Banks Might Face Legal Problems Upon Invoking Personal Guarantees

In May, the Supreme Court permitted invoking personal guarantees concerning corporate debtors. Many lenders shifted to the National Company Law Tribunal (NCLT) for recovering dues from defaulters.

As per auditors and lawyers, public sector banks shifting to NCLT for invoking personal guarantees of promoters concerning defaulting firms may encounter a robust and highly contentious path. This is because most of the promoters do not register assets under their names.

A few foreign banks even employ detectives to gather information regarding promoters’ assets set aside overseas. However, very few Indian banks use such measures.

It isn’t easy to invoke personal guarantees in India since the court trials tend to go on for years and lenders lose interest. Only in a very few cases, banks have recovered money concerning personal guarantees. For example, in the Vijay Mallya case, banks have recovered only a portion of their dues this year after several years of litigation. There are still various accounts that are under litigation.

Earlier, promoters of various Indian companies had implicated their professional managers in fraud and diversion of company funds. However, lawyers have mentioned that they will not get any relaxation from the Insolvency and Bankruptcy Code (IBC) since a lender can now invoke personal guarantees. Top lawyers believe that invoking guarantees will be beneficial to the lenders, increasing the settlement chances.

For any clarifications/feedback on the topic, please contact the writer at bhavana.pn@cleartax.in