New Delhi Shareholders and founders who give personal guarantees to their companies, additional comfort to lenders, are increasingly ending up in bankruptcy tribunals, marking a significant development in India’s bankruptcy resolution push.
Official data from the Insolvency and Bankruptcy Board of India (IBBI) showed that individual guarantors represent more 1 trillion was dragged into these tribunals since they were brought under the bankruptcy code in 2019.
Close to 70% of the 1,235 cases of personal guarantors who faced creditor action ended up in tribunals in FY22, even as the economy recovered from the contraction seen in the previous financial year.
out of total 1.1 trillion worth of personal guarantees that reached tribunals in FY22 approx 63,000 crores.
In the April-June period of FY23, 123 cases of personal guarantors ended up in tribunals, accounting for more than 5,000 crore, the data showed.
The founders of businesses facing creditor action for the personal guarantees they give is a significant development in the bankruptcy resolution regime.
Personal guarantee gives additional comfort to the lender while taking the risk of giving the loan. They can also help convince lenders that the promoter has skin in the venture, especially in the case of companies with low capital.
Anoop Rawat, partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas & Co, said that initially, when the Insolvency and Bankruptcy Code (IBC) came into force, the provisions relating to individual guarantors were not operational.
“Later, the provisions were notified, and the Supreme Court brought clarity on upholding the liability of individual guarantors, irrespective of whether a resolution plan for the corporate debtor was approved or not. Also, the trend is now in many cases. The individual guarantors are to be pursued in parallel while the corporate insolvency resolution process is on.”
As of June, more than 5,600 corporations have ended up in the National Company Law Tribunal (NCLT) for bankruptcy resolution, of which two-fifths represent the manufacturing sector and a fifth account for the real estate sector. Construction, retail trade, hotels, electricity and transport account for the rest.
The data also shows that out of the cases admitted so far in the Tribunal, cases have been registered for lapses of at least 1 crore, 80% of the operations like vendors were triggered by the creditors.
To address such aggressive action by operational creditors and the use of IBCs as a recovery tool, the government had raised the minimum payment default for IBCs to be enforced. 1 crore in 2020.
As of the end of June, more than 500 cases of corporate distress have received resolution plans under the IBC regime, with creditors realizing that 2.35 trillion.
The total claim of the creditors in these cases was approximately 7.6 trillion. The fair value of these enterprises was lost when they entered the bankruptcy process. 2 trillion.
The Center is currently working on a bill to amend the IBC to further improve the outcome of procedures in terms of hedging of companies and recovery of investments by lenders. The bill is expected to be introduced in the winter session of Parliament.
Official data also shows that by the end of June, 786 petitions were filed by administrators of insolvent businesses seeking to reverse suspicious past transactions of these entities and recover lost funds.
The amount involved in these transactions, which involve fraudulent or undervalued deals, is eliminated 2.2 trillion.
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