NCLT Mumbai: Notice To CD Recalling Loan Facility Doesn't Constitute Demand On Corporate Guarantor

Background Facts:

State Bank of India (“SBI'), the financial creditor, extended various creditor facilities to Deogiri Infrastructure Private Limited (Principal Borrower). Navjeevan Tyres Private Limited (Corporate Debtor) extended a corporate guarantee to SBI for the repayment of total outstanding dues payable by the Principal Borrower.

On 30.10.2018, owing to default in payments, SBI classified the Principal Borrower's loan account as a Non-Performing Asset (“NPA”). On 10.04.2019, a notice under Section 13(2) of the SARFAESI Act, 2002, was issued to the Principal Borrower, demanding the full repayment of Rs. 33.22 crores with a bank guarantee outstanding of Rs. 8.10 crores as of 31.03.2019 within sixty days.

On failure to repay the said amounts, SBI initiated a Corporate Insolvency Resolution Process (“CIRP”) against the Principal Borrower under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) which is still pending. Meanwhile, SBI having the right to initiate simultaneous action against the corporate guarantor under IBC filed the CIRP application against Navjeevan Tyres Private Limited before NCLT Mumbai.

NCLT Verdict:

The NCLT Mumbai dismissed the application and held that notice to Corporate Debtor recalling loan facility doesn't constitute Demand on Corporate Guarantor.

The Tribunal determined that the CIRP petition is not maintainable as the Financial Creditor had not made any demand for repayment of debt or invoked the guarantee towards the Corporate Debtor. Further, relying on the Supreme Court's decision in Syndicate Bank vs. Channaveerappa Beleri & Ors., it noted that a guarantor's liability depends on the terms of their contract. Presently, Clause 1 of the Guarantee Agreement dated 23.05.2014 indicated that the guarantee was unconditionally payable to the Financial Creditor upon demand. Thus, the Corporate Debtor's liability would only arise when a demand was made by the Financial Creditor.

It also noted that the legal notice dated 08.10.2018 sent to the Principal Borrower and guarantors, including the Corporate Debtor, demanding payment within 10 days did not reference the guarantee agreements, nor was it sent to the correct address, resulting in improper service and non-invocation of the guarantee.

NCLT pointed out that SBI's legal notice dated 10.04.2019 under Section 13(2) of the SARFAESI Act, 2002 was addressed only to the Principal Borrower and did not indicate an intention to invoke the corporate guarantee. Further, it referred to a related case of State Bank of India v. Shaliwahan Farms Pvt. Ltd., wherein the Tribunal dismissed a similar petition ruling that sending a notice to the corporate debtor to recall the loan facility does not constitute a demand on the guarantor.

The Tribunal also ruled that the paper publication of its demand notice dated 22.04.2019 under Section 13(2) of the SARFAESI Act, 2002 was intended as a substitute service and did not mention the guarantee agreements. Relying upon the Supreme Court's decision in Neerja Realtors Private Limited vs. Janglu (dead) Through Legal Representatives wherein it was held that substitute service by publication is invalid unless primary service attempts have failed. NCLT ruled that presently proper service was not demonstrated, making the publication invalid.

In conclusion, NCLT Mumbai observed that there is no proof that SBI made a demand on the Corporate Debtor/Guarantor by invoking the guarantee or that the Corporate Debtor defaulted on its liability under the Guarantee Agreements. Therefore, since the pre-requisite condition for initiating CIRP under Section 7 of the IBC has not been satisfied, the CIRP application is unmaintainable.

Case Title: State Bank of India vs. Navjeevan Tyres Private Limited

Case No.: CP (IB) No.1282/MB/2022

Counsel for Applicant: Advocate Ajinkya Kurdukar

Counsel for Respondent: Advocate Aniruth Purusothaman

Date of Judgment: 25^th June, 2024

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