SC ruling on personal guarantors could be a wake-up call for Indian promoters
The Supreme Court on Thursday allowed banks to launch insolvency proceedings under the Insolvency and Bankruptcy Code or IBC against those who had furnished personal guarantees for loans taken by companies that have defaulted. This ruling, a blow to many promoters, is significant – more so because it again signals a shift in favour of Indian lenders- bolstering their ability to enforce guarantees without long legal battles besides leading to faster recoveries.
It comes at a time when banks and institutional lenders dampened by earlier court rulings are increasingly taking recourse to other avenues for recovery other than the IBC route. It should hopefully end the gaming of the legal system by many promoters who have stymied the efforts of many banks to enforce personal and corporate guarantees against their loans on which there have been defaults.
And an attitudinal change when it comes to fulfilling debt obligations. Interestingly, the Supreme Court has this time dismissed the case built up by some promoters that some of the provisions of the bankruptcy law on personal insolvency cases violated the principles of natural justice and that due process was not followed.
In an earlier ruling on wilful defaulters, banks were told to provide an opportunity of hearing to wilful defaulters before enforcing the rights of lenders. This ruling in a way levels the field for both ordinary or retail borrowers and big promoters who have the ability to stave off legal proceedings and drag the process for long, frustrating lenders.
Indeed, Indian newspapers are full of public e-auction notices issued by banks on sell-off of properties, and assets of individual borrowers. For long, Indian companies and promoters have been offering
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