Focus on personal insolvency law after Delhi HC stay | Economic Times

New Delhi: At a time when business owners such as Anil Ambani and Venugopal Dhoot are trying to defend their family assets from getting attached as lenders stake claim on loans with personal guarantees, a little known Delhi-based businessman could provide much needed succour. In a recent ruling, the Delhi High Court has stayed personal insolvency proceedings against Lalit Kumar Jain, who runs auto components company Lakshmi Precision Screws, after he approached the court challenging the validity of the law pertaining to insolvency of personal guarantors to corporate debtors on legal and constitutional grounds. The Delhi High Court has issued notices to the ministry of corporate affairs, ministry of law and justice and Insolvency and Bankruptcy Board of India to explain their position in response to the writ petition filed by Jain, as per court filings seen by ET.Jain approached the Delhi High Court after Intec Capital (a financial creditor) dragged him to the National Company Law Tribunal (NCLT) to invoke a personal guarantee that he had provided to them for a loan taken by his company. He claimed he was seeking relief through a writ petition as a larger question of the constitutionality of the law was at stake. 77732710The litigation could potentially impact recovery of several billion dollars worth of loans given by banks to companies that were personally guaranteed by promoters, feel banking sources. Jain’s two main contentions in court were that the law was passed in an ‘unlawful’ manner and that the law is flawed because it creates a ‘duplication’ of liabilities for the same loan. In his petition, Jain has claimed that the Insolvency and Bankruptcy Act does not allow provisions pertaining to a specific class of debtors (in this case personal guarantors) to be notified exclusively. Secondly, he argued that a guarantor could be asked to participate in a corporate insolvency proceeding of his company thereby creating the effect of a ‘duplication’ of liability for the same loan if a parallel personal insolvency proceeding is initiated against him to recover that loan. Intec Capital did not respond to ET’s queries. Mails sent to ministry of corporate affairs, ministry of law and justice and Insolvency and Bankruptcy Board of India went unanswered.A lawyer representing respondents in the case confirmed notices were received by the parties and counsels had made arguments before court on August 4. The government of India notified the personal insolvency provisions on November 15 last year. The provisions came into effect from December 1. Banks have been using the law to recover debts from promoters of companies undergoing insolvency proceedings. such as in the case of Anil Ambani. Jain’s company Lakshmi Precision Screws is undergoing insolvency proceedings at NCLT. According to the petition, Intec Capital filed its claims for recovery of dues from his company as it had provided a loan to it. The creditor also simultaneously invoked personal guarantees provided for the loans by Jain through the personal insolvency law. “Banks usually took these personal guarantees to ensure a moral responsibility on the part of the debtor to repay the debt. It was never conceived as an instrument to be enforced in court. Moreover, one could argue that you can’t be punished for the same offence twice,” a veteran banker said on condition of anonymity.Promoters of large stressed firms such as the Ruias of Essar, Venugopal Dhoot of Videocon, Singals of Bhushan Power and Naresh Goyal of Jet Airways are amongst a group of people who have provided personal guarantees to banks for loans taken by their companies.“With newer legislations, judicial precedents certainly hold the key for future interpretations. In this light, this matter would definitely impact the way personal insolvency or recourse to personal guarantors is being presently looked at,” said Milind Jha, partner at Link Legal.