Denial Of IBC Relief By Supreme Court Creates Fresh Recovery Opportunity For Lenders

The recent Supreme Court (SC) ruling, permitting bankruptcy proceedings against personal guarantors of loans to defaulting companies, may unlock a novel avenue for recovery, potentially amplifying banks' returns.

This development is expected to strengthen lenders' negotiating power with defaulters, acting as a deterrent against impractical personal guarantees from promoters in the future, as noted by banking professionals and legal experts.

According to the latest data from the Insolvency and Bankruptcy Board of India (IBBI), a total of 2,289 cases about personal guarantees, involving corporate debt amounting to Rs 1.63 lakh crore, have been lodged at the National Company Law Tribunal (NCLT). Among these, 282 cases have been accepted, with 21 resulting in recoveries totalling Rs 91.27 crore.

The SC order signifies a breakthrough in cases stalled at the NCLT, with banks expected to lodge fresh pleas in light of this ruling. Supreme Court lawyer and bankruptcy law expert, Biswajit Dubey, commented, "Banks will now not only pursue the old cases but will also file new applications now," anticipating increased recoveries due to heightened concerns about potential loss of personal assets.

The verdict will elevate recovery prospects even for accounts previously written off, contributing positively to the bottom lines of financial institutions.

Hari Hara Mishra, CEO of the Association of ARCS in India, noted, "These cases will now move fast and over the next few quarters (are) likely to yield multiple times of Rs 91 crore meagre realisations under personal insolvency so far."

Bankers express optimism about gaining more leverage with defaulters, especially as the SC ruling allows banks to become party to personal insolvency cases.

The decision follows the dismissal of petitions by former promoters of bankrupt companies, including Anil Ambani, Venugopal Dhoot, and Sanjay Singal, challenging personal insolvency proceedings initiated against them.

Bankers emphasise a commitment to pursuing old cases, with the stigma associated with bankruptcy expected to motivate many promoters to settle dues.

The ruling is anticipated to serve as a deterrent against promoters offering unrealistic bank guarantees. In light of the heightened scrutiny, banks had previously engaged detective agencies to uncover hidden assets of defaulters.

Personal insolvency cases are now poised to disrupt defaulters, as the associated stigma is seen as a powerful deterrent.

In a personal insolvency case, the resolution professional assesses the defaulting individual's estate and distributes it among creditors.

Failure to settle dues results in bankruptcy, with assets sold and proceeds distributed to creditors.

The individual faces restrictions on holding directorships, accessing bank loans, entering the bond market, or standing for public office for a year after the sale proceeds' distribution.

The SC ruling is expected to discourage promoters of heavily indebted companies from providing unfounded personal guarantees, as illustrated by cases involving Anil Ambani and Sanjay Singal and his wife Arti Singal.