It is becoming corporate India’s newest puzzle, and it is hard to digest.
The National Company Law Tribunal, in its latest order in the personal insolvency proceedings against Essel Group founder Subhash Chandra, has said that creditors will receive a mere Rs 6.5 crore under an approved repayment plan, even though he stood guarantee for Rs 22,006 crore, the aggregate of claims made against him personally for borrowings by several Essel / Zee-linked companies.
Chandra, in a statement released on August 26, has clarified that he had not borrowed money from any lender and was only a personal guarantor. He said the lenders' claims objecting to the plan were only Rs 3,992 crore. Chandra also said Rs 620 crore of the objectors’ claims had been settled and that borrower entities had offered more payments. The statement further says Essel companies had debt of nearly Rs 45,000 crore in January 2019 and have since repaid Rs 43,000 crore.
Borrowing And Repayment
If what is claimed is correct, it sets aside the simplistic narrative that Rs 22,000 crore of borrowing has simply been written off in exchange for Rs 6.5 crore. It means the borrowers remain liable, and creditors still have avenues to recover.
Yet, the case leads to several questions. The first question is the real economic value of a promoter’s personal guarantee. A promoter does not need to have the entire guaranteed amount in cash. It is just an additional layer of protection for lenders if the borrowing company defaults. But that begs the question: why did lenders accept a guarantee of a few tens of crores when the total amount borrowed runs into thousands of crores?
Limits Of Personal Guarantees
The second issue is more important: a promoter who knows that a personal guarantee can be tested only against his personal assets has an obvious incentive to keep substantial wealth outside his own name. Not only that, a business house can build a superstructure where wealth is spread across investment vehicles and entities owned by different family members. So, when the business succeeds, the promoter family enjoys a share of the wealth, but when the company defaults, creditors can pursue only the assets to which they have a legal claim.
There is no evidence to suggest Chandra deliberately kept his personal wealth outside his name to defeat creditors. However, what is troubling is not that the lenders did not realise the downside of such a scenario if the loan turns into an NPA but that they did not put enough guardrails in place to protect the money they lent to Chandra's group.
Questions Over Creditor Voting
The creditors’ vote raises another question. The plan received 80.814 per cent support, but five entities backing it together accounted for 61.78 per cent of the voting power. Dissenting lenders pointed out that these entities were connected to Chandra and should, therefore, not have been allowed to vote. The NCLT did not find enough legal grounds to do so. The issue, therefore, is whether the vote adequately reflects independent creditor interests.
A case like this clearly shows up in the limits of personal guarantees, the complexity of promoter structures, and the difference between legal ownership and economic control.
