The Ahmedabad Bench of the DRT observed that in the absence of any remaining underlying debt owed by the ESIL, secured financial creditors cannot legally trigger personal guarantees.
The Ruias were promoters of Essar Steel India before it went bankrupt. ArcelorMittal and Nippon Steel acquired the company in December 2017 for Rs 42,000 crore in one of the country’s largest stressed asset deals.
To invoke personal guarantees by a secured financial creditor, the underlying debt owed by the borrower legally acts as a condition precedent, DRT Chairman Laxman Madnani said in his March 11 order.
The decision was made on a request filed by the Ruias to dismiss the plea filed by SBI in 2018.
“The judgment (if upheld) will likely be seen as a blow to lenders across the country and force them to review the way personal guarantee contracts are drafted in the future,” said Pooja Tidke, senior partner of the law firm. Parinam Law Associates. “It is not uncommon in foreign jurisdictions for a personal guarantee agreement to create debt independent of the underlying debt owed by the principal debtor; however, it remains to be seen whether such a provision will be applicable in India,” she said.
Lead attorneys Mihir Thakore and Vikram Nankani, appearing for the Ruias, argued that all of ESIL’s debt had been assigned to ArcelorMittal and that no debt could be considered due on the bank’s books. “Absent any outstanding debt to the bank, the issue of the enforcement of the personal guarantees relating thereto would not survive,” the lawyers argued.
Lead attorney Navin Pahwa, representing the lender, argued that the banks failed to assign personal guarantees to the guarantors with the debt assignment. “They specifically withheld and reserved the guarantees. Therefore, they are entitled to recover the bond amounts from the defendants,” he said.
Further, the lender argued that once a resolution plan was approved, it was binding on all stakeholders, “therefore, pursuant to the terms of the resolution plan, the defendants’ guarantees having been specifically excluded, the requesting banks are entitled to invoke the guarantee of the recovery of the sum which is due to them”.