State Bank of India, India’s largest lender, has decided to invoke personal and corporate guarantees of defaulting firms even when they face bankruptcy proceedings but the move could face legal challenges from promoters unwilling to part with their assets.
Two senior officials of the bank said that letters have been issued to all officers in charge of credit that they must immediately invoke the personal and corporate guarantees. “As many as 200 such notices for invoking guarantees would be issued by the bank,” one person told ET on condition of anonymity.
The decision could have a major fallout as the list of promoters who have provided guarantees includes names like Arvind Dham of Amtek AutoBSE -0.58 %, Prashant Ruia and Ravi Ruia of Essar Group, Manoj Gaur of Jaiprakash AssociatesBSE 1.85 % and Rishi Agarwal of ABG ShipyardBSE 3.48 %. Firms of all these promoters are facing bankruptcy proceedings.
Opinions Differ Over Standstill Clause
Legal experts whom ET spoke with said that a lender cannot invoke guarantees after a case is admitted to National Company Law Tribunal (NCLT) since the moratorium will apply on legal actions.
As per Insolvency & Bankruptcy Code (IBC), a standstill clause becomes applicable for 270 days. This means no legal action can be taken against the company. Lenders have to arrive at a resolution plan within this time period.
If they fail to do so, then the assets of the company would be liquidated.
But SBI officials said the rule does not prevent lender action.
“We have a difference of opinion with legal experts. Under Insolvency & Bankruptcy Code (IBC), you can’t go against the company,” one of the officials said. But “we think there is no standstill clause on the guarantor.”
“Aren’t the promoters separate from a corporate? Isn’t a guarantor separate from the corporate?” the person said.
They added that it’s important to invoke guarantees early or the guarantors might get away scot free.
“If the debt is resolved in NCLT, then you may not have a claim against the guarantor and then courts would interpret it their way. So unless you have invoked it (guarantee) earlier you can’t claim it,” one of the officials reasoned.
The resolution plan will recast the loan completely so if the guarantor is on board it is fine.
If he is not on board, then he is not liable for the borrowings as the restructured liabilities will be a fresh loan and the old loans and terms will no longer be valid, said the official.
“Therefore, as soon as a decision is taken to refer a company to NCLT, simultaneously we will work towards invoking the guarantees,” he said.
The SBI officials also said the credit officers who fail to invoke these guarantees will be made accountable for inaction.
Many industries facing bankruptcy proceedings have given personal and corporate guarantees to banks, particularly in the last twothree years when efforts were made to restructure their loans.
SBI has non-performing loans amounting to Rs 1.8 lakh crore and post provisions for the loss it may incur, the share of bad loans is Rs 97,896 crore.