As many as 2,496 insolvency cases against personal guarantors (PG) to corporate debtors (CD) are awaiting admission at various tribunals across the country, latest IBBI data showed. 

This translates to 84 per cent of the total 2,964 cases that were eligible for admission under IBC.  Of this, only 468 cases have been admitted so far up to June 2024. 

From 468 admitted cases, only 26 cases yielded approval of repayment plan leading to a recovery of  ₹102.78 crore which is 2.16 percent of their admitted claims, latest IBBI data showed.

This pendency to admission of PG cases comes even as the government had recently emphasised that it was focused on expanding the number of NCLT benches and Debt Recovery Tribunals (DRTs) to improve the overall efficiency of IBC ecosystem.

Also read
When questions are raised about recovery from non-performing assets, banks risk undermining their own credibility by ignoring the income generated while the loan was performing

Loan recovery: How banks blot their own copybook

SREENIVASA MURTHY V

IBBI Unveils Bold Plan to Accelerate MSME Resolutions under IBC

The provisions relating to PG were introduced under the Insolvency and Bankruptcy Code (IBC) in 2019, but were subsequently challenged before various Courts and the matter travelled to the Supreme Court. 

The Supreme Court through a catena of judgments in Lalit Kumar Jain, Mahendra Kumar Jajodia, and most recently with the judgment in Dilip B. Jiwrajka rendered in November 2023, settled the position of law with respect to the process, liability and constitutional validity of the provisions governing insolvency proceedings against PGs under IBC. 

“The positive effect of the same can be witnessed through IBBI data for April-June ’24, wherein of 187 applications filed, 55 have been accepted. While the recovery rate at 2 per cent is not optimal, IBC is primarily not a recovery mechanism,” Yogendra Aldak, Partner, Lakshmikumaran and Sridharan, said. 

Aldak highlighted that the liability of PGs is coextensive with that of the CD, meaning that many claims against PGs terminate as they are resolved against the CD. Thus, the recovery of about ₹100 crore from the PGs is of the claims which fall through against the CD. Thus, the overall recovery is bound to be more than as indicated by the 2 per cent in isolation, he added.

Process and provisions

Aldak also pointed out that the process and provisions governing initiation of personal insolvency proceedings against PGs to corporate debtors (CD) have long been under challenge before the Courts. This has affected the admission and adjudication of applications pertaining to PGs before the Adjudicating Authority, he added.

Hari Hara Mishra, CEO, Association of ARCs in India, said the quantitative recovery from PGs may be small.  However, qualitatively, its efficacy as a behavioral tool to enforce credit discipline and use as pressure point to fulfill contractual obligations cannot be overlooked, he added.

“To improve recovery from enforcement of guarantee, timely admission and adequate timely information on assets and liabilities and diversion thereof, if any, may be traced with possible use of new technology like artificial intelligence,” Mishra said.

The Finance Ministry had in 2020 directed public sector banks to up their game in initiating insolvency process against personal guarantors.

Related Topics