EXCLUSIVE: New amendment to bankruptcy law has Prashant Ruia’s personal guarantee on its radar

Union Finance Minister Nirmala Sitharaman addresses the media during the release of 'Jan Connect' on the initiatives taken by the government under '100 days of Bold Initiatives and Decisive Actions', in Chennai.Photo) (
  • The government is looking to increase the accountability of promoters towards their defaulted loans.
  • To this effect, the government could amend its bankruptcy law which will allow banks to invoke personal guarantees given by promoters for loans to their companies.
  • An appellate court had earlier disallowed such a move, in a case involving the Ruias and their bankrupt Essar Steel.

India’s Finance Ministry is sitting on a new amendment to the bankruptcy law. That might be a big setback for the Ruia family, the promoters for the bankrupt Essar Steel, and others who gave personal guarantees against bank loans.

As per the current resolution process, lenders can recover a certain portion of the dues from the bankrupt company. The proposed amendment targets personal guarantors to corporate debt. Once amended, the law will allow lenders to recover some ‘more money’ from such guarantors, according to sources who added that the Finance Ministry’s approval is likely in the next few days.

A recent ruling by the National Company Law Appellate Tribunal (NCLAT) had disallowed a similar appeal by Essar Steel’s lenders.

“Once the debt payable by the ‘Corporate Debtor’ stands cleared in view of the approval of the plan by making payment in favour of the lenders (‘Financial Creditors’), the effect of ‘Deed of Guarantee’ comes to an end as the debt stands paid,” the NCLAT order had said. ”The ‘financial creditors’ in whose favour guarantee were executed as their total claim stands satisfied to the extent of the guarantee, they cannot reagitate such claim from the Principal Borrower,” it added.

But the government is intent on ensuring that banks get as much money back as they can, even if it is from the promoter’s personal assets.

“If the government is proposing amendments in this space by way of amendment in the IBC (Insolvency and Bankruptcy Code) and if that is so, it would need a parliament approval. We will have to wait and see the nature of amendments to be sure whether parliamentary approval is needed or not. Secondly, I am sure that promoters of various corporate debtors will test any such amendment in a court of law,” said Kunal Tandon, a lawyer who has represented banks in bankruptcy cases.

"The matter is subjudice and recovery amounts haven’t yet been crystallised. Hence it is premature to comment," an Essar Group spokesperson told Business Insider.

This will be the second change to the bankruptcy law in the last three months

In July, the NCLAT approved ArcelorMittal’s ₹42,000-crore ($6 billion) offer for Essar Steel.

However, the NCLAT also held that financial creditors (banks) at par with operational creditors (unpaid suppliers, vendors etc). This would have reduced the banks’ share of proceeds from the sale amount.

But the government argued that the ruling was against the spirit of the bankruptcy law and process. So it brought in an amendment soon after that allowed the banks to decide how the proceeds of the resolution will be distributed.

SEE ALSO:
ArcelorMittal's bid for the bankrupt Essar Steel clears another hurdle that will give banks 60% off their dues-- butthe appellate order has done something more

A slowing Indian economy is clouding over ArcelorMittal's $6 billion bid for Essar Steel

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