'NCLT order rightly stayed': Subhash Chandra personal guarantee issue back to the drawing board

Tuesday’s verdict by the National Company Law Tribunal (NCLT) in the personal insolvency case against Essel Group founder, Subhash Chandra, means the case will have to be heard afresh. The backdrop to all this is Chandra offering to pay Rs 6.25 crore to his creditors against claims of over Rs 22,000 crore.

Essel Group, for whom the flagship is Zee Entertainment Enterprises Limited (ZEEL), made a foray into infrastructure—power transmission, road construction, and solar energy—for which the promoters had pledged their shares of ZEEL. It transpired later that Chandra had provided personal guarantees or that he would be responsible for the repayments. That blew into a full-blown crisis leading to now lenders potentially losing 99.97% of the receivables.

It is brought the issue of personal guarantees under the scanner and what it really means.

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Shriram Subramanian, Founder and Managing Director of InGovern Research Services, a corporate governance advisory firm, points out that personal guarantees are fairly common across the global banking industry. “However, the RBI's guidelines say that banks should take personal guarantees from promoters, directors, managerial personnel or major shareholders only when absolutely warranted and after examining the circumstances, rather than automatically. Fundamentally, the concept of a personal guarantee conflicts with the concept of limited liability. Therefore, banks should revoke personal guarantees when financial fraud occurs, rather than in cases of business failure,” he explains.

Specifically on the Essel Group, Subramanian says that for a highly leveraged, closely held company where the promoter controls the business and the company's standalone creditworthiness is weak, the justification for a personal guarantee is considerably stronger.  “The Essel group had leveraged in the infrastructure sectors where projects did not perform as expected,” he adds.

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Today’s development takes the issue back to the drawing board. According to Subramanian, the five-member NCLT bench has rightly stayed the previous settlement. “It will have to be looked at afresh to determine the final settlement amount,” he says.