Personal guarantors face IBC heat

Since FY20, over 1,400 personal guarantors have been taken to bankruptcy tribunals by lenders for recovery of about ₹1.25 trillion, according to the latest data available with bankruptcy rule-maker Insolvency and Bankruptcy Board of India (IBBI).

Personal guarantees by major shareholders give lenders extra comfort while lending to businesses. Recovery action under the IBC, which has now picked up momentum, is set to make many promoters carefully evaluate extending personal guarantees now. Personal guarantors were brought under the IBC in December 2019.

In the June quarter, 149 people were taken to tribunals for recovery of over ₹6,400 crore and in the September quarter, IBC action was taken against 126 people for recovery of ₹13,108 crores, the IBBI said. In FY22, 865 people had been taken to tribunals by lenders to recover over ₹62,700 crore of debt that they backed.

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Experts said the spurt in action against personal guarantors by lenders under the IBC was for recovery of the haircut pursuant to the bankruptcy resolution process.

“The action against promoters for recovery of guarantee amounts will test the efficacy of IBC. At the same time, fearing the action under IBC, promoters would be wary of extending personal guarantees for loans required by their companies,” said Anoop Rawat, partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas & Co.

Data also showed that at the end of September, the extent of haircut suffered by lenders in about 550 cases that achieved resolution under the IBC was 69% of their admitted claims and less than 16% of the fair value of the assets.

Improving the recovery rate and reducing the time taken for bankruptcy resolution are key areas which the ministry of corporate affairs and the IBBI are currently working on. A series of amendments to the IBC is expected that will also try to cut down the time taken in filing of bankruptcy in the case of distressed businesses, admission of cases by tribunals after establishing default and approval of resolution plans.

So far 5,893 cases have been admitted in the National Company Law Tribunal for bankruptcy resolution, of which, 3,946 cases are closed and 1,900 cases are pending.

IBBI chairperson Ravi Mital said in a quarterly update that the IBC has led to behavioural change in the debtor-creditor relationship. Fear of losing control of the firm on initiation of IBC proceedings is nudging debtors to settle their dues with the creditors as soon as possible. Till September, 23,417 applications for initiation of bankruptcy resolution, having underlying default of ₹7.3 tn were resolved before their admission, Mital said.