SC verdict: Banks explore options of invoking the personal guarantee of promotion.

SC Verdict talks about Banks exploring options of invoking personal guarantee of promotion

According to the sources, the SC Verdict gives banks the option to invoke personal guarantees to recover the loans from the delinquent firms of business tycoons ranging from Venugopal Dhoot to Kapil Wadhawan. 

According to the estimates, A debt of over ₹ 1.6 lakh crore has been guaranteed by the top ten personal guarantees alone. Among the big names, former promoters of Bhushan Steel and Power, Sanjay Singhal and Aarti Singhal had personally guaranteed up to ₹ 24,550 crores of loan from a consortium of banks led by SBI. SC verdict: Banks explore options of invoking the personal guarantee of promotion.

Anil Ambani, the former promoter of Reliance Communications, had also provided a personal guarantee against the loan taken.

Erstwhile promoter Kapil Wadhawan guaranteed the loan taken by DHFL, which is sitting on a debt of around ₹90,000 crores, while Venugopal Dhoot has given a guarantee to a part of the loan to Videocon.

On 15th November 2019 SC held government notification allowing banks and other financial institutions to move against personal guarantors under IBC was ‘valid’ and ‘legal’. 

After the judgement, a senior officer of a bank said that they are accessing the level of involvement of the personal guarantors against the loan. After an assessment, another banker also said that the bank would move NCLT to invoke a personal guarantee as a part of the process for recovery.

The official also said that banks have started receiving calls from many promoters asking to exclude their personal guarantee from the NPAs. Some are coming forward to resolve bad loans in order to save their personal wealth.

The order has generated a sense of fear of losing personal wealth among those directors and promoters who have pledged their personal guarantees. The personal guarantee angle would accelerate the resolution process as the guarantors stand at the risk of losing their personal wealth and property.

This ‘guarantee’ concept is derived from section 126 of the Indian Contracts Act, 1872. A guarantee contract is made among the debtor, creditor and guarantor. The guarantor will have to pay the debt in case the debtor fails to do so.

The creditors have the right to begin insolvency proceedings against the guarantor if the guarantor doesn’t pay. Usually, the promoters of big businesses submit personal guarantees in order to secure the loan and assure repayment.

KK Venugopal, the Attorney General, argued that involving the personal guarantors will ensure that they would ‘arrange’ for the payment of the debt in order to obtain a quick discharge.


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