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SBI's plan to invoke guarantees on companies under NCLT unlikely to succeed

Lawyers say SBI's credit recovery team will have to wait for a while

Anup Roy  |  Mumbai 

SBI, State Bank of India

A proposed plan of the (SBI) to invoke personal and corporate guarantees of defaulting companies is unlikely to pass legal scrutiny, having been barred from doing so in previous cases. The country’s largest bank is likely to issue about 200 notices invoking personal guarantees, even in cases where proceedings were underway. Apart from numerous smaller companies, at least 40 large accounts are facing The Reserve Bank of India (RBI) had in June last year come up with 12 names for immediate referrals. Later, it brought another list of 26 large accounts. Such promoters might have personal guarantees running into tens of billions, but may not be in a position to pay. And, in case, the plans to invoke these personal guarantees, the bank will be sued by these promoters. The promoter of a company on the RBI’s first list said he was aware that a plan of invoking personal guarantees was in the works, but added it was completely against the spirit of the and Code (IBC). Another promoter on the second list said that it won’t stand on grounds of law. “Invoking guarantees is effective of liquidation, and we have not reached that stage yet. Once you go to the (NCLT), there is a moratorium.” provides 180 days for a resolution, which can be extended by 90 more days. If a resolution is not achieved within this timeframe, the company is liquidated. “In case the does go ahead with its plan, it will be legally challenged,” said the promoter. So far, promoters on the first and second list have refrained from challenging the ordinance that barred them from bidding. However, any such move would be challenged, they say. It is likely that the promoters would prevail in such cases, say senior lawyers.

In fact, any ambiguity on the matter has been cleared in two earlier cases, with asked to back off when proceedings were on. A legal expert said the situation would unlikely to change, irrespective of what SBI's interpretation of the law was. In one such case, Veesons Energy Systems versus SBI, the Chennai bench of the stopped the bank from invoking the of V Ramakrishnan, director of the company. notified Veesons and Ramakrishnan on November 12, 2016, that the personal assets would be sold. The firm challenged it, stating it had applied to the (BIFR) and till its application was decided, dues could not be recovered. The became operational in December 2016. The bench ruled that in case a guarantor’s personal property is sold to realise a portion of dues against a company in default, it would create a charge on assets of the company, “which shall amount to ‘encumbering’ the properties of the corporate debtor”. Meaning, if the bank tried to sell off the assets, the promoter would be deemed a creditor to the company, since his assets had been sold to pay off The says when a firm is going through proceedings, “transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein” is prohibited. Beside, there are several cases that spurned the banks’ claim whenever the lenders went to invoke personal guarantees of the promoter, simultaneously with proceedings going on. In the case of Sanjeev Shriya verses & others, the turned down SBI's move. “The argument advanced by Shri Navin Sinah is also fortified on the ground that once the liability is still in a fluid situation and the same has not been crystallised, then in such a situation, two parallel/split proceedings in a different jurisdiction should be avoided, if possible,” the court ruled in early September 2017. Similarly, in the case of Axis Bank versus Edu Smart Services, the Delhi ruled against the bank. Stating it could not invoke such guarantees when there was an proceeding on and the mandatory limit of 270 days had to be honoured. The and Board of India was trying to change these through tweaks in the law to help invoke such guarantees. It is unclear if the recommendations on favouring of creditors have been accepted by the board or not. Even if accepted, it is highly unlikely that the law would be changed in favour of bankers as far as guarantees are concerned in a relatively short span. Therefore, lawyers say, SBI’s credit recovery team will have to wait for a while.

First Published: Fri, January 26 2018. 21:52 IST