Personal guarantees amounting to ₹1.8-lakh crore given by promoters of as many as 42 defaulting corporate entities are under the scanner, following a direction by the Supreme Court to the Centre asking it to explain why these guarantees have not been invoked by public sector banks.

So far, only State Bank of India has moved to encash personal guarantees given by Anil Ambani, according to a public interest litigation filed with the apex court.

The PIL, seen by BusinessLine , names several the personal guarantees not invoked, including by Kapil and Dheeraj Wadhwan of DHFL (₹79,344 crore); Venugopal and Rajkumar Dhoot (₹22,076 crore; Madhusudhan Rao & family (₹5,253 crore); IVRCL’s Sudhir Reddy (₹7,058 crore); and Jatin Mehta of Winsome Diamonds (₹6,185 crore).

“Personal guarantees are not taken by banks (including PSBs) as a matter of course but only in special circumstances. Accordingly, where the occasion arises to invoke such personal guarantees on account of a default of the borrowing entity, the same ought to be done without delay,” the PIL said, adding that a Master Circular issued by the Finance Ministry on July 1, 2009 clearly allowed banks to invoke personal guarantees when a default happens, but the banks have been reluctant to act.

‘Case-by-case basis’

But senior public sector bankers said the assumptions made by the petitioners are not entirely correct. “Banks have been invoking personal guarantees or pledged shares whenever required and on a case-by-case basis,” said a banker. Justices Rohinton Fali Nariman and Navin Sharma have asked the petitioners, represented by senior advocate Manan Kumar Mishra and Durga Dutt (advocate on record), to send a representation to the Finance Ministry in this regard. They asked the Finance Ministry to respond within four weeks on receipt of the representation.

According to industry experts, the PIL could be a test case for the Finance Ministry.

L Viswanathan, Partner, Cyril Amarchand Mangaldas, said recovery proceedings for personal guarantees in civil courts have continued for years without any meaningful recovery given the case load in the legal system.

“Creditors do approach recovery tribunals for claims under personal guarantees. Where there are assets available for realisation, usually debtors come forward to settle. However, in many cases, assets may not be available, traceable or limited and hence pursuit of legal action may not yield results. This has to be seen on a case-by-case basis.”

Recovery options

“With the provisions of the Insolvency and Bankruptcy Code, 2016 coming into effect for personal guarantors (to corporate debtors) and given that the recent Ordinance does not contemplate suspension of insolvency filings against personal guarantors, it is likely that lenders will re-assess the efficacy of this measure while evaluating their recovery options. The IBC, apart from providing for a bankruptcy regime for personal guarantors, would also bring into focus asset transfers pre insolvency and transfers that are intended to avoid liability to creditors can be voided,” he added.

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