Subject: Banking Regulations

Why in the News

The NCLT approved Subhash Chandra’s personal insolvency repayment plan, allowing creditors with ₹22,006.57 crore in admitted claims to recover just ₹6.25 crore, a 99.97% haircut.

Core issue: The case highlights how personal insolvency under the IBC, 2016 works when a guarantor’s admitted liability is much larger than the assets available in their personal estate. Dissenting creditors, including HDFC Bank, are considering an appeal.

How does personal guarantor insolvency work under the Insolvency and Bankruptcy Code, 2016?

1. A personal guarantee is a promise to pay another’s debt: An individual undertakes to repay a borrower’s debt if the borrower defaults.
2. The firm and the guarantor are separate legal persons: Proceedings against a company and against its personal guarantor are separate proceedings even when they arise from the same borrowing.
3. The guarantor proposes, the creditors vote: In personal insolvency the first step is for the borrower to propose a repayment plan, which the creditors then vote on.
4. Approval triggers a statutory discharge: Once the creditors and the NCLT approve the plan, Section 119 of the Code passes a discharge order giving the guarantor a fresh start.

Why do the corporate and personal proceedings run in parallel?

1. Section 60 sends the guarantor to the same tribunal: The IBC provides for insolvency of a personal guarantor of a corporate debtor to be dealt with by the NCLT where proceedings against the corporate debtor are pending.
2. A guarantor’s liability is coextensive and independent: Contract law treats that liability as running alongside the principal borrower’s rather than only after it.
3. A corporate process seeks a buyer, a personal process seeks a plan: Corporate insolvency resolves a firm’s debt by taking over its management and finding a buyer or revival plan, and failing that leads to liquidation.
4. The personal order settles nothing for the firms: The founder’s personal insolvency does not extinguish the liabilities of the Essel linked firms that borrowed the money.

Why does the 99.97 per cent haircut overstate what was lost?

1. The comparison is against admitted claims, not realisable assets: The haircut measures the gap between claims admitted in the proceedings and the amount proposed for distribution.
2. The disclosed estate was Rs 31.79 crore: The resolution professional assessed the guarantor’s disclosed personal assets at that figure.
3. The tribunal applied a better off test: The NCLT considered whether creditors would recover more under the repayment plan than if the guarantor were pushed into bankruptcy.
4. The guarantor disputes the claim base: His office has stated that he borrowed no money, and that the claim against him by the objectors to the plan is Rs 3,992 crore.

How did the plan clear the creditors despite objections?

1. The plan carried 80.814 per cent of voting share: The statutory threshold is more than three-fourths, so the requirement was met.
2. No individual creditor holds a veto: A plan sanctioned by the tribunal binds every creditor covered by it, including those who voted against it.
3. Five entities were alleged to be associates: Dissenting creditors argued those entities were connected to the founder and should not have been permitted to vote. The NCLT did not accept the objection.
4. The Bench itself was divided: The original NCLT Bench differed over the plan, and a third judicial member decided the matter.

What did the tribunal do with the net worth discrepancy?

1. Earlier certificates showed a far larger figure: A 2017 net worth certificate furnished to RBL Bank put his net worth at about Rs 45,888 crore, and a 2018 certificate at about Rs 40,562 crore.
2. Creditors sought a forensic audit: They asked for an examination of the gap between those certificates and the assets disclosed in the present proceedings.
3. Suspicion was held not to be proof: The NCLT held that the creditors had not shown with evidence that specific assets were transferred, concealed or diverted to defraud them.
4. A forensic audit is not a precondition: The tribunal held that such an audit is not mandatory before a repayment plan can be approved.

What grounds remain if the creditors appeal?

1. The appeal lies to the appellate tribunal: Creditors can challenge the order before the National Company Law Appellate Tribunal (NCLAT).
2. The challenge must be legal or procedural: Available grounds include ineligible creditors being allowed to vote, the statutory majority being wrongly calculated, or the law being wrongly applied.
3. A low recovery is not itself a ground: A creditor cannot overturn a plan merely because it considers the amount recovered too small.
4. The associate votes are the strongest ground: If the appellate tribunal finds those votes were wrongly counted and the required majority was consequently not reached, it can interfere with the approval.
5. The corporate borrowers stay exposed: Creditors can continue to pursue the principal borrowers through separate legal or insolvency proceedings.

Is this outcome exceptional or the norm?

1. 5,186 cases have produced 64 repayment plans: Since the personal guarantor provisions came into force, creditors have filed about that many cases and only 64 ended in a repayment plan.
2. Recovery across those plans is about 1 per cent: Creditors recovered roughly that share of what they were owed in the cases that did reach a plan.
3. The case is therefore representative: A near total haircut is the ordinary result of this regime rather than an outlier produced by one guarantor’s circumstances.

Challenges to the personal guarantor insolvency regime

1. Admitted claims bear no relation to the estate: A guarantor is admitted for the whole defaulted corporate debt, and the recovery pool is one individual’s property, so the ratio is guaranteed to look catastrophic. Eg. Guarantees securing multi-thousand crore project loans are routinely taken from promoters whose personal balance sheets are a fraction of that size.
   The Fix: Require lenders to record and periodically revalue the guarantor’s net worth against the guaranteed exposure, so the guarantee is priced as security rather than counted at face value.
2. Voting power can sit with connected parties: The Code sets a voting threshold without a tested standard for excluding creditors related to the guarantor, so a majority can be assembled from within the group. Eg. Related party voting was the reason corporate insolvency law had to bar connected persons from the committee of creditors through Section 29A.
   The Fix: Extend a Section 29A style disqualification expressly to voting in personal guarantor repayment plans, with the burden of disclosure on the guarantor.
3. Asset disclosure is self reported: The estate rests on what the individual declares to the resolution professional, who has limited power to trace assets held through family members or offshore structures. Eg. Benami holdings and trust structures sit outside the disclosure a resolution professional can compel.
   The Fix: Give the resolution professional statutory access to income tax, benami property and foreign asset reporting records for the guarantor and immediate family.
4. The process is slow relative to the value at stake: A guarantor’s estate does not appreciate during the proceedings, and delay erodes the small recovery that exists. Eg. Corporate insolvency resolution has routinely overrun the 330 day outer limit the Code prescribes.
   The Fix: Set a hard outer timeline for personal guarantor cases with automatic escalation to the appellate tribunal on breach.
5. Discharge closes the file without closing the debt: A discharge order releases the guarantor while the borrowing companies remain in default, so lenders keep the exposure and lose the security. Eg. Group structures allow the operating company, the borrower and the guarantor to fail in three separate forums on different timelines.
   The Fix: Require the corporate and personal proceedings arising from the same borrowing to be heard by a single Bench, so the two outcomes are decided against one record.

Conclusion

The regime was built to do two things at once. It gives an honest guarantor a fresh start, and it gives a lender a second claim on a defaulted loan. It cannot do both when the claim admitted is the whole debt and the estate is one person’s property. The marker to watch is whether the appellate tribunal treats disqualification of connected voters as a live standard, since that is the only part of this process a dissenting creditor can still reach.

Back2Basics: Insolvency and Bankruptcy Board of India

1. Establishment: Set up in 2016 as the regulator created by the Insolvency and Bankruptcy Code, 2016.
2. Regulated entities: It regulates insolvency professionals, insolvency professional agencies and information utilities.
3. Powers: It carries legislative, executive and quasi-judicial functions, framing regulations under the Code and enforcing them.
4. Data role: It publishes case level outcomes of the insolvency process through periodic newsletters.

[2017] Which of the following statements best describes the- term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news?

(a) It is a procedure for considering ecological costs of developmental schemes formulated by the Government.

(b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.

(c) It is a disinvestment plan of the Government regarding Central Public Sector Undertakings.

(d) It is an important provision in ‘The Insolvency and Bankruptcy Code’ recently implemented by the Government.