Bad credit and personal guarantees

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On May 21, 2021, the Supreme Court rejected 75 petitions against the filing, including those against Anil Ambani, Sanjay Singhal, Venugopal Dhoot, Kapil Wadhawan and 45 other industrialists. (The Supreme Court ruled that the notice issued by the Union Government on November 15, 2019 under the Bankruptcy and Bankruptcy Act was legal and valid.)

The ruling gave creditors the opportunity to take action against guarantors of such defaulting companies in order to collect debts in the event of personal guarantees to secure funds. Significantly, lenders can take action against the guarantors even if the company’s bankruptcy resolution process is not complete. The problem with such loans is that the influencing industrialists can secure loans without due diligence, resulting in non-payment of loans or late repayments.

All aboard’

Personal guarantors can argue that they alone should not be held accountable and that the board of directors who run the company should be prosecuted. However, if there is an individual guarantee contract, the relevant person is liable.

After the Kingfisher Airlines mortgage along with other corporate guarantees, loans and pledged shares, the defunct airline still has 9,000 crore in debt. The organizer, Vijay Mallya, has denied his personal accountability. This raises many questions. Was the collateral sufficient to sanction such large amounts? Has the personal guarantor, Vijay Mallya’s political influence, changed the way banks work internally?

Likewise, SBI has yet to recover more than £ 1,200 crore from Anil Ambani for the loans approved to Reliance Communications and Reliance Infratel. Similarly, Dewan Housing Finance Corporation Ltd. (DHFL) and their personal guarantor Kapil Wadhawan published a settlement offer to NCLT to look for a solution (preliminary ex parte regulation of Deewan Housing Finance Corporation Ltd., 2020).

In an ongoing appeal, the ex-director of Gujarat Hydrocarbons and Power SEZ Ltd (corporate debtor) had taken out a £ 100 billion loan from SREI Infrastructure Finance Ltd, where Assam Company India Ltd was a corporate guarantor. The debtor failed to pay the loan amount and interest, which led to the filing of an application for recovery of claims of the corporate debtor, the surety (Kanwar Raj Bhagat versus Gujarat, 2021).

In terms of Sanjay Lamba v Union Bank of Indiathe total of the Standard Amount is more than £ 70 crore. Complainant Sanjay Lamba is willing to pay a settlement amount of £ 67 billion by May 31, 2021, but was not accepted by the Union Bank of India.

The complainant had drawn several facilities from the bank between 2011 and 2012, including cash credit facility, term loan facility, ad hoc working capital limit, etc. The corporate debtor’s account was classified as a distressed asset in 2016.

The famous Videocon bankruptcy case had offered to pay 30,000 crore to pay off the debt and release 13 of the 15 companies in the Videocon group from bankruptcy proceedings. The chairman and executive director of the suspended board of directors of Videocon Industries mentions robust pre-payment debt plans to regain Videocon’s market share and image.

Manipulative power

Political interference has been instrumental in ensuring that tycoons and big players manage the system. The IBC was one of the most significant changes in commercial law. The strategy encourages the regularization of bankruptcy and bankruptcy proceedings in India, where at least 11 percent of loans are “bad”. In the event of distressed assets invading the country’s economy, the IBC offers banks two channels of recovery. So far in 2020, the IBC has reclaimed 42.5 to 45 percent of total non-performing loans. Now the lender can initiate parallel proceedings against the surety. Previously, there was no concrete solution for financial creditors to get money back. it would open the way for personal guarantors to escape.

The Supreme Court ruling has brought relief to banks after long battles against bad credit. It also guaranteed personal guarantors against consequences. Following the announcement, various bankruptcy proceedings were initiated against business people Anil Ambani, Kapil Wadhawan, Atul Punj, Sanjay Singhal and Venugopal Dhoot.

(The author is Managing Partner & CEO, Surana & Surana, International Attorneys)



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