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Guarantor beware: On loans to corporate borrowers

Entrepreneurs signing guarantee will have to be certain that the business will not flounder

Several corporate leaders are set to be impacted. The promoters of many defaulting corporates, which are facing action under the IBC, had furnished guarantees for thousands of crores in loans availed by the companies they ran. The State Bank of India alone had submitted in the apex court that it had served demand notices aggregating to more than ₹39,000 crore to individuals who had signed as guarantors for credit provided to corporate entities. The judges also cleared the air over another issue that is bound to strengthen the creditors’ positions in all ongoing, future and even completed insolvency proceedings. The Bench ruled that the approval of a resolution plan for the corporate debtor does not extinguish the personal guarantor’s liability, which it said “arises out of an independent contract”. Lenders can now proceed against the guarantors to enhance recovery given that most banks agree to ‘haircuts’ when negotiating a resolution plan with a new promoter for the defaulting company. The only wrinkle here is that once the resolution plan becomes legally binding, the guarantor loses the recourse to remedy from the borrower when the creditor invokes the personal guarantee. Entrepreneurs will now have to think twice before signing a personal guarantee unless they can be very certain that the business they found will not flounder.

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