Large NBFCs
The RCOM-SBI case could be an acid test for the new rules
In December 2019, the government brought personal bankruptcy under the ambit of NCLT. That meant; in the event of business bankruptcy, the NCLT can initiate personal bankruptcy against the promoter, if they have guaranteed a loan. The first test case appeared in the Anil Ambani versus SBI case.
Supreme Court vacates stay
Last month, the NCLT had appointed an IRP to initiate bankruptcy proceedings against Anil Ambani individually as he had guaranteed loans worth Rs.1700 cr taken by RCOM and Reliance Infratel. However, Anil Ambani had sought a stay on the action from the Delhi High Court post which SBI had approached the Supreme Court. The vacation of stay asks SBI and Anil Ambani to go back to the Delhi High Court and argue the case before coming to the Supreme Court.
Genesis of the dispute
The dispute refers to a 2016 loan given by SBI to RCOM, which carried personal guarantee of Anil Ambani. However, Anil Ambani has contended that it was just a letter of comfort given to SBI and not a legally enforceable guarantee. When the IBBI was amended, SBI opted to make the best of the new rules by appointing an independent resolution professional or IRP to initiate individual bankruptcy proceedings against Anil Ambani. That case will now have to be argued out in the Delhi High Court next month.
Banks look for precedent
Most banks are awaiting the outcome of the SBI-RCOM case as it is the first high profile case where the bank is trying to enforce bankruptcy on the basis of personal guarantees given for company loans. In the past, the NCLT allowed the liquidation of business assets, but not the individual assets. As of now, this new amendment that was brought in December 2019 is yet to be tested practically. That is what the banks were waiting for. It would have given them a good precedent. Clearly, now the case is going to continue for much longer.
There is a tightrope to walk
The purpose of the amendment was to curb cases of unscrupulous promoters hiding behind corporate veils to defend their personal assets. The problem is that such decisions become subjective and it may be hard for the courts to create a template. Harish Salve pointed out that personal bankruptcy has much larger implications. Hence, the court would have to be extremely careful in extending a corporate bankruptcy to the personal assets and properties of the promoters and their families. For the courts, this is clearly going to be a tight- rope walk. India needs to encourage the businesses to take risk but a very punitive personal bankruptcy law could curb risk taking. At the same time the public assets with the banks have to be protected. It is over to the courts!
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