Money & Banking

Post SC order, banks move to assess value of promoters’ assets

Suresh P Iyengar Mumbai | Updated on June 14, 2021

Many are in the process of appointing advisors to arrive at the ‘fair value’

Armed with the Supreme Court’s order on invoking personal guarantees of defaulting promoters, banks have set in motion the process to assess the value of assets held by promoters of at least 40 companies that are under the insolvency process.

This includes assets owned by Kapil and Dheeraj Wadhwan of DHFL; Videocon promoters Venugopal and Rajkumar Dhoot; Lanco Infratech’s Madhusudhan Rao and family; IVRCL’s Sudhir Reddy; and Jatin Mehta of Winsome Diamonds.

“Banks are in the process of appointing valuation advisors to arrive at the current fair value of the assets owned by the promoters. Most of the personal guarantees given by the promoters are well documented but their value may not have been determined properly when the loan agreements were signed,” said a banking industry source.

Resolution process

“Once the value is known, the banks can take the next step of initiating the resolution process under which the defaulting promoters will be given 180 days to come up with a settlement plan,” the source added.

In May, the Supreme Court upheld the amendment to the Insolvency and Bankruptcy Code (IBC) that allowed lenders to invoke the personal guarantee of promoters to recover their dues.

This means that if the promoter of a defaulting company does not offer a credible repayment plan, creditors can initiate bankruptcy proceedings against them.

“This judgment gave teeth to the provisions of the Code, by clearing the air of uncertainty and other legal hurdles caused by the top brass promoters facing bankruptcy proceedings,” said Sushmita Gandhi, Partner, IndusLaw.

Sumit Batra, a Corporate Lawyer, said: “Earlier, with no remedy in sight for the lenders to go after the personal guarantors, promoters had an easy escape route, and at times,they used it as a roadblock in the Corporate Insolvency Resolution Process. One can expect more debt realisation for the lenders as personal guarantors would now want to settle with the lenders to avoid any unwarranted consequences.”

 

Challenges ahead

Banks can also invoke promoters’ guarantees even in cases where the company has been sold off under the IBC. This could spell trouble for former promoters of companies like Essar Steel and Bhushan Power. However, lenders could still face several challenges despite the ruling.

One of the biggest hurdles is that many of the promoters are scam-tainted and being investigated for fraud. DHFL’s former promoter Kapil Wadhawan, for example, is in prison for alleged fraud.

“Most of these promoters in default are scam-tainted and their multi-billion assets are already attached by the Enforcement Directorate and Economic Offence Wing of the Police. Getting this released from investigating agencies will take its own time,” said a lawyer on conditions of anonymity because he is representing one of the defaulting promoters.

“The actual scope of recovery in view of these provisions in each case would vary based on net worth of the guarantors, etc. Further, the other challenges that a lender may face are the huge backlog of cases plaguing the NCLTs, due to which decisions are often being delayed to a great extent, more so ever since the pandemic,” Gandhi said.

Nakul Sachdeva, Partner, L&L Partners, said though the SC judgment has brought promoters’ personal guarantee under the ambit of the IBC and provided a great boon to the banks, impediments may arise as the procedure for personal guarantors is yet to be tested to the fullest.

(With inputs from Surabhi)

Published on June 13, 2021

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