A group of lenders, led by the State Bank of India (SBI), is embarking on a challenging journey to sell personal and corporate guarantees associated with loans to Essar Steel. This effort comes nearly seven years after the steelmaker's insolvency resolution.
According to a document from BoB Capital Markets Ltd, 12 lenders are looking for bidders for these guarantees. The admitted claims during the Essar Steel insolvency totaled ₹49,000 crore, with about ₹41,970 crore, or 92%, recovered under the resolution plan. As of January 31, 2022, the outstanding liabilities under the guarantees amount to ₹13,751.21 crore, including accrued interest.
Experts suggest that while pursuing the sale of these guarantees is a prudent move for lenders, the expected recovery may fall short of covering banks' dues. Potential buyers typically include asset reconstruction companies and litigation financiers with the resources and time to pursue such assets.
Recovery Challenges
Recovery from personal and corporate guarantees is expected to be complicated. A former banker involved in the Essar Steel lenders' consortium noted that the assets backing these guarantees must be located, which could be a difficult task.
Legal professionals highlight that the enforcement of guarantees can be time-consuming, especially when assets are overseas. Pratish Kumar, a partner at JSA Advocates & Solicitors, emphasized that the nature and quality of the assets being acquired play a significant role in recovery outcomes.
When negotiating these guarantees, the goal may sometimes shift to simply settling the loans rather than full recovery. The reserve price set by the SBI-led consortium for these guarantees is ₹200 crore.
Personal Guarantees Under Review
This renewed effort to recover dues follows a Supreme Court ruling that allowed personal guarantees to be included in the Insolvency and Bankruptcy Code (IBC). The guarantees in question were provided by former promoters Prashant S. Ruia and Ravi N. Ruia, as well as corporate guarantees from various Essar entities, covering working capital and term loans.
Legal experts assert that assigning rights under these guarantees post-recovery is legally permissible, though not common. Siddharth Srivastava, a partner at Khaitan & Co, noted that the chances of recovery from personal guarantees are often slim, as they are typically unsecured and may not yield sufficient assets for repayment.
Prospects for Recovery
Challenges persist in tracing the assets of the promoters, which complicates the process of selling personal guarantees. A thorough asset mapping exercise is required to identify assets both in India and abroad.
While selling these guarantees may be more straightforward than banks handling the process themselves, it remains a time-consuming endeavor. Only specialized litigation funds are likely to have the capacity to manage such complex transactions effectively.
