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Current Affairs

SC ruling on personal guarantee of creditors

Date: 25 May 2021 Tags: miscellaneous

Issue

The Supreme Court has given an important ruling stating that creditors can initiate recovery proceedings against promoters who have given personal guarantee to secure funds.

 

Background

The Supreme Court had transferred all such related matters to itself about six months ago. This will help in better debts recovery process.

 

Details

  • The top court has also given lenders the permission to start proceeds against the promoters of defaulting firm eventhough its corporate insolvency resolution process has not been completed.

  • The court added that mere permission for debt structuring will not discharge the company promoters from the liability of personal guarantee given to the lenders.

  • Personal guarantee is usually given by a promoter to lenders to assure that their money will be returned and he/she has given assurance for that.

  • The ruling will allow lenders to pursue guarantors for the losses that they will face due to haircut during debt recovery process.

 

Personal guarantee

  • The promoter of an entity gives personal guarantee as a substitute for collateral that the lender may demand, for the risk he is taking by lending to a company that may not be doing well.

  • It forms an assurance that the promoter will use the funds to improve financial condition of the entity and repay back the loan. It is different from collateral.

 

Significance

  • Promoters usually secure money by giving personal guarantee. Their past transaction will ensure banks give them money easily.

  • Promoters then divert the funds for another purpose that the intended ones. This may cause loss to the lenders.

  • The new ruling will see to it that banks get the amount from personal wealth of the promoters by using personal guarantee as a medium.