caalley logo

Welcome to the one-stop destination for Indian Chartered Accountants and other finance professionals

Surge in personal guarantor cases under IBC in FY23

Feb 22, 2023

Synopsis
In the first three quarters of the ongoing fiscal 2023, National Company Law Tribunals (NCLTs) have admitted 117 such cases against personal guarantors, compared with 28 in the entire FY22 and nine in the previous year, data compiled by the Insolvency and Bankruptcy Board of India showed.

Personal guarantors of loans taken by bankrupt companies are in the dock as lenders are increasingly invoking such guarantees under the Insolvency and Bankruptcy Code (IBC).

In the first three quarters of the ongoing fiscal 2023, National Company Law Tribunals (NCLTs) have admitted 117 such cases against personal guarantors, compared with 28 in the entire FY22 and nine in the previous year, data compiled by the Insolvency and Bankruptcy Board of India showed.

Creditors and lenders have filed 428 such cases during FY23 so far claiming ₹32,765 crore of dues. In FY22, 913 such cases were filed with claims worth ₹65,222 crore, though the number of admitted claims was fewer, data showed.

The surge in personal guarantor cases is mainly due to two reasons, say market participants. First, lenders are being forced to take steep haircuts, or write-offs, in the IBC process and hence to recover the balance dues, they are increasingly going after the personal guarantors. Secondly, jurisprudence also has emerged for handling such cases.

In March 2022, a clutch of promoters of insolvent companies moved the apex court challenging the validity of the personal guarantor law, however they have so far not received any respite.

"This substantial increase in the personal guarantor cases was bound to happen as creditors in most cases have no other ways to recover the dues. In most cases, lenders tend to take such personal guarantees while giving credit, so what is the use of such guarantees if they are not invoked?" said Manoj Kumar, partner, Corporate Professionals. "The jurisprudence for such cases has also evolved now and hence NCLTs have started admitting more such cases."

While extending credit to a company, lenders may seek additional guarantees from the promoters. These guarantees may include shares of group companies or any other securities depending on the situation.

The government had amended the IBC in 2019 to include even such personal guarantees under the purview of the code.

After many promoters moved the Supreme Court challenging the validity of such provisions, NCLTs were reluctant to admit personal guarantee claims until 2021 as the matter was sub-judice. However, in the last two years, a number of Supreme Court judgements have upheld the validity of this law.

"If the lenders cannot recover the full outstanding debt, this action to recover the balance through invocation of personal guarantee is a step in the right direction," said Nishant Singh, partner, Luthra and Luthra Law Offices.

"It will send a clear signal to promoters/ shareholders that they cannot limit their liability when they offer comfort to any lender by offering their personal guarantees. If default happens, the personal guarantors will be on the hook," he added.

[The Economic Times]

Don't miss an update!
Subscribe to our newsletter