The recovery rate of personal guarantors, currently at 5.22%, is expected to increase following the recent Supreme Court ruling upholding the constitutionality of the IBC provisions regarding Insolvency Resolution of Personal Guarantors. This ruling implies that the personal assets of guarantors can now be used to settle outstanding debts owed to creditors.
The ruling enables banks to immediately recover dues by liquidating personal assets such as residential properties, stocks and bonds, gold and jewelery of these promoters. Legal experts suggest that this development is likely to encourage promoters and directors to voluntarily step forward to pay pending fees, potentially boosting the recovery of bad loans.
Among the big names, former Bhushan Steel and Power promoters Sanjay Singhal and his wife Aarti Singhal have provided personal guarantees worth up to Rs 24,550 crore to take loans from a consortium of banks led by State Bank of India (SBI).
The former promoter of Reliance Communications, Anil Ambani, also gave a personal guarantee against the loan taken. Former promoter Wadhawan stands guarantee to loans taken by DHFL, while Dhoot has also given a personal guarantee to a portion of a Rs 22,000 crore loan to Videocon.
The status
The Insolvency and Bankruptcy Board of India reports that 2,289 cases related to personal guarantees, involving corporate debt of Rs 1.64 lakh crore, have been filed at the National Company Law Tribunal.
Of the 2,289 applications, 88 were withdrawn/rejected/rejected prior to the appointment of a resolution professional.
Resolution professionals were appointed in 991 cases, while 282 cases were accepted. Of these cases, 90 were closed, 7 withdrew, and 62 were closed due to non-presentation/rejection of plans.
Only 21 have given approval of repayment plans and realized Rs 91.27 crore which is 5.22% of their approved claims. 62 cases were withdrawn/rejected/dismissed.
The verdict
Before the ruling, promoters would urge banks to recover fees by liquidating the company’s assets, a process known for its time-consuming nature. The recent decision upholds the constitutionality of the Insolvency and Bankruptcy Code (IBC) provisions on personal guarantors in the insolvency resolution process, offering relief to lenders. The implications of the judgment are expected to be profound, especially in ongoing legal battles involving high-profile names such as Anil Ambani, Venugopal Dhoot, Kishore Biyani, Kapil and Dheeraj Wadhwan, who are facing efforts by lenders to recover their dues.
The Supreme Court’s clarification on the issue left personal guarantors with fewer options, prompting them to consider negotiations and compromises with creditors. The ruling reduces ambiguity in the legal framework, making it more difficult for guarantors to avoid liabilities.
Q2 activity
The average time taken for resolution or liquidation continues to increase for operating creditors (OC) and financial creditors (FC) during the September quarter. Meanwhile, the overall recovery up to Q2FY24 was 31.85% implying a haircut of about 68%. The cumulative recovery rate was on the decline, declining from 43% in Q1FY20 and 32.9% in Q4FY22 as larger resolutions had already been executed and a significant number of liquidated cases were either BIFR cases and/or dormant with high resolution time.
After a slowdown in the pandemic period of FY21 and FY22, the number of insolvency cases reported increased by around 19% indeed in Q2FY24. However, despite the increase, the number of cases admitted to the insolvency process was still lower compared to earlier quarters in FY20. The distribution of cases across sectors remains broadly similar, compared to earlier periods given the extended resolution timelines.