Bad debts: SC allows banks to invoke personal guarantees from defaulters

The Supreme Court upheld a notification from the Indian government to invoke personal guarantees from developers whose companies defaulted on bank loans. The Supreme Court ruling will now allow banks to file personal bankruptcy against several large Indian developers whose companies have been referred to the National Company Law Tribunal (NCLT) for debt resolution.

The IBC was enacted in 2016 and at the end of 2017 at least 52 companies including Videocon Industries, Bhushan Steel, Punj Lloyd, Essar Steel, were referred to NCLT for defaulting on bank loans. The lawyers said that personal guarantees given by the promoters of these companies will be invoked. Several promoters had moved high prices across India when banks invoked personal guarantees. The Supreme Court then transferred all the cases to itself following petitions from Indian lenders.

The Indian government amended the IBC in November 2019 and empowered lenders to invoke personal guarantees from defaulters. In fact, the promoters of several Indian companies then accused their professional executives of fraud and embezzlement of company funds. But lawyers have said they will not get any respite from the Insolvency and Bankruptcy Code (IBC) as lenders will now rely on their personal guarantees. “If personal guarantees fall under contract law, litigation against former employees will fall under criminal law. A promoter cannot link the two, ”said a lawyer.

The verdict is a boost for lenders as it allows them to seek recovery of contributions from loan guarantors even while corporate bankruptcy proceedings are pending. This could potentially speed up the efforts of lenders trying to eliminate one of the world’s worst bad debt piles, Bloomberg reported.

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