is the significance of personal guarantee and what will change for a guarantor after SC order?

In a landmark order, the Supreme Court on Thursday upheld provisions of personal guarantors under the Insolvency and Bankruptcy Code (IBC) as constitutionally valid, paving the way for lenders to pursue recovery from Anil Ambani of ADA Group, Venugopal Dhoot of Videocon Industries and Kishore Biyani of Future Retail among others.

The three-member bench headed by Chief Justice of India D Y Chandrachud dismissed over 350 petitions objecting to the provisions of IBC on personal insolvency. ET explains the implication of the order.

1. What is the significance of order?
The order is a victory for lenders as there are 2289 applications before several tribunals claiming Rs 1.63 lakh crore from personal guarantors as of September 30, according to the Insolvency and Bankruptcy Board of India (IBBI). Most of them are promoters of corporate debtors of companies undergoing insolvency, but since recovery from these bankrupt companies is not adequate to cover the loan’s value, lenders invoked the personal guarantee clause. So far, lenders have failed in their attempts since personal guarantors challenged the provisions of the law at the apex court.

2. What is the process of recovery under personal guarantor insolvency resolution?
It’s a multi-stage process. In the first stage, the court admits a lender’s application to initiate a personal insolvency process against a guarantor under Section 95. This admission of the application, however, does not give the resolution professional (RP) the right to take control of the guarantor’s assets. It only ensures a moratorium on the guarantor’s assets.

In the second stage, the RP verifies the claims of the lender that applied to initiate recovery against the personal guarantor. Based on the findings, he submits a report to the tribunal under Section 99. On reviewing the RP’s report, the court will decide on whether to admit or reject the lender’s application. If the application is admission, the RP invites claims from other lenders (under section 100). In the third stage, the RP works on a debt repayment plan along with the borrower. Thus, the borrower’s cooperation is integral to recovery. His debt repayment plan must be accepted by majority lenders, failing which, the personal guarantor is declared bankrupt, a bankruptcy estate is formed and the RP begins selling the assets to recover the money. 3. What is the point of contention?
Ever since IBC was amended in 2019 to allow recovery from guarantors, promoters who provided personal guarantees objected to it (Section 95 to 100) claiming that the moratorium is imposed even before they are given a chance to present their arguments before the tribunal. Borrowers also alleged the absence of due process and violation of natural justice principles. However, the Supreme Court dismissed these, stating that the Act provides sufficient safeguards on the manner in which a resolution professional functions during an insolvency process.

4. What are the rights of a personal guarantor?
The guarantor can retain unencumbered vehicles, furniture, life insurance policies and equipment necessary for employment. They can also retain one dwelling unit valuing Rs 20 lakhs in urban areas and Rs 10 lakhs in rural areas. Also, the RP will not have the right to gain control over jewellery up to Rs 1 lakhs.

5. What challenges lenders may face despite the Apex court upholding its constitutional validity?
Since the case was stuck at the Supreme Court for four years, several errant borrowers have transferred their assets to a trust or disposed of them, making it difficult for lenders to exercise their rights over them. Also, yet another hurdle is that the regulation prescribes forensics of personal guarantors’ assets, which could be a long and arduous process for recovery of dues. Lastly, several guarantors will continue to litigate on frivolous ground, making it difficult for lenders to claim meaningful recovery.


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