On May 21, 2021, the Supreme Court upheld the 2019 amendment to the Insolvency and Bankruptcy Code (IBC) according to which, despite a bankrupt company having obtained redress in the hands of NCLT, its promoters who guaranteed the loans are not paid up. the hook ipso facto.
The amendment and the approval of the Supreme Court clearly shocked the promoters who, until then, blithely believed that the guarantees were not worth the paper on which they were written. And as a result, it has boosted the morale of banks and financial institutions — the blow of huge, straight haircuts often to the tune of 60 percent of the dues inevitably imposed by the resolution process can be mitigated if not fully offset by personally responsible.
So far all is well, but the devil is in the thick of the matter because the guarantee of a promoter is not in the same league as a bank guarantee. It is now a well-established law that a bank cannot under any circumstances waive or evade its guarantee, except fraud or counterfeiting. So much so that the financiers as well as the suppliers of machinery / materials feel more comfortable with bank guarantees even though they are not accompanied by any tangible guarantees. Banks must pay without dispute, deadline, when the guarantee is invoked. Compare that with the personal guarantees of the promoters, and it will be seen how difficult and inadequate they can be.
First, the creditor only makes a cursory assessment of the financial situation of the guarantor promoter. No physical and tangible security is required to such an extent that the promoter signs on the dotted lines without losing sleep, because he wants to obtain a huge injection of money to launch his project.
Second, it is common knowledge that the institution of benami is alive and well and active in the country despite the grim prospect that property held under fictitious names will be confiscated by the central government and that one needs to cool one’s heels in the prison ranging from one to seven years in addition to spitting out a penalty of 25% of the market value of the property.
Third, promoters make investments in group companies through a complex network of investment firms in a way that spins around, challenging the identification of ultimate beneficiaries and the extent of their control. It is therefore difficult for the authorities to get their hands on property held in the form of shares of various companies without disentangling the complex web of multi-layered investments,
Finally, the eagerness with which the promoters flee the nation greatly disrupts the recovery process. Diamond dealers Nirav Modi and his uncle Mehul Choksi allegedly defrauded the Punjab National Bank to the tune of 13,500 crore rupees. Another is Vijay Mallya, the promoter of Kingfisher Airlines, who owes the banks Rs 9,000 crore and faces extradition from London.
The Fugitive Economic Crimes Act 2019 of course allows authorities to confiscate their properties in India and abroad, but as previously stated, this is easier said than done thanks to the institution of the benami and to the complex network of investment firms.
Foreign bank accounts in countries with bank secrecy laws have often frustrated Indian investigative and prosecution agencies. And crafty developers are always one in the game — namely that Nirav Modi’s residential property in London would be in his sister’s name and that of Vijay Mallya in the same town in the name of a family member.
Therefore, banks and financial institutions in India cannot yet open the champagne although the verdict of SC is undoubtedly a gunshot in their arms.
(The writer is a senior columnist and tweets @smurlidharan)