An insolvency professional explains why enforcing Anil Ambani's personal guarantee is a tough task
Reuters
Synopsis
The progress of the case between State Bank of India (SBI) vs Anil Ambani (Respondent) is expected to lay the groundwork for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors (IRPPG).
By ET CONTRIBUTORS
Last Updated:
By Devendra Mehta
The jurisprudence of corporate insolvency resolution process (CIRP) has been evolving over the past four years. The progress of the case between State Bank of India (SBI) vs Anil Ambani (Respondent) is expected to lay the groundwork for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors (IRPPG).
CIRP has been much litigated, primarily by existing promoters, as the incumbents wanted to retain their companies. IRPPG goes a step further targeting promoters’ personal wealth and thus would entail vicious litigation. In another case of IRPPG, Intec Capital versus Lalit Kumar Jain, a stay has been granted as the constitutionality of the law has been challenged. Respondent too has been granted a stay on August 27 by the Delhi High Court on grounds of constitutional validity. Media reports state that the order of NCLT will also be challenged under Section 61 of IBC at NCLAT. Unlike CIRP, IRPPG has not been tested in courts and thus all the lacunas will come to fore which will create challenges in enforcing the personal guarantee.
However, before delving into the specifics of the Insolvency and Bankruptcy Code (IBC) that may arise in relation to IRPPG two “unintended consequences” specific to this case. One, SBI filed the application on March 12 that resulted into an interim moratorium coming into effect (Section 96). Thus, the UK court order of May, asking Respondent to pay US$ 717 million to a trio of Chinese banks could not have been enforced. Two, in the order, the judges point out that “The accounts were retrospectively declared as Non-Performing Account (NPA) with effect from 26.08.2016 i.e. even before loan agreements had been entered into. Such retrospective declaration seems rather incongruous, akin to the adage “putting the cart before the horse”. While debt and default has remained undisputed, the incongruity of declaration of NPA, has not been raised and contested by the Respondent.” The second point may be a ground to litigate if the need so arose in future.
In terms of IRPPG per-se, some of the issues detailed below may lengthen/delay the process.
Section 109 states that “a creditor shall not be entitled to vote in respect of a debt for an unliquidated amount”. This is possibly going to one contentious issue that may debar SBI from casting a vote. The term, unliquidated amount, has not been defined under IBC.
Liquidated amount is a determined amount and does not have any ambiguity on who is to pay and what is to be paid. In the current context, the argument presented by the Respondent on which the court has not opined is “It was the understanding between the Financial Creditor and Personal Guarantor, at the time of execution of the Personal Guarantee deed dated 23.09.2016, that the Corporate Guarantee provided by RITL, Reliance Communications Infrastructure Limited, RCOM and Reliance Telecom Limited would be invoked before invoking the Personal Guarantee. The Personal Guarantee would be invoked only upon there being any shortfall in the recovery of amounts under the credit facilities.” “Shortfall” is not a determined sum and thus may be classified as unliquidated debt.
Section 99 states that resolution professional shall examine the application and submit a report to Adjudicating Authority (AA) recommending approval or rejection. Furthermore, the section states that debt if registered with information utility cannot be disputed. We are not aware whether the debt is registered with information utility. However, if the guarantee is for “shortfall” mentioned above the amounts may be classified as disputed. In the current order too, respondents had taken the plea “since the Application for approval of the Resolution Plan is pending the RP could not file any report on the admissibility or otherwise of the Applications.”
AA may issue instructions for the purpose of conducting negotiations between the creditor and the debtor under Section 100 of IBC. Historically, negotiations for corporate resolutions under various schemes have been endless. No time limit has been prescribed for completion of negotiations.
Debtor in consultation with RP under Section 105 must prepare a repayment plan which the RP would submit to AA under Section 106 within 21 days of last date of submission of claims. It is quite likely that the negotiations between respondent and SBI are not concluded even at the end of aforesaid 21 days. Thus, AA may possibly have to grant extension? Also, it is not mandatory to call meeting of creditors, in case the reasons for same are provided by resolution professional. Unliquidated debt whence single creditor has filed the application may be one reason. Additionally, maximum period too is not prescribed for the term of repayment plan.
Debtor may choose to replace resolution professional (RP) under Section 98 of IBC. It is not clear under what circumstances the debtor can replace the resolution professional.
Finally, moratorium comes into play from the date of admission for a period of 180 days as per Section 101. In case the repayment plan is not finalized will the moratorium continue. This is because lapse of 180 days is not a condition to take debtor to bankruptcy under Section 121
Ambiguities in IBC for IRPPG as detailed above will make the enforcement, if at all, an endless process. Let us hope this case will establish jurisprudence.Terms of Use & Grievance Redressal Policy
The jurisprudence of corporate insolvency resolution process (CIRP) has been evolving over the past four years. The progress of the case between State Bank of India (SBI) vs Anil Ambani (Respondent) is expected to lay the groundwork for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors (IRPPG).
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CIRP has been much litigated, primarily by existing promoters, as the incumbents wanted to retain their companies. IRPPG goes a step further targeting promoters’ personal wealth and thus would entail vicious litigation. In another case of IRPPG, Intec Capital versus Lalit Kumar Jain, a stay has been granted as the constitutionality of the law has been challenged. Respondent too has been granted a stay on August 27 by the Delhi High Court on grounds of constitutional validity. Media reports state that the order of NCLT will also be challenged under Section 61 of IBC at NCLAT. Unlike CIRP, IRPPG has not been tested in courts and thus all the lacunas will come to fore which will create challenges in enforcing the personal guarantee.
However, before delving into the specifics of the Insolvency and Bankruptcy Code (IBC) that may arise in relation to IRPPG two “unintended consequences” specific to this case. One, SBI filed the application on March 12 that resulted into an interim moratorium coming into effect (Section 96). Thus, the UK court order of May, asking Respondent to pay US$ 717 million to a trio of Chinese banks could not have been enforced. Two, in the order, the judges point out that “The accounts were retrospectively declared as Non-Performing Account (NPA) with effect from 26.08.2016 i.e. even before loan agreements had been entered into. Such retrospective declaration seems rather incongruous, akin to the adage “putting the cart before the horse”. While debt and default has remained undisputed, the incongruity of declaration of NPA, has not been raised and contested by the Respondent.” The second point may be a ground to litigate if the need so arose in future.
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In terms of IRPPG per-se, some of the issues detailed below may lengthen/delay the process.
Section 109 states that “a creditor shall not be entitled to vote in respect of a debt for an unliquidated amount”. This is possibly going to one contentious issue that may debar SBI from casting a vote. The term, unliquidated amount, has not been defined under IBC.
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Liquidated amount is a determined amount and does not have any ambiguity on who is to pay and what is to be paid. In the current context, the argument presented by the Respondent on which the court has not opined is “It was the understanding between the Financial Creditor and Personal Guarantor, at the time of execution of the Personal Guarantee deed dated 23.09.2016, that the Corporate Guarantee provided by RITL, Reliance Communications Infrastructure Limited, RCOM and Reliance Telecom Limited would be invoked before invoking the Personal Guarantee. The Personal Guarantee would be invoked only upon there being any shortfall in the recovery of amounts under the credit facilities.” “Shortfall” is not a determined sum and thus may be classified as unliquidated debt.
Section 99 states that resolution professional shall examine the application and submit a report to Adjudicating Authority (AA) recommending approval or rejection. Furthermore, the section states that debt if registered with information utility cannot be disputed. We are not aware whether the debt is registered with information utility. However, if the guarantee is for “shortfall” mentioned above the amounts may be classified as disputed. In the current order too, respondents had taken the plea “since the Application for approval of the Resolution Plan is pending the RP could not file any report on the admissibility or otherwise of the Applications.”
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AA may issue instructions for the purpose of conducting negotiations between the creditor and the debtor under Section 100 of IBC. Historically, negotiations for corporate resolutions under various schemes have been endless. No time limit has been prescribed for completion of negotiations.
Debtor in consultation with RP under Section 105 must prepare a repayment plan which the RP would submit to AA under Section 106 within 21 days of last date of submission of claims. It is quite likely that the negotiations between respondent and SBI are not concluded even at the end of aforesaid 21 days. Thus, AA may possibly have to grant extension? Also, it is not mandatory to call meeting of creditors, in case the reasons for same are provided by resolution professional. Unliquidated debt whence single creditor has filed the application may be one reason. Additionally, maximum period too is not prescribed for the term of repayment plan.
Debtor may choose to replace resolution professional (RP) under Section 98 of IBC. It is not clear under what circumstances the debtor can replace the resolution professional.
Finally, moratorium comes into play from the date of admission for a period of 180 days as per Section 101. In case the repayment plan is not finalized will the moratorium continue. This is because lapse of 180 days is not a condition to take debtor to bankruptcy under Section 121
Ambiguities in IBC for IRPPG as detailed above will make the enforcement, if at all, an endless process. Let us hope this case will establish jurisprudence.Terms of Use & Grievance Redressal Policy
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