The Elusive Wealth Behind Personal Guarantees

The recent case of Subhash Chandra’s paltry repayment of Rs 6 crore against admitted claims of over Rs 22,000 crore has sparked outrage and raised important questions about the effectiveness of personal guarantee recoveries in India. This is not an isolated incident – data from the insolvency regulator reveals that nearly 5,200 applications have been filed against personal guarantors since 2019-20, with a meager 64 resulting in approved repayment plans.

Personal guarantees create liability without necessarily preserving the wealth behind them. Lenders can scrutinize a guarantor’s assets, liabilities, and credit history but may not be able to protect those assets from fluctuation, sale, or misuse unless specific property is separately pledged or mortgaged.

The phenomenon of asset erosion between loan origination and guarantee invocation has become all too familiar in India. Chandra’s case exemplifies this issue, where his net worth certificates submitted in 2017 and 2018 estimated his worth at over Rs 40,000 crore, only to be reduced to around Rs 32 crore during the insolvency proceedings.

To mitigate this problem, lenders could require guarantors to maintain a minimum net worth or liquid assets while the loan is outstanding. This approach has been used in other jurisdictions, where guarantors are required to hold substantial amounts of net worth and liquid assets. For example, some jurisdictions mandate that guarantors hold at least $90 million in net worth and $8 million in liquid assets.

Another solution is for lenders to back guarantees with specific assets, such as mortgaging a house against the guarantee. India already permits this arrangement, which gives lenders a tangible asset rather than relying on general promises backed by whatever assets remain later. The 2026 rules have also expanded disclosures from personal guarantors to include assets held through nominees, trusts, and companies.

The government’s decision to drag personal guarantors into insolvency was aimed at making corporate borrowing harder for companies to shrug off. However, the question remains whether this approach is effective. While statistics are dismal, there are instances where lenders have successfully recovered substantial amounts from personal guarantors.

The Chandra case and others like it raise critical questions about the system’s efficacy in holding individuals accountable for their obligations. It also prompts a broader discussion on the role of personal guarantees in corporate lending. Policymakers must reexamine the framework governing personal guarantee recoveries to ensure it is fair, effective, and aligned with global best practices.

The case of Subhash Chandra serves as a stark reminder that personal guarantees can be a double-edged sword – while providing lenders with a tangible means of recovering debts, they also pose risks for guarantors who may see their wealth evaporate over time. As India’s corporate sector continues to grow and evolve, it is essential to address these complexities to create a more robust and equitable lending environment.