Serving Demand Notice To Personal Guarantor Under Rule 7 Of Personal Guarantors Rules Cannot Be Considered Invocation Of Guarantee: NCLAT

Brief Facts:

LML Ltd. (Corporate Debtor) was extended Financial Facilities by State Bank of India (“SBI”). Deepak Kumar Singhania (Respondent) executed a Deed of Guarantee dated 28.03.2005 along with other two Personal Guarantors in favour of SBI and a Multi-Partite Agreement dated 28.03.2005 was executed.

The SBI issued a Demand Notice under Rule 7 of the 2019 Rules upon the Guarantor - Deepak Kumar Singhania, calling upon the Respondent to make payment

An application under Section 95 of the code was filed by the Appellant on 28.05.2022. The Adjudicating Authority appointed Resolution Professional (“RP”) by order dated 02.01.2024.

On 28.11.2024, the impugned order was passed by the Adjudicating Authority, rejecting Section 95 Application. The Adjudicating Authority held that Applicant having failed to invoke the guarantee, the application filed under Section 95 does not satisfy the mandatory pre-requisite for issuing a legally valid demand notice under Rule 7(1) for filing such application.

Application under Section 95 was held as not maintainable and dismissed. It was held that the Respondent is not a Guarantor as defined in Rule 3(1)(e) of 2019 Rules.

Contentions:

The Appellant submitted that the Adjudicating Authority committed error in rejecting the application on the basis of the fact that there was no Notice of invocation of guarantee by the Bank, prior to issuance of Demand Notice under Rule 7(1). Whereas Notice under Rule 7(1) itself is Notice for invoking the guarantee demanding the payment from Personal Guarantor.

It was also argued that the definition of 'Personal Guarantor' as provided under Section 5, sub-section (22) of the Insolvency and Bankruptcy Code, 2016 (Code) shall automatically cover the Respondent, irrespective of the fact whether such contract or guarantee is invoked or not.

Per contra, the Respondent submitted that invocation of personal guarantee and existence of default is a must before any action is contemplated under Section 95 of the code.

It was also argued that both conditions as contemplated in Rule 3(1)(e) that guarantor is Personal Guarantor to a Corporate Debtor and in respect of whom the guarantee has been invoked by the Creditor has to be fulfilled. Unless the guarantee is invoked, there shall be no default on the part of the Guarantor, nor there shall be any unpaid debt.

It was further submitted that the Demand Notice in Form-B, cannot be construed as the invocation of guarantee. Notice under Rule 7(1) is statutory Notice, prior to initiate proceedings under Section 95, which is a statutory pre-requisite for any Creditor intending to initiate Corporate Insolvency Resolution Process (“CIRP”) against the Personal Guarantor.

Issue before NCLAT

Whether the Demand Notice issued under Rule 7(1) of the 2019 Rules can be considered as Notice for invocation of guarantee for the purposes of filing Section 95 Application by a Creditor?

Observations:

The Tribunal observed that as per section 95(4) of the code, an application under section 95 must be accompanied by the required details and documents as specified. Section 95(7) further states that the documents and details required to be submitted under section sub section 4 shall be such as may be specified. Additionally, Rule 2 of the 2019 Rules applies to the insolvency resolution process for personal guarantor to corporate debtors.

It further observed that the 'Guarantor' within the meaning of 2019 Rules, means a Debtor who is a Personal Guarantor to a Corporate Debtor and in respect of whom guarantee has been invoked by the Creditor and remains unpaid in full or part.

The Tribunal said that Section 5, sub-section (22) of the IBC is in Part-II, whereas Section 95 of the IBC is in Part-III. Hence, the definition of 'Personal Guarantor' under Rule 5(22) may not be applicable with regard to initiation of insolvency resolution process against the Personal Guarantor and the definition given in Rule 3, sub-rule (1) (e) of 2019 Rules has to be looked into for the purpose of initiating insolvency resolution process against the Personal Guarantor.

The Tribunal observed that under section 95(4) of the code and Rule 7 of the 2019 Rules, a default on the part of the guarantor must exist on the date when Notice in Form B is issued. As per sections 3(11) and 3(12) of the code, default arises only when the debt due is not paid. Therefore, for a default, the debt has to be due and Debtor shall be only that person to whom debt is due. A personal guarantor becomes debtor only when guarantee is invoked making him liable to make the payment to the lender.

Based on the above, the Tribunal opined that in the present case, there is no case setup by the Appellant that at any point of time guarantee was invoked, except issuance of Notice in Form-B, which is claimed by the Appellant to be treated as Notice for invocation of guarantee.

Furthermore, the Tribunal noted that the definition of 'Guarantor' under Rule 3(1)(e), which while defining a 'Guarantor' contain two conditions, i.e. (i) who is a Personal Guarantor to a Corporate Debtor; and (ii) in respect of whom, guarantee has been invoked by the Creditor and remains unpaid in full or part.

The Tribunal observed that the word 'and' occurring under Rule 3(1)(e) cannot be read as 'or' to alter the statutory intent. A guarantor is not debtor unless the guarantor has been invoked against such guarantor. Unless such guarantee is invoked, no default on the part of the personal guarantor is said to have occurred.

In light of the above discussion, the Tribunal said that initiating a personal insolvency resolution process against a guarantor when the debt is not yet due is not justified.

The Tribunal concluded that “we are not persuaded to accept the submission of the Appellant that Notice under Rule 7 (1) issued in Form-B to the Guarantor, demanding repayment of the default amount, has to be treated as Notice for invoking guarantee. Default before issuance of Notice under Rule 7(1), must exist on the part of the Guarantor. Hence, we reject the submission of the Appellant that Notice under Rule 7, sub-rule (1) is a Notice, invoking the guarantee.”

Accordingly, the present appeal was rejected.

Case Title: State Bank of India Versus Mr. Deepak Kumar Singhania

Case Number: Company Appeal (AT) (Insolvency) No.191 of 2025

Judgment Date: 28/02/2025

For Appellant : Mr. Brijesh Kumar Tamber, Mr. Vinay Singh Bist, Mr. Prateek Kushwaha, Ms. Arani Mukherjee, Mr. Sahas Bhasin and Mr. Yashu Rustagi, Advocates.

For Respondents : Mr. Ashish Makhija and Mr. Deep Bisht, Advocates.

Click Here To Read/Download The Order