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| Updated on May 23, 2021

SC ruling on personal guarantees in corporate bankruptcies is welcome, but NCLT is not in sync

There have been two important, and in fact contrary, developments regarding insolvency and bankruptcy laws last week. A positive development was the Supreme Court ruling that creditors can initiate proceedings against personal guarantors of a corporate debtor, and even after approval of a resolution plan. This will facilitate more effective resolutions of corporate insolvencies and better recoveries for banks. The apex court has now clarified that the surety or guarantee arises from an independent contract with the creditors vis-a-vis the resolution plan, thereby upholding the notification of the Centre issued in November 2019 in this regard. Therefore, parallel proceedings against the corporate debtor and their personal guarantor will now come under a common adjudicator — the NCLT. The NCLT shall have a fair view of the assets available to settle dues of creditors.

The ruling will curb rash borrowing by companies, using guarantees given by promoters. Promoters are likely to cooperate with the Committee of Creditors to realise maximum value for the corporate debtor’s assets, as they will be liable to repay the balance if they have given guarantees. Banks are now empowered to initiate proceedings against guarantors of companies including Videocon, DHFL and Punj Lloyd to claim their dues. The spirit of the Supreme Court ruling is broadly consistent with that of Section 29A of the IBC which debars wilful defaulters from re-claiming a company under liquidation; now, they will have to pay up in a personal capacity as well.

But oddly enough, a recent ruling by the NCLT asking the Committee of Creditors (CoC) of DHFL to consider the offer of the company’s former CMD, Kapil Wadhawan, strikes a contrary note. It opens a back-door to errant promoters to regain management control. With DHFL’s CoC having already approved the offer from Piramal Capital and Housing Finance Ltd and with the RBI also giving its nod to the offer, the Tribunal’s direction appears to be a faux pas — especially since the CoC had refused an earlier offer from Wadhawan due to ineligibility under Section 29A. While Wadhawan’s offer, which includes upfront payment of ₹9,000 crore in cash and ₹31,000 crore to be paid over seven years with 8.5 per cent interest is more attractive than the offer from Piramal Capital, objections under Section 29A remain valid. The Tribunal’s order seems to be influenced by the recent instance of lenders allowing an offer from C Sivasankaran to take control of the company he owned. The reason given was that he was willing to pay a sum higher than the liquidation value and there were no other bidders. Section 12A of the IBC, which allows insolvency cases to be withdrawn by the CoC with the approval of the Tribunal, was applied here. But the Sivasankaran and DHFL instances have set a bad precedent. Hopefully, the Supreme Court ruling will resolve this ambivalence.

Published on May 23, 2021

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