Personal Guarantee Recoveries Under IBC Lagging, Creditors See Paltry 1% Return
NEW DELHI – While India’s Insolvency and Bankruptcy Code (IBC) has shown moderate success in corporate insolvency cases, recovering approximately 31% of claims, its performance in realizing debts from personal guarantees remains alarmingly poor. Latest data reveals a stark reality: creditors are seeing a mere 1% recovery on admitted claims in such cases, highlighting significant bottlenecks in the current framework.
Since December 2019, a total of 5,186 applications have been filed by creditors and companies seeking to invoke personal guarantees. However, resolution professionals have been appointed in only 2,137 cases, representing roughly 41% of the total, according to data released by the Insolvency & Bankruptcy Board of India (IBBI). This includes 51 appointments facilitated by debt recovery tribunals.
Even within this limited number of cases, the path to recovery has been arduous. So far, only 64 cases have reached the stage of an approved repayment plan. The total amount realized by creditors from these cases stands at a meager Rs 235 crore, which translates to an average realization of just Rs 3.7 crore per case and a paltry 1% of the overall admitted claims. This indicates a significant struggle in converting personal guarantee claims into tangible recoveries for lenders.
The IBC was designed with provisions allowing banks and other creditors to pursue guarantors when claims from corporate insolvency resolution processes were not fully met. This was particularly aimed at holding promoters accountable for loans secured by their personal assets. Many prominent promoters, from the Ruias of Essar to the Bhushans of Bhushan Steel and Dhoot of Videocon, had provided such guarantees for loans or restructurings of companies that subsequently defaulted.
Despite the intent, the current data suggests that the mechanism for personal guarantee recovery is failing to deliver on its promise. The law stipulates a repayment schedule to be agreed upon in such cases, but the slow pace of admissions and the low recovery rates indicate that the process is fraught with delays and complexities. When including these guarantor repayments, the total amount realized by creditors is projected to be less than a third of their overall claims.
Further complicating the landscape are avoidance claims, which have been filed by resolution professionals following forensic audits of companies undergoing IBC resolution. While the IBBI has not provided specific details on the amounts realized from these claims, data indicates that avoidance transactions, including diversions of funds, exceed Rs 4.6 lakh crore across 2,132 cases. This underscores the scale of financial irregularities that often precede corporate insolvencies.
Despite the challenges in personal guarantee recoveries, the IBC has, in its first decade, emerged as a significant deterrent against defaulting promoters. The fear of losing control over their companies has spurred a considerable number of pre-admission resolutions. Over 30,000 cases filed before the National Company Law Tribunal (NCLT) have been resolved at the pre-admission stage through withdrawals, involving an estimated Rs 14 lakh crore. This highlights the preventative power of the IBC, even as its enforcement mechanisms for personal guarantees require further refinement and acceleration.
