Essel Group chairman Subhash Chandra is at the centre of an insolvency case involving admitted creditor claims of Rs 22,006.57 crore. Yet the repayment plan approved by the National Company Law Tribunal (NCLT) , along with Rs 25 lakh towards the insolvency process.
That raises a basic question. How can there be claims of more than Rs 22,000 crore against Chandra when he says he never personally borrowed that money?
The answer lies in his role as a personal guarantor.
The loans at the centre of the case were taken by companies associated with the Essel Group. Chandra had provided personal guarantees for some of their borrowings. He was therefore not the original borrower, but had undertaken a separate obligation towards the lenders if the borrowing companies failed to meet obligations covered by his guarantees.
That distinction is important to understanding both the case and what a personal guarantee means.
A guarantee is a legal promise made by one person to a lender to meet the obligation of another person if that person defaults, subject to the terms of the guarantee.
The law governing contracts of guarantee in India is the Indian Contract Act, 1872.
Section 126 of the Act refers to three parties. The person whose liability is being guaranteed is the principal debtor. The person giving the guarantee is the surety, commonly called the guarantor. The person receiving the guarantee is the creditor.
Take a simple example.
A person borrows Rs 10 lakh from a bank and another person agrees to guarantee the loan. The guarantor does not receive the Rs 10 lakh. The borrower does.
But by signing the guarantee, the guarantor makes a legal commitment to the bank. If the borrower defaults, the bank can seek payment from the guarantor, subject to the terms of the guarantee.
The same principle applies when a company borrows money and its promoter gives a personal guarantee. The company receives the loan, while the promoter gives the lender a separate commitment that can make him personally liable if the borrower defaults.
So a guarantee can involve one individual guaranteeing another individual’s borrowing, or an individual guaranteeing a company’s borrowing. What matters is the legal promise to answer for another person’s or entity’s obligation.
A company is a separate legal entity from its promoter or shareholders. Its debt is ordinarily its own obligation.
A lender may nevertheless ask a promoter to provide a personal guarantee as an additional source of recovery if the company defaults. For the promoter, that means a debt taken by the company can eventually affect his personal finances.
The extent of that liability depends on the guarantee document.
Section 128 of the Indian Contract Act says that the liability of the surety is co-extensive with that of the principal debtor unless the contract provides otherwise.
In simple terms, the guarantor can be liable for the borrower’s obligation, subject to the terms of the guarantee. The guarantee may contain limits or other conditions that determine the extent of that liability.
When a borrower fails to meet its obligations, the lender can take steps available under the loan documents and the guarantee.
One term that appears frequently in such cases is invocation of the guarantee. This means the lender is calling upon the guarantor to honour the commitment made under the guarantee.
If a person or company defaults on a loan, the lender can invoke the guarantee and seek payment from the guarantor, subject to its terms. The same principle applies whether the original borrower is an individual or a company.
A lender does not necessarily have to wait until every remedy against the borrower has been exhausted before proceeding against the guarantor. The Supreme Court has recognised the co-extensive nature of a surety’s liability under Section 128, although the precise rights of the lender depend on the relevant contracts.
The other law that matters in the Chandra case is the Insolvency and Bankruptcy Code, 2016.
The IBC has a framework specifically dealing with personal guarantors to corporate debt. Section 95 allows a creditor to apply for initiation of an insolvency resolution process against a personal guarantor, subject to the requirements of the law.
This allows insolvency proceedings against a person even though the original borrowing was undertaken by a company.
The provisions relevant to Chandra’s case specifically concern personal guarantors to corporate debt.
Several companies associated with the Essel Group had borrowed money from banks and financial institutions. for some of these borrowings.
One set of transactions recorded in the NCLT proceedings involved Indiabulls Housing Finance.
The lender had extended four financial facilities totalling Rs 726 crore to Gnex Projects Pvt Ltd, Vivek Infracon Pvt Ltd, Renu Realtech Pvt Ltd and Gnex Infrabuild Pvt Ltd, with Essel Home Pvt Ltd also involved in the facilities.
Chandra executed a deed of guarantee dated December 5, 2018.
A more detailed example in the NCLT record concerns a Rs 170-crore facility involving Vivek Infracon. The loan was disbursed in three tranches between December 2016 and August 2017.
By November 2018, Indiabulls had raised concerns about the security cover available for the facility. The lender sought either a payment of about Rs 287.85 crore or additional shares worth about Rs 341.83 crore to restore the required security cover.
The borrowers subsequently undertook to make a Rs 100-crore prepayment and to have Chandra execute a personal guarantee.
Chandra provided the guarantee.
Indiabulls recalled the facility on February 4, 2019 and invoked the personal guarantees. The lender subsequently issued a demand notice to Chandra in January 2022 seeking about Rs 178.79 crore, including pending TDS, in relation to the facility.
It then approached the NCLT under Section 95 of the IBC seeking insolvency proceedings against Chandra as a personal guarantor.
The insolvency proceedings record admitted claims of Rs 22,006.57 crore against Chandra in his capacity as a personal guarantor. This is the figure that has been rounded off to Rs 22,000 crore in reporting on the case.
The claims relate to borrowings for which Chandra had provided personal guarantees. The underlying loans were taken by companies, while Chandra’s liability arose from the guarantees he had given to lenders.
There can be several different figures attached to a loan over its lifetime. The amount sanctioned may differ from the amount actually disbursed. The borrower may make repayments, while the lender may recover money through securities or other means. Interest and other charges can also affect the outstanding amount.
The Rs 22,006.57 crore figure therefore needs to be read alongside the individual creditor claims, the underlying borrowings, the guarantees and the payments and recoveries recorded against them.
Chandra has said that substantial amounts relating to the corporate loans for which he had .
That is his position.
The insolvency proceedings also dealt with claims of repayment and the documentary evidence supporting them. The records show that evidence relating to payments by principal borrowers, other sureties and through securities was considered in the process.
Whether particular dues had been repaid or recovered therefore has to be examined against the relevant loan accounts, payment records, creditor acknowledgements and other documents.
The admitted claims in the insolvency proceedings total Rs 22,006.57 crore. The repayment plan provides Rs 6.25 crore for creditors and another Rs 25 lakh towards the insolvency process.
The plan had the support of creditors representing 80.81% of the voting share. Several lenders, however, opposed it, including LIC Housing Finance, Canara Bank and Union Bank of India.
The voting itself became a point of dispute. Dissenting creditors argued that five entities linked to Chandra or his family were associates or related parties and should not have been allowed to vote on the plan. Those entities together accounted for 61.78% of the voting share. The tribunal did not accept that objection.
There was also a disagreement within the NCLT before the plan was approved. The original two-member bench delivered a split verdict, following which the matter was referred to a third member, Nilesh Sharma. He approved the repayment plan under Section 114 of the IBC on August 25, 2026.
That may not be the end of the matter. HDFC Bank, LIC Housing Finance and Union Bank of India have said they intend to challenge the NCLT’s decision before the National Company Law Appellate Tribunal.
As the situation stands, the NCLT-approved plan provides Rs 6.25 crore for creditors against admitted claims of Rs 22,006.57 crore. The questions around the underlying borrowings, guarantees, repayments, recoveries, creditor objections and the approval of the plan remain part of the record and, potentially, the appellate proceedings.