Issuance of Demand Notice to Personal Guarantor u/r 7 of Personal Guarantors Rules not Amounts to Invocation of Guarantee: NCLAT [Read Order]

The National Company Law Appellate Tribunal (NCLAT) New Delhi bench has ruled that a Notice served to the personal guarantor under Rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 ("2019 Rules") cannot be regarded as a "Invocation of Guarantee."

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State Bank of India ("SBI") offered financial facilities to LML Ltd, the corporate debtor.  Along with two other personal guarantors, respondent Deepak Kumar Singhania executed a Deed of Guarantee in favor of SBI on March 28, 2005, and a Multi-Partite Agreement on the same day.  Under Rule 7 of the 2019 Rules, the SBI sent a Demand Notice to Deepak Kumar Singhania, the Guarantor, requesting payment from the Respondent.

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The appellant submitted an application on May 28, 2022, under Section 95 of the law.  By order dated 02.01.2024, the Adjudicating Authority designated a Resolution Professional ("RP").  The Adjudicating Authority issued the contested order on November 28, 2024, dismissing the Section 95 application.  The adjudicating authority determined that the application submitted under Section 95 does not meet the necessary requirements for issuing a legally valid demand notice under Rule 7(1) for filing such an application because the applicant did not invoke the guarantee.

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The Section 95 application was rejected because it was deemed unmaintainable.  According to Rule 3(1)(e) of the 2019 Rules, the Respondent is not a Guarantor, it was decided.  According to the appellant, the Adjudicating Authority erred in dismissing the application since the Bank had not issued a Notice of Invocation of Guarantee before issuing a Demand Notice under Rule 7(1).  On the other hand, the notice stated in Rule 7(1) is a notice to invoke the guarantee and seek payment from the personal guarantor.

Additionally, it was contended that the Respondent would be automatically covered by the definition of "Personal Guarantor" found in Section 5, sub-section (22) of the Insolvency and Bankruptcy Code, 2016 (Code), regardless of whether or not such a contract or guarantee is invoked.  In contrast, the Respondent argued that before any action is considered under Section 95 of the law, the occurrence of default and the invocation of a personal guarantee are required.

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The bench of Justice Ashok Bhushan (Judicial Member), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) noted that in accordance with section 95(4) of the code, an application under section 95 needs to be submitted with the necessary information and supporting documentation.  Additionally, section 95(7) specifies that the information and documentation that must be provided under section subsection 4 must be as described.  Furthermore, the bankruptcy resolution procedure for personal guarantors of corporate debtors is governed by Rule 2 of the 2019 Rules.

The Tribunal determined that the Notice under Rule 7 (1), which was sent to the Guarantor in Form-B and demanded repayment of the default amount, had to be interpreted as a Notice for invoking guarantee in order to reject the appeal.  The Guarantor must be in default prior to the Notice being issued under Rule 7(1).

To Read the full text of the Order CLICK HERE

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