IBC rule on personal guarantees no help to promoters blaming managers

Payment of bank loans by a company is an obligation under the contract law and fraud by professionals is a criminal matter, says government official.

Promoters of several Indian companies, who are accusing their professional managers of fraud and diversion of company funds, will not get any respite from the insolvency and bankruptcy code (IBC) as lenders invoke their personal guarantees. 

“While personal guarantees come under the contract law, the litigation against former employees will come under the criminal law. A promoter can’t link the two,” said a top Indian government official.

The official said the payment of bank loans by the company is an obligation under the contract law and the other (fraud by professionals) is a criminal matter. "These two matters are against different parties. The company has taken a loan and the promoter has a given guarantee. These are different parties from those involved in the FIR (first information report) filed by the promoter against employees of the company. The laws are different,” the official said.

Professional managers of travel firm Cox and Kings are facing charges of fund diversion and banks are planning to recover their dues by enforcing the IBC law. The personal guarantees of the promoters are also expected to be invoked in these cases. But some of the promoters have said as they were not running day-to-day operations, their guarantees should not be invoked.

Corporate lawyers said this matter will ultimately be taken up  by the Supreme Court, which decided on Thursday to hear a bunch of petitions filed in various high courts across the country. “While some promoters, who were in non-executive positions, may have genuine cases as they were defrauded by their own employees, the Supreme Court will have to decide whether their personal guarantees can be invoked or not. The one-size-fits-all formula may not work,” said a Mumbai-based corporate lawyer.

Since August-end this year, lenders are on an overdrive to invoke personal guarantees in the old bank default cases. This was following a nudge from the Supreme Court in July this year, which had asked the finance ministry to invoke personal guarantees in all bank default cases. The apex court was hearing a petition which alleged that banks are not taking action against defaulters despite having personal guarantees.

The finance ministry, in turn, sent a communication to the heads of all public sector banks on August 26, saying the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, which have come into force with effect from December last year, empowers lenders to file insolvency application against the personal guarantors of defaulters in National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code, 2016.

“In this connection, banks may consider putting in place a mechanism for monitoring the cases which may require initiation of individual insolvency process before the NCLT against personal guarantors to corporate debtors. Banks may also consider setting up IT (information technology) systems to collate data regarding personal guarantors to corporate debtors in all such cases for the requisite follow-up and consequential action,” it had said.