Banks target personal guarantees to chase high-profile loan defaults

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© Dinesh Unnikrishnan NCLT order on SBI-ADAG case: Banks target personal guarantees to chase high-profile loan defaults The decision of an Indian appellate tribunal to appoint a resolution professional (RP) in a loan default case against businessman Anil Ambani underscores the newfound seriousness of banks to chase loan defaults by invoking […]



Anil Ambani wearing a suit and tie: NCLT order on SBI-ADAG case: Banks target personal guarantees to chase high-profile loan defaults


© Dinesh Unnikrishnan
NCLT order on SBI-ADAG case: Banks target personal guarantees to chase high-profile loan defaults

The decision of an Indian appellate tribunal to appoint a resolution professional (RP) in a loan default case against businessman Anil Ambani underscores the newfound seriousness of banks to chase loan defaults by invoking personal guarantees in high-profile cases.

The order by the Mumbai bench of the National Company Law Tribunal (NCLT) has come in a case filed by the country’s largest lender, State Bank of India (SBI), in connection with the default of two separate bank loans totalling Rs 1,200 crore granted to two Ambani’s group companies.  The ADAG group has contested that the order — NCLT appointed Jitender Kothari as the RP — doesn’t amount to admission of SBI’s application for bankruptcy proceedings.

After having failed to repay bank loans to lenders in multiple loan cases, the chairman of Reliance Anil Dhirubhai Ambani Group (ADAG) is now facing the prospects of bankruptcy proceedings that will likely pile on pressure on his debt-ridden group.

A spokesman for Ambani said NCLT has declined SBI’s request for a restriction on Ambani from dealing or appropriating his assets. “The NCLT order directing appointment of a RP does not constitute an admission of SBI’s insolvency application by NCLT. The RP will examine SBI’s insolvency application against Ambani and submit a report to NCLT.”

What the NCLT order means for Ambani?

According to legal experts, NCLT order would mean that the RP will have ultimate say in deciding the future course of the company if the company fails to pay its dues even now. It even needs to be seen whether Ambani can continue as a director of group companies in the context of latest developments, said Prem Rajani, Managing Partner, Rajani Associates.

”The recent order is to appoint a RP of Anil Ambani, in his capacity as the personal guarantor of a corporate debtor; and not against an individual or partnership firm (which provisions are yet to be notified). Those ADAG companies already undergoing Corporate Insolvency Resolution Process (CIRP) are under supervision and control of the CoC (Committee of Creditors) and the RP,” Rajani said.

As for those not undergoing CIRP, where Ambani is a director, while other provisions of the Insolvency & Bankruptcy Code (IBC) will apply in due course, we will need to ascertain whether he can continue as director or will be disqualified to continue as a director of such ADAG companies not undergoing CIRP, Rajani stated.

“If those companies are professionally managed with adequate and qualified professional and independent directors and key managerial personnel (KMPs), perhaps this order may not affect the operations of those companies not undergoing CIRP,” he added.

JN Gupta, a former Sebi executive director and founder of proxy advisory firm SES, said the NCLT ruling is a big blow for Anil Ambani and his ambitions. “Once a company goes through corporate insolvency, the promoters become practically untouchable for banks. Investors and banks will be very cautious in dealing with that promoter then,” he added.

Also, the likelihood of bankruptcy proceedings could impact banks’ exposure to the group, Gupta said. “Since Anil Ambani has large borrowing from banks, the ongoing developments could mean big amount of non-performing assets (NPAs) in the making for banks. Recoverability of this exposure becomes very doubtful. There will be a haircut for banks for sure,” he explained.

Gupta emphasised that in the event of any resolution that arises out of a loan default or fraud, the first thing that should get wiped off should be promoter’s equity. “The common shareholder should not suffer,” he said.

Another lawyer with a Mumbai-based law firm said the RP will assess the valuations of the company’s assets to see what can be recovered for distribution. “He will look at where creditors stand and if anything will come out of the liquidation if the RP evaluation progresses to liquidation,” said a lawyer. He declined to be named saying the matter is sensitive for his employer.

What are personal guarantees?

At the heart of the case is the personal guarantee Ambani offered to SBI and other banks while drawing loans for his group companies. Personal guarantees are powerful but less used weapons by banks in a number of corporate loan default cases.

Personal guarantees by a promoter enables banks to target the promoter’s personal assets in the event of a loan default though the loan is granted to the company. Of late, banks have been aggressive in chasing loan defaulters especially in cases where there is a personal guarantee. That wasn’t the case before.

In the case of Vijay Mallya-Kingfisher Airlines case too (banks loaned the once flamboyant businessman loans for the failed airline), it was personal guarantees that landed Mallya in big trouble. Banks were ergo able to chase his personal assets to recover dues.

Mallya had defaulted Rs 9,000 crore loans to a bank consortium led by SBI. Mallya had taken loans from banks against his personal guarantee along with other collaterals.

Though banks had invoked personal guarantee, they acted late in that case. The liquor baron departed from the country in March 2016, hours before banks moved Supreme Court seeking his detention.

In Ambani’s case, SBI may not repeat the mistake.

How the events unfolded in the Ambani case

The Anil Ambani case harks back to September 2016 when SBI sanctioned two separate loans of Rs 565 crore to Reliance Communications (Rcom) and another loan of Rs 635 crore to Reliance Infratel (RITL), part of the ADA Group. Ambani, along with other securities, provided personal guarantee under a Personal Guarantee Deed dated September 23, 2016 in favour of SBI.

Both RCOM and RITL defaulted in and around January 2017. SBI declared these loans as NPAs effective August 26, 2016.

After the defaults, SBI invoked the personal guarantee on January 31, 2018 against Ambani. Despite this, the Ambani group didn’t make any repayments to SBI and the lender issued a demand notice to Ambani in February. It didn’t receive any response. Finally, on March 12, SBI filed a case in NCLT. However, due to the COVID-19 lockdown, the case got delayed.

More personal guarantees

In its order, NCLT noted that Ambani had given personal guarantees to various other banks without obtaining the consent of SBI in availing credit facilities for group companies of Reliance ADAG . These lenders include the Industrial and Commercial Bank of China, China Development Bank and Exim Bank of China. The Chinese Banks have initiated recovery proceedings against the respondent in United Kingdom.

Following this, the High Court of England and Wales, in an order dated May 22, had directed Ambani to pay an amount of $717 million (Rs 5,448 crore) within 21 days. In case the respondent fails to make the payment, the Chinese banks could pursue all available options of enforcement of the order of the UK Court, the NCLT order noted.

Section 97(3) of the code mandates that the NCLT to direct the Insolvency and Bankruptcy Board of India (IBBI) within seven days of filing of such application to nominate the name of the RP. However, in this case, the NCLT court has directly ordered appointment of RP.

In its order, the court also noted that the accounts were retrospectively declared as NPA with effect from August 26, 2016, i.e. even before loan agreements had been entered into.

“Such retrospective declaration seems rather incongruous, akin to the adage putting the cart before the horse.” While debt and default has remained undisputed, the incongruity of declaration of NPA, has not been raised and contested by the respondent,” NCLT said.

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