Money & Banking

FinMin directs banks to up the game on personal guarantors to corporate loans

KR Srivats/Shishir Sinha New Delhi | Updated on August 27, 2020

Tells them to install IT and monitoring systems to collate structured data

In a move to keep a keener eye on personal guarantors of corporate debtors, the Finance Ministry has directed public sector banks (PSBs) to institute a mechanism to monitor cases that may require the initiation of individual insolvency process against such guarantors before the National Company Law Tribunal (NCLT).

Banks may also consider setting up IT systems to collate data regarding personal guarantors to corporate debtors in all such cases, the Department of Financial Services (DFS) said in an advisory to the SBI Chairman and the chief executives of all PSBs. In the absence of an IT system and a central database, banks were not in a position to effectively monitor cases of personal guarantees although the IBC regulations were amended in November 2019 to initiate proceedings against personal guarantors.

Many bankers see the advisory as a “moral suasion” to banks to initiate insolvency proceedings against personal guarantors of corporate debtors before the NCLT under IBC. This is indirectly telling the banks that they should file cases against personal guarantors, too, if there is any corporate default, said a former PSB chief.

The Insolvency and Bankruptcy Board of India had, in November 2019, empowered creditors to file insolvency applications against personal guarantors to corporate debtors. But not many banks had utilised this facility.

SBI recently dragged Anil Ambani to the NCLT in connection with a personal guarantee he had offered for loans extended to RCom and Reliance Infratel. However, many cases including several high-profile ones are still pending before the Tribunal, where banks had not invoked insolvency proceedings against personal guarantors although they had taken the corporate debtor through IBC, sources in the banking industry said.

Most banks already have mechanisms to identify personal guarantees to corporate loans. However, a mechanism of monitoring may be separately required and hence the need for a separate database or an IT system for this purpose.

Eye on recovery

Souvik Ganguly, founder and Managing Partner, Acuity Law LLP, said the DFS advisory clearly shows PSBs are being encouraged to achieve maximum recovery as permitted under insolvency law. This could include restructuring or liquidating distressed companies and enforcing personal guarantees given by promoters of defaulting companies.

“A structured approach by using available data on personal guarantors and the use of technology in analysing such data will certainly help in better realisation under the insolvency process,” he said.

Aseem Chawla, Managing Partner, ASC Legal, concurred that the DFS advisory indicates the intent of the policymakers to enable creditors to pursue insolvency proceedings against personal guarantors. Judicial intervention may just end up being a headwind in such pursuit, he added.

Kumar Saurabh Singh, Partner, Khaitan & Co, said the advisory appears to be a fallout of clarifications sought by the Supreme Court from the concerned government department on the progress in initiating proceedings against personal guarantors of borrowers in default as per the provisions of IBC. It will pave the way for filings before the NCLT against personal guarantors along with borrowers, he added.

Published on August 27, 2020

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