In the last five years, efforts to recover funds from the promoters of defaulted companies have seen minimal progress. So far, only about 2% of the dues, amounting to ₹103 crore, have been recovered from 26 cases. This slow recovery rate highlights the ongoing struggles in the debt resolution process.
High Volume of Cases and Limited Success
A significant number of cases have been filed in the National Company Law Tribunal (NCLT) and the Debts Resolution Tribunal to recover a staggering ₹2.07 lakh crore. Out of 3,184 cases, 3,134 were filed with NCLT. However, 117 of these cases were either withdrawn or rejected before a resolution professional (RP) was appointed.
For the remaining cases, RPs were appointed in 1,542 instances, and 468 cases were admitted for resolution. The resolution process saw 146 cases closed, 12 withdrawn, and 108 closed due to non-submission or rejection of plans, according to a CareEdge Rating report.
Transition from SARFAESI to IBC
Until nearly three years after the introduction of the Insolvency and Bankruptcy Code (IBC), lenders relied on SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) to recover dues from personal guarantors. The IBC provisions related to personal guarantors were only notified later, and even then, their constitutional validity was under challenge until November of last year, when the Supreme Court declared them constitutional.
Prashant Mara, Managing Partner at BTG, Advaya, noted that while the law has evolved, it’s crucial for lenders to shift from SARFAESI to IBC and initiate proceedings against personal guarantors alongside corporate debtors. This approach helps preserve the quality of guarantors’ assets.
Legal Tactics and Asset Recovery Challenges
Jidesh Kumar, Managing Partner at King Stubb & Kasiva, Advocates and Attorneys, pointed out that personal guarantors often use legal maneuvers to delay proceedings. In many cases, their assets are either limited or challenging to liquidate. To improve recovery efficiency, Kumar suggests streamlining legal processes, enhancing asset tracking, and enforcing stricter asset-freezing measures.
Recent Developments and Procedural Delays
Rahul Sundaram, Partner at IndiaLaw LLP, reported that the NCLT admitted 81 petitions for recovery of ₹1.88 lakh crore against personal guarantors in the March quarter. This figure is the highest in seven quarters. Despite clear laws on personal guarantors’ liability matching that of corporate debtors, procedural delays continue to affect the speed and effectiveness of the recovery process.
Recommendations for Improvement
Smiti Tewari, Partner at Khaitan Legal Associates, highlighted a critical issue: the actual assets of personal guarantors are often disproportionately lower than the default amounts, and lenders rarely have a charge on these personal assets. Tewari recommends that lenders create security interests through mortgages or pledges on personal assets of guarantors. This way, enforcement of guarantees should be an automatic process rather than a last-resort action.
Conclusion
The current state of recovery from defaulted companies and their promoters is fraught with challenges. The transition from SARFAESI to IBC is essential, and more efficient legal and procedural mechanisms are needed to address delays and improve the overall recovery process. Lenders should take proactive measures to secure personal assets and streamline the resolution process to enhance their chances of successful recovery.
