NEW DELHI: The Union Ministry of Finance has asked public sector banks (PSBs) to exercise their option of initiating insolvency proceedings against individual guarantors in the case of big ticket corporate defaults. In an advisory issued on August 26, the Department of Financial Services asked PSBs to monitor cases which may require the initiation of individual insolvency process before the National Company Law Tribunal (NCLT) against personal guarantors of such bad debt.
“Banks may also consider setting up IT system to collate data regarding personal guarantors to corporate debtors in all such cases for the requisite follow up and consequential action,” the advisory said. The Insolvency and Bankruptcy Code (IBC) provides for the initiation of insolvency proceedings against personal guarantors of corporate debtors, but the provision has not been used much by lenders to recover dues so far.
The rule governing initiation of insolvency process against the personal guarantor to corporate borrowers came into effect from December last year. The move to go after personal guarantors now also reflects the situation the Central exchquer finds itself. Tax revenues have plunged in the wake of the pandemic and subsequent containment measures. The Centre, for instance, is already tussling with the states over a Rs 2.3 lakh crore hole in revenue due to low GST collections.
Under the IBC, individuals are classified into three classes—personal guarantors to corporate debtors, partnership firms and proprietorship firms, and other individuals. There are cases when a corporate debtor takes a loan guaranteed by another corporate person (corporate guarantor to the corporate debtor) or an individual (personal guarantor to the corporate debtor). In case of a default, the lender is allowed to pursue a remedy against the guarantor or the corporate debtor.
Recently, the NCLT’s Mumbai bench allowed the State Bank of India (SBI) to initiate insolvency proceedings against Anil Ambani as a personal guarantor to recover Rs 1,200 crore dues from two companies RCom and RITL promoted by him. Ambani had given personal guarantees for these loans.
Anil Ambani first major instance of such action
The State Bank of India last week had approached the bankruptcy courts to begin the process of personal insolvency since the businessman had given personal guarantees in the case of two corporate loans.