New Delhi: Bankruptcy cases against personal guarantors of companies continue to pile up.
Lenders took action against 156 of them in the quarter ended June to recover ₹10,563 crores, while 31 personal guarantors represent ₹1,433 crore in defaults by companies that approached bankruptcy courts on their own to resolve their debt, according to data available with the Insolvency and Bankruptcy Board of India (IBBI).
Lenders generally seek to recover more than ₹2 trillion from personal guarantors since December 2019, when they were brought under the Insolvency and Bankruptcy Code (IBC). Of these, 3,134 cases are in bankruptcy courts (National Company Law Tribunal) while 50 are pending in Debt Recovery Tribunals (DRT), IBBI data showed.
Often, major shareholders own high-value assets, such as real estate, rather than being on the company’s books. That leads lenders to act against them to recover debts when it is determined that the defaulting company’s assets are insufficient to resolve the debt.
In FY24, 696 people ended up in bankruptcy courts and 27 in debt recovery courts because the companies for which they were guarantors failed to pay their debts. ₹28,222 crore of debt.
However, recovery is slow. Only 468 cases were admitted to court and several were withdrawn, either before or after admission. In 26 cases, the courts approved payment plans and creditors realized that almost ₹103 crore or a little over 2% of its admitted claims.
Despite Supreme Court clarifications and a government notification on the jurisdiction of the National Company Law Tribunal, the involvement of both the NCLT and the DRT in personal insolvency matters of corporate guarantors has led to confusion, said Mukesh Chand, senior counsel at law firm Economic Laws Practice. Many personal guarantors file applications to benefit from the interim moratorium that stops recovery actions, often as a delaying tactic rather than a genuine attempt to resolve the insolvency, Chand said.
Simply filing a petition with the NCLT is enough to bring the moratorium into effect as it does not require admission.
“These factors, coupled with the NCLT’s caseload and the unclear approach of lenders to the new framework, are contributing to the slow pace of the resolution process,” Chand said. “To improve outcomes, there is a need for streamlined processes, clearer guidelines for lenders and measures to curb strategic applications that misuse the interim moratorium.”
According to Yogendra Aldak, partner at law firm Lakshmikumaran and Sridharan, allotment was affected as the rules governing insolvency of personal guarantors of corporate debtors have been under question for long. But a series of Supreme Court judgments settling the legal position on this aspect had a positive effect in the June quarter as data shows 187 applications were filed and 55 were accepted, he said.
“While the 2% recovery rate is not optimal, the IBC is not, in principle, a recovery mechanism,” Aldak said. Furthermore, it is pertinent to note that the liability of personal guarantors is “coextensive” with that of the corporate debtor and claims against the defaulting company that are not realized are recovered from the personal guarantors. Therefore, the total recovery by creditors will be higher than the 2% indicated in isolation, Aldak said.
In November 2023, the Supreme Court upheld the bankruptcy code provisions dealing with personal guarantors, rejecting the guarantors’ challenge.
In the June quarter, courts approved debt resolution plans for 58 corporations.
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