ET Explains: What is the significance of personal guarantee and what will change for a guarantor after SC order?
Supreme Court on Thursday upheld provisions of personal guarantors under the Insolvency and Bankruptcy Code (IBC) as constitutionally valid, paving the way for lenders to pursue recovery from Anil Ambani of ADA Group, Venugopal Dhoot of Videocon Industries and Kishore Biyani of Future Retail among others.
The three-member bench headed by Chief Justice of India D Y Chandrachud dismissed over 350 petitions objecting to the provisions of IBC on personal insolvency. ET explains the implication of the order.
1. What is the significance of order?
The order is a victory for lenders as there are 2289 applications before several tribunals claiming Rs 1.63 lakh crore from personal guarantors as of September 30, according to the Insolvency and Bankruptcy Board of India (IBBI). Most of them are promoters of corporate debtors of companies undergoing insolvency, but since recovery from these bankrupt companies is not adequate to cover the loan's value, lenders invoked the personal guarantee clause.
So far, lenders have failed in their attempts since personal guarantors challenged the provisions of the law at the apex court.
2. What is the process of recovery under personal guarantor insolvency resolution?
It’s a multi-stage process.
In the first stage, the court admits a lender’s application to initiate a personal insolvency process against a guarantor under Section 95. This admission of the application, however, does not give the resolution professional (RP) the right to take control of the guarantor's assets. It only ensures a moratorium on the guarantor's assets.
In the second stage, the RP verifies the claims of the lender that applied to initiate recovery against the personal guarantor.
