Notice u/s13(2) SARFAESI Act Demanding Payment from Guarantor Constitutes Invocation of Personal Guarantee: NCLAT [Read Order]
The NCLAT ruled that a Section 13(2) notification constitutes an invocation of the personal guarantee when it expressly requests payment from the guarantor in accordance with the guarantee agreement
NCLAT – SARFAESI Act – NCLAT personal guarantee – Taxscan
NCLAT – SARFAESI Act – NCLAT personal guarantee – Taxscan
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench held that where a Section 13(2) notice explicitly demands payment from the guarantor in terms of the guarantee agreement, it amounts to an invocation of the personal guarantee.
The State Bank of India granted a business loan to M/s Surana Metacast (India) Private Limited, the major borrower. In connection with the loan, the appellant had executed a Deed of Personal Guarantee. However, the bank sent notice to the principal borrower and personal guarantor under Section 13(2) of the SARFAESI Act, 2002, asking repayment of ₹28,56,64,336.06 after the loan A/C was determined to be non-performing on May 1, 2023.
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The key borrower was later the focus of insolvency proceedings on August 5, 2024. In order to initiate personal insolvency proceedings against himself, the Personal Guarantor filed an application under Section 94(1) of the Code on August 22, 2024.
The NCLT denied the Section 94(1) application on the grounds that it was premature and unjustified. The tribunal noted that the Personal Guarantor had not received any further communication or notice using the guarantee, except for the notice under Section 13(2).
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Whether the notification delivered to the personal guarantee on October 9, 2023, under Section 13(2) of the SARFAESI Act, constituted a valid invocation of the personal guarantee and, as such, established a cause of action under Section 94(1) of the IBC was the primary question before NCLAT.
The bench of Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka (Technical Member) and Mr. Barun Mitra (Technical Member) held that the Section 13(2) notice was explicitly titled “Notice to Guarantor” and was addressed to the Personal Guarantor. The notice clearly required the Personal Guarantor to discharge the outstanding liability within 60 days.
The tribunal emphasized that the invocation of a personal guarantee must be in accordance with the terms of the guarantee agreement. It observed that Clause 7 of the Guarantee Agreement in the present case did not prescribe a specific form or mode for the demand notice. Therefore, any demand made against the personal guarantor requiring repayment of dues could be construed as invocation of the guarantee.
The NCLAT held that the language of the 13(2) notice issued by the State Bank of India demonstrated a clear demand upon the Personal Guarantor for payment of ₹28,56,64,336.06, and hence, constituted a valid invocation of the guarantee.
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The NCLAT ruled that a Section 13(2) notification constitutes an invocation of the personal guarantee when it expressly requests payment from the guarantor in accordance with the guarantee agreement. As a result, under Section 94(1) of the IBC, such a notice may serve as a legitimate basis for starting personal insolvency proceedings.
To Read the full text of the Order CLICK HERE
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