Subhash Chandra’s tiny repayment highlights personal guarantor insolvency gaps in India

Subhash Chandra’s proposed repayment of a little over Rs 6 crore against more than Rs 22,000 crore of admitted claims worked out to less than 0.03%. That looks exceptionally small. And it was. But personal-guarantor insolvency cases have produced very low recoveries more generally. Data from the insolvency regulator shows that nearly 5,200 applications have been filed against personal guarantors since the process came into force in 2019-20. Only around 64 have so far ended in repayment plans approved by creditors and the tribunal. Across those cases, lenders recovered a little under Rs 235 crore — roughly 1% of their admitted claims. So the larger problem is not specific to Chandra — on September 1, a specially constituted five-member bench of the NCLT stayed the order approving it anyway — but that the amount a person guarantees can be very different from what is actually available by the time lenders try to collect.

A personal guarantee creates a liability. It does not, by itself, preserve the wealth behind that liability. When lenders take a guarantee, they can look at the guarantor’s assets, liabilities, credit history and other guarantees already given. But unless specific property is separately pledged or mortgaged, those assets are not locked away for the lender. But years can pass between a loan being made and a guarantee being invoked. In the meantime, assets can fall in value, be sold, be pledged elsewhere or be used to meet other liabilities. Chandra’s case shows how large that gap can become. Net-worth certificates submitted to banks in 2017 and 2018 put his worth at more than Rs 40,000 crore. During the insolvency proceedings, he said his assets were worth a little under Rs 32 crore, most of them already mortgaged, leaving around Rs 6.5 crore. (Chandra has disputed the earlier figure, saying it did not represent what he personally owned.)

If the problem is that the wealth behind the guarantee can disappear or become unavailable, one way to make guarantees more useful is to make sure some of that wealth remains in place. Lenders can, for instance, require a guarantor to maintain a minimum net worth or a minimum amount of liquid assets while the loan is outstanding. Such covenants are used elsewhere. One US guarantee filed with the securities regulator required the guarantors to maintain at least $90 million in net worth and $8 million in liquid assets, and restricted transfers that would take them below those levels. Another option is to back the guarantee with a specific asset. A house, for instance, can be mortgaged against the guarantee. India already allows this, and such arrangements give lenders something more concrete than a general promise backed by whatever assets happen to remain later.