SC RULING ON CREDITORS INVOKING PERSONAL GUARANTEES

SC RULING ON CREDITORS INVOKING PERSONAL GUARANTEES

Subject: Polity

Context: Recently, the Supreme Court has ruled that creditors can proceed against promoters of defaulting companies to recover debt if such promoters have given personal guarantees to secure funds.

Concept:

• The SC has said is that mere approval of a resolution plan for a debt-laden company does not automatically discharge a promoter from their liability in lieu of the personal guarantee they had given to secure the funding for the company.
• The personal guarantees from promoters are a kind of assurance to lenders that the monies being borrowed will be returned.
• The apex court has said that under the contract of guarantee, the liability of the promoter will be over and above the liabilities of the company.

What is a personal guarantee?

• A personal guarantee is most likely to be furnished by a promoter or promoter entity when the banks demand for collateral which equals the risk they are taking by lending to the firm, which may not be doing so well.
• It is different from the collateral that firms give to banks to take loans, as Indian corporate laws say that individuals such as promoters are different from businesses and the two are very separate entities.
• A personal guarantee is an assurance from the promoters or promoter group that if the lender allows them the fund, they will be able to turn around the loss-making unit and repay the said loan on time.