India Ratings and Research (Ind-Ra) on July 10 said the Insolvency and Bankruptcy Board of India’s (IBBI) proposed amendments to the regulations regarding the treatment of guarantees in resolution plans will increase prudency among potential guarantors, knowing they would remain accountable even post-resolution.
This could lead to more responsible financial practices and risk assessments by corporate debtors and their guarantors, promoting a healthier credit ecosystem, the agency said.
Additionally, the amendment is likely to enhance recovery value for creditors, the rating agency said.
The proposed amendment clears the ambiguity around the liability of guarantors, thus bringing in the much-needed clarity to the resolution process involving guarantors and will significantly reduce the cross litigation on account of varied interpretations.
In a nutshell, the amendments state that a resolution plan shall not automatically release guarantors from their liabilities, aligning with the Supreme Court’s interpretation in the Lalit Kumar Jain v. Union of India case.
It reinforces creditor’s rights to pursue guarantors even after the approval of a resolution plan.
A meaningful impact of the amendment on recovery quantum may be visible in the medium to long term, as the rule of law is actioned upon by creditors. The interpretation of the law by courts would also be a key monitorable.
According to Jatin Nanaware, Senior Director, India Ratings, around 38% of the wholesale NPL cases in the Ind-Ra rated security receipts portfolio are expected to be resolved under the IBC.
“The present amendment, once enacted, will have a positive impact on security receipt ratings involving personal guarantees. The likely increase in recovery quantum will enhance the recovery value for asset reconstruction companies in the long term” Nanaware said.
Unequivocally stating that the approval of a resolution plan does not extinguish the liability of guarantors will ensure creditors retain their rights to enforce guarantees.
However, the data published by IBBI in its March 2024 newsletter hints at a lower recovery rate of 2.16% for 26 cases closed through the approval of a resolution plan under the personal insolvency resolution process (PIRP) of personal guarantees (PGs) to corporate debtors (CDs) till March 2024.
Ind-Ra believes insolvency proceedings against PGs are challenging due to varied interpretations by different judicial forums, cross-litigations, and the time-consuming and complicated nature of the insolvency process with respect to guarantee agreements.
Additionally, borrowers/PGs sometimes engage in practices such as diversion of assets during the pendency of proceedings which adds to the woes of creditors, the rating agency said.