Wealth: Personal guarantors risk losing wealth

NEW DELHI: Personal guarantors, who have been taken to National Company Law Tribunal (NCLT) for initiation of personal insolvency, stand to lose not just their wealth and assets, but face several restrictions during the time they face bankruptcy action.
After the Supreme Court decision on Thursday, the number of cases filed – which were close to 2,300 on last count – can see stepped up action and increase the worry for the ousted promoters.

The apex court upheld the validity of several provisions of the Insolvency & Bankruptcy Code related to action against personal guarantors, paving the way for banks and other creditors to initiate push the process against the likes of Anil Ambani to Venugopal Dhoot, Kishore Biyani, the Ruias of Essar and Bhushans of Bhushan Steel, who have lost control of their company after a series of loan defaults. With the lenders unable to recover their full dues, they had initiated personal insolvency action against the promoters, who would liberally hand out personal guarantees to secure large loans, without realising that some day they could face action.
The law provides for a two-stage process. In the first stage, insolvency action is to be initiated against personal guarantors, which is akin to the corporate insolvency resolution process for companies. Under this stage the idea is to allow for repayment of dues to creditors, which experts said, is more like loan settlement. If the process goes through, the debtor or the personal guarantor gets to maintain the assets, credit, social reputation and right to borrow.
But this is a viable proposition only if sufficient assets are available for the creditors to recover their dues. Financial sector executive said delay in the process has allowed several personal guarantors to transfer the ownership.
But it will mean bad news for them as the law gives the creditors the option to initiate bankruptcy action against them, which is like liquidation for companies. But unlike liquidation, the creditors must file an application to launch the process. During this period, the estate will vest in bankruptcy trustee and section 141 of IBC bars those, who have offered personal guarantees from being a director on the board of companies or promoting, forming of managing a company. Besides, there are restrictions on foreign travel.
Once bankruptcy is declared, the personal guarantor will be able to keep unencumbered personal ornaments of up to Rs 1 lakh and retain just one dwelling unit that costs up to Rs 20 lakh in urban areas and Rs 10 lakh in rural areas.
“They will not be able to maintain the lifestyle they have maintained all these years and will have to be content with basic living… There was no reason not to extend insolvency action to personal insolvency. The idea (of the petitions) seemed to be to delay the action,” said Vinod Kothari of Vinod Kothari & Co.