Demand Notice Issued u/s 13 of SARFAESI Constitute Valid Invocation of Personal Guarantee: NCLAT Upholds Insolvency Resolution Proceedings [Read Order]

The National Company Law Appellate Tribunal (NCLAT) has upheld the initiation of insolvency resolution proceedings against the personal guarantor by holding that the notice issued under Section 13 of the SARFAESI Act amounts to invocation of the personal guarantee.

The NCLAT has held that there is no need to issue any special notice invoking the personal guarantee if the notice issued under Section 13 of the SARFAESI Act has specifically called upon the guarantor to discharge the debt.

The issue arises from the financial creditor which has provided credit facilities to the corporate debtor, which were secured by a personal guarantee executed by the appellant.

However, on default, the account was classified as a Non-Performing Asset, and the financial creditor sent a demand notice under Section 13(2) of the SARFAESI Act calling upon the borrower and the guarantor to repay the dues outstanding.

Thus, insolvency proceedings were initiated against the personal guarantor under the Insolvency and Bankruptcy Code, 2016, which were admitted by the NCLT, prompting the personal guarantor to file an appeal against the admission order before NCLAT.

The contention of the appellant was that the notice issued under SARFAESI was not an invocation of the personal guarantee as it had not specifically mentioned the invocation of the guarantee in express words and had primarily mentioned him as a director.

The financial creditor opposed the appeal and stated that the conditions of the personal guarantee had not specifically stated the form or mode of invocation. The demand notice issued under SARFAESI had unequivocally demanded payment from the guarantor.

The appeal was dismissed by NCLAT and it held that what is important is substance rather than form. The Tribunal stated that if a demand notice has fastened liability on the guarantor and has called upon him to pay the due amount, then the invocation is satisfied.

Further, the tribunal further stated that the liability of a personal guarantor is co-extensive with the liability of the principal debtor.

The judgment was pronounced by a Bench comprising Justice Mohamad Faiz Alam Khan (Judicial Member) and Mr. Naresh Salecha(Technical Member) affirming a creditor friendly interpretation of personal guarantee enforcement under the insolvency framework.

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