What is insolvency and bankruptcy?
- Insolvencyis when individuals or companies are unable to repay their outstanding debt.
- Bankruptcy is when a court has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors.
- It is a legal declaration of one’s inability to pay off debts.
- The Mumbai bench of the National Company Law Tribunal (NCLT) has allowed the initiation of insolvency proceedings against Anil Ambani
- After two companies promoted by him failed to pay dues on Rs 1,200 crore that they had borrowed from State Bank of India (SBI).
Why the process against Anil Ambani?
- The insolvency process will be initiated against Ambani as he had given personal guarantee against the loans provided to his firms.
Why it is significant?
- The case is significant as it is one of the first cases of insolvency against a major business group head.
What exactly happened?
- In 2015, Anil Ambani-promoted Reliance Communications Limited (RCom) and Reliance Infratel Limited (RITL)
- Approached the Project Finance Strategic Business Unit of the SBI, and sought two loans of Rs 565 crore, and Rs 635 crore
- Anil Ambani gave a personal guarantee equivalent to the loan amount of Rs 1,200, which was disbursed in 2016.
- On failure to repay the credit extended to RCom and RITL, State Bank invoked the personal guarantee given by Ambani.
- However, before the same could be enforced, both his companies were admitted into insolvency on an application moved by Ericsson India Private Limited.
- Since the companies were admitted into insolvency, all the loans and assets of the company as well as promoters were placed in a moratorium.
- The Insolvency and Bankruptcy Code (IBC) then did not have provisions for personal insolvency as well.
- The rules for initiation of personal insolvency were notified last year in December.
How banks provide loan on personal guarantee?
- When banks provide loans against personal guarantee,
- The guarantor has to furnish a list of assets whose value is equivalent to the total amount of loan being given.
- In case of failure to pay these assets, these guarantees can be invoked.
- For example, if Ambani’s assets are worth Rs 2,000 crore and the bank’s claims are worth Rs 1,200 crore, there is a possibility that the bank can recover all its dues.
- However, if Ambani claims to have personal assets less than the value of the personal guarantee given by him, the banks will have to make do with what they get.
- The bank can not claim rights over the assets of his wife or children.
Process for personal insolvency?
- NCLT has allowed the appointment of an interim resolution professional (IRP).
- SBI will now approach the IRP with a list of the assets provided by Ambani as a personal guarantee when his companies had sought the loan.
- However, any or all assets mentioned in the list provided at the time of sanctioning of the loan,
- Even if transferred to someone else, can also be attached and sold.