The recovery rate from personal guarantors, currently at 5.22%, is anticipated to rise following the Supreme Court’s recent ruling affirming the constitutionality of the IBC provisions regarding Personal Guarantors’ Insolvency Resolution. This ruling implies that the personal assets of guarantors can now be utilised to settle outstanding debts owed to creditors.
The ruling enables banks to immediately recover dues by liquidating personal assets such as residential properties, shares and bonds, gold, and jewellery of these promoters. Legal experts suggest that this development will likely encourage promoters and directors to voluntarily step forward to settle pending dues, potentially bolstering the recovery from bad loans.
Among the big names, former promoters of Bhushan Steel and Power Sanjay Singhal and his wife Aarti Singhal had furnished 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, has also given a personal guarantee against the loan taken. Erstwhile promoter Wadhawan stands guarantee to loans taken by DHFL, while Dhoot has also given a personal guarantee to a portion of 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Of the 2,289 applications, 88 were withdrawn/rejected/dismissed before the appointment of a resolution professional.
Resolution professionals were appointed in 991 cases, while 282 cases have been admitted. Out of these cases, 90 have been closed, 7 have withdrawn, and 62 have been closed due to non-submission/rejection of plans.
Only 21 have yielded approval of repayment plans and have realised Rs 91.27 crore which is 5.22% of their approved claims. 62 cases have been withdrawn/rejected/dismissed.
The verdict
Prior to the ruling, promoters would urge banks to recover dues 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, particularly in ongoing legal battles involving high-profile names like Anil Ambani, Venugopal Dhoot, Kishore Biyani, Kapil and Dheeraj Wadhwan, who are facing efforts from lenders to recover their dues.
The Supreme Court’s clarification on the issue has left personal guarantors with fewer options, prompting them to consider negotiations and settlements with creditors. The ruling reduces ambiguity in the legal framework, making it more challenging for guarantors to evade liabilities.
Q2 performance
The average time taken for resolution or liquidation continues to increase for operational creditors (OCs) and financial creditors (FCs) during the September quarter. Meanwhile, the overall recovery rate till Q2FY24 was 31.85% implying a haircut of approximately 68%. The cumulative recovery rate has been on a downtrend, decreasing from 43% in Q1FY20 and 32.9% in Q4FY22 as larger resolutions have already been executed and a significant number of liquidated cases were either BIFR cases and/or defunct with high-resolution time.
After slowing in the pandemic period of FY21 and FY22, the number of insolvency cases referred has increased by around 19% y-o-y in Q2FY24. However, despite the increase, the number of cases admitted to the insolvency process continued to be 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.
