personal guarantees given by promoters of companies raising bank loans, said people at advisory firms. The move is aimed at preventing them from transferring these personal assets to a special trust, which may be bankruptcy remote.
This move by banks follows the recent landmark Supreme Court order that upheld the constitutional validity of recovery provisions against personal guarantors under the Insolvency and Bankruptcy Code (IBC).
In practice, lenders insist on personal guarantees from promoters of small and medium companies while large borrowers, leveraging their heft, have stopped providing these guarantees long ago.
«Going forward, we expect banks will exercise even more vigilance about the assets of promoters who provide personal guarantees for their companies availing loans,» said Bikash Jhawar, senior partner at law firm Saraf and Partners.
«They may introduce loan covenants that allow them to create a negative lien on the assets underlying the personal guarantees given by promoters.
Lenders will also track the assets owned by borrowers and guarantors regularly to ensure assets do not dissipate.» By creating a negative lien, the borrower commits not to dispose of the asset or create encumbrance on it without consent of the lender.
Underlying Assets Not Pledged
Provisions of the IBC empower lenders to initiate personal insolvency against promoters to recover shortfalls after the creditors have sold assets of the defaulting company. There are 2,289 applications before several tribunals claiming Rs 1.63 lakh crore in aggregate in individual insolvency cases as of September 30, data from the Insolvency and Bankruptcy Board of India (IBBI) showed.
Typically, when a company avails a loan, the promoter provides