Under the IBC, enforcing personal guarantee remains a tall order

As lenders scramble to invoke promoter guarantees against corporate debtors with little success, government officials say a corporate insolvency resolution process is not over till the insolvency of the personal guarantor is also resolved.
 

The law may have enabled lenders to invoke personal guarantees against corporate debtors. In practice, however, it is proving to be much more difficult, with several grey areas leaving to interpretation issues such as the correct timing of such a move as well as the amount that can be claimed through this provision.
 

The provision for the insolvency resolution of personal guarantors was enabled in November last year by the Insolvency and Bankruptcy Board of India.
 

“It is a new law and there are very few precedents of cases completing the process. Most processes are in different stages of insolvency or bankruptcy. The jurisprudence in this matter is still evolving,” said Anshul Jain, partner, PwC India.
 

State Bank of India has invoked Anil Ambani’s personal guarantee for Reliance Communications’ default, which has become a test case for the latest provision.
 

In September the bank sent notice to Sanjay Singhal, promoter of Bhushan Power & Steel, invoking his personal guarantee. Both matters are pending in high courts.
 

The two cases, along with several others, have brought out the lacunae in the law, which, experts say, will be resolved only after the matter reaches the Supreme Court.

 

“At what stage the personal guarantee should be evoked and how to bifurcate the claim of the lender between the company and the guarantor are some of the unanswered questions,” said Manoj Kumar, partner, Corporate Professionals.
 

There are three main challenges in evoking the personal guarantee of a corporate debtor. It is still unresolved if a banker’s agreement with the corporate debtor and the personal guarantor are inter-linked or separate. To put it simply, if a bank has accepted a resolution under the corporate insolvency resolution process and the loan has been written off, it is argued that there is no more liability left to be claimed on the loan. This is usually the case when banks want to recover the “hair-cut” amount or the under-recovery of a loan.
 

“Banks have argued that by agreeing to a resolution plan they have not subrogated their right against the guarantor to the new applicant (buyer) ... the IBC (Insolvency and Bankruptcy Code) does not state the amount for which the personal guarantee can be invoked or if the two agreements are interdependent,” a legal expert said.
 

Contract law says that the principal debtor and guarantor are jointly and separately liable and the lender has the option to recover money from either of them. The argument for personal guarantors is that the same amount cannot be claimed at two places since the claim cannot be twice the amount of the debt.
 

“The rights of the personal guarantor flow from Contract Law, not the IBC,” the senior government official said.
 

Secondly, insolvency law experts say that invoking personal guarantees goes against the spirit of the IBC, which is resolution and not recovery.
 

An IBC lawyer said in the case of genuine promoters when a company is undergoing a corporate insolvency resolution process for a long period, there is a huge loss in the value of the assets.
 

“The promoter has nothing left with him in the form of assets then to offer anything to the bank in the form of personal guarantees ... It also raises the question if the banks are killing the company to recover the loan amount or looking to resolve the company.” A practical challenge, according to the lawyer, is also in the fact that a record of promoter assets is not readily available and in most cases public information is only to the extent of tax returns filed. Lawyers often advise their clients -- promoters who have given personal guarantees to transfer their assets to family members or close relatives when the threat of insolvency is looming.
 

“With no record of assets, there is no real resolution for lenders.”
 

The rules for insolvency of personal guarantors were brought as part of the phased introduction of individual insolvency laws.

“We also wanted to provide a level playing field between the corporate guarantor and the personal guarantor,” the senior government official added.