Theme: Law | SC’s Ruling on Personal Guarantors: A Game Changer for Banks

In this State of the Economy podcast, businessLine’s KR Srivats, Senior Deputy Editor, discusses the recent landmark Supreme Court judgement on personal guarantors' insolvency in India with Dhananjay Kumar, Partner, Cyril Amarchand & Mangaldas, a leading law firm.  By upholding the constitutional validity of Insolvency and Bankruptcy Code (IBC) provisions related to personal guarantors' insolvency (Sections 95 to 100), the three-member SC Bench led by Chief Justice of India D YChandrachud has, in its verdict in the cases of Dilip B. Jiwrajka vs. Union of India and others, strengthened the hands of banks and other creditors efforts in using this route for loan recoveries. In one go, the apex court dismissed 384 petitions that raised several legal challenges in the implementation of the insolvency process on personal guarantors. The quietus seen on this front in the last two years because of the legal challenges has come to an end, thanks to the SC judgement. In this podcast, Dhananjay Kumar delves into the legal impact of the judgment and its potential as a game-changer for banks in recovering corporate dues from personal guarantors. With this SC judgement, banks will certainly go after personal guarantors in respect of corporates, where there have been huge haircuts on corporate borrowers, according to Kumar. It will certainly encourage banks—who were sitting on the wall—to go after the personal guarantors for recovery and file insolvency applications against them in a big way. With this judgement and given the number of pending petitions, the time is ripe for banks and creditors to consider innovative tools for recovery from personal guarantors. Kumar felt that a lot of opportunity for innovation has arisen in cross-border situations where money has left shores and money has been deployed in other structures. Put simply, creditors can even reach overseas jurisdictions to recover assets held abroad by personal guarantors. There is going to be an opportunity for banks to recover more money than what has been given under the IBC repayment plan for personal guarantors, says Kumar. Not only that, the latest SC judgement will bolster the flow of credit to the industrial sector, as banks now know they have a powerful tool at their disposal to recover money should the loan go bad. However, Kumar felt there was also a need for the government to strengthen the DRT and SARFAESI structures so that insolvency is not the only effective tool available for creditors to recover money. When you want to ramp up industrial credit in the economy, you must also give powerful tools to creditors for recovery. Strengthening the DRT and SARFAESI systems is also equally important, emphasises Kumar. SC has clarified that all personal guarantees issued prior to November 2019 will also be subject to these insolvency provisions of the IBC, and creditors will be able to move against the personal guarantors to seek their recoveries, says Kumar. In essence, banks can go after personal guarantors for their past guarantees as well. So does all this mean that the SC judgement has come as a huge setback for personal guarantors? Not really, says Kumar, who sees this IBC insolvency process as a second opportunity for personal guarantors to deal with issues in a peaceful way. This is an excellent mechanism not only for the banks' loan recovery but also for the liability management of personal guarantors. This landmark SC judgement is a win-win for lenders and personal guarantors and a game changer for the IBC landscape, for sure. (Host: KR Srivats, Producer: Nabodita Ganguly)