Finance ministry asks PSBs to monitor cases requiring insolvency process against personal guarantors
The Finance Ministry has asked public sector banks (PSBs) to put in place a mechanism for monitoring cases which may require initiation of insolvency proceedings against the personal guarantors to corporate debtors.
According to sector experts, the move has been taken to ensure that banks look at all possible ways to realise their dues and also invoke personal guarantees which lenders generally perceive as the last resort.
The norms for initiation of the insolvency resolution process for personal guarantors to corporate debtors before the National Company Law Tribunal (NCLT) came into effect in December last year.
"Banks may consider putting in place a mechanism for monitoring the cases which may require initiation of individual insolvency process before the NCLT against personal guarantor to corporate debtors," said the letter dated August 26, from the Department of Financial Services (DFS) to state-run banks.
It also said that banks may also consider setting up IT systems to collate data regarding personal guarantors to corporate debtors in all such cases for the requisite follow-up and consequential action.
The directive comes at a time when corporate insolvency resolution processes (CIRP), under Section 7, 9 and 10 of the Insolvency and Bankruptcy Code (IBC), are suspended for a period of six months starting March 25.
Manoj Kumar of Corporate Professionals said that bankers are, many times, lenient towards big promoters and although they have power to invoke corporate guarantees in all the cases, they never do so.
"The government is nudging the banks to take action against corporate guarantors," he said.
Sonam Chandwani, Managing Partner at KS Legal & Associates, said that the blanket suspension on Sections 7, 9, and 10 of the Insolvency and Bankruptcy Code left financial and operational creditors scrambling to recover monies and keep themselves afloat during the pandemic.
"However, the Finance Ministry's recent amendment empowering creditors to file insolvency application against personal guarantors to corporate debtors before the NCLT under IBC, 2016 is a bold recognition of the principle of co-extensive liability of surety," she said.
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