Demand Notice Issued U/S 13(2) Of SARFAESI Act Without Obligating Guarantor To Make Payment Is Not An Invocation Of Guarantee: NCLT Mumbai

It further held that therefore, an application under Section 95 of the Insolvency and Bankruptcy Code, 2016 (Code), cannot be admitted, as an insolvency application against the personal guarantor can only be entertained when the guarantee has been invoked.

Brief Facts:

The present application has been filed by Bank of Maharashtra (Financial Creditor) under section 95 of the Code seeking initiation of the Personal Insolvency Resolution Process against Mrs. Kavita Ninad Mestry (Personal Guarantor/Respondent) who is a personal guarantor to the M/s Autocrat Automotive Stamping Private Limited (corporate debtor).

The Corporate Debtor availed Term Loan facility of Rs.3.75 Crore and Cash Credit Facility of Rs.1.25 Crore from the Financial Creditor in the year 2013. The Respondent being one of the Directors to the Corporate Debtor had provided personal guarantee against the Credit Facility extended to the Corporate Debtor.

Observations:

The Tribunal noted that the financial creditor specified the date of default as 12 May 2014 which date pertains to the default of the corporate debtor. However, the default for a personal guarantor arises when the guarantee is invoked and the date of default in case of the personal guarantor is determined by nature and contents of the deed of guarantee executed by guarantor.

The Supreme Court in Syndicate Bank Vs. Channaveerappa Belari and Ors.held that a claim may be time barred against the principal debtor but still be enforceable against the personal guarantor. The liability of the personal guarantor arises when the debt is not discharged after the guarantee has been invoked.

The liability of the personal guarantor arises only when explicit demand is made by the financial creditor. The demand notice dated 17 May 2018 neither explicitly invoked the guarantee nor provided proof of receipt by the guarantor in capacity of the guarantor. Therefore, the notice issued under section 13(2) of the SARFAESI Act cannot be considered as an invocation of guarantee.

The Tribunal noted that the Financial Creditor relied on the demand notice dated 3 November 2022 under Rule 7(1) of the Personal Guarantor Rules, 2019 to establish invocation of the guarantee. However a careful examination discloses that the notice lacks an explicit invocation of the guarantee agreement. It does not call upon the personal guarantor to repay the outstanding debt under the deed of guarantee. Instead it serves as a statutory requirement under section 95(4) of the code.

The NCLAT in State Bank of India vs. Mr. Deepak Kumar Singhania categorically held that a Demand Notice issued under Rule 7(1) of the Personal Guarantor Rules, 2019 cannot be considered a notice for invocation of a guarantee for the purpose of filing an application by a creditor under Section 95 of the Code.

The Tribunal concluded that since the guarantee has not been invoked in the present case, the default on the part of the personal guarantor cannot be said to have arisen. Therefore, the requirements of Section 95 of the Code are not satisfied, and the application deserves to be rejected.

Accordingly, the present application was dismissed.

Case Title: Bank Of Maharashtra Stressed Asset Management Branch Vs Mrs. Kavita Ninad Mestry

Case Number: CP (IB) No.1009/MB/2023 with IA (IBC) No.4914/2024

Judgment Date:11/03/2025

Financial Creditor: Adv. Meet Pandya i/b Kay Legal & Associates LLP

Personal Guarantor: None

Resolution Professional: Adv. Kartikee Korgaonkar

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