Misrepresentation of Borrower as Guarantor Invalidates Section 95 Application: NCLAT Sets Aside Insolvency Proceedings [Read Order]

In a recent ruling the National Company Law Appellate Tribunal (NCLAT) has quashed insolvency proceedings initiated against appellant, holding that he was wrongly portrayed as a personal guarantor when records showed he was only a co‑borrower to a corporate loan.

The case arose from a ₹5.55 crore credit facility sanctioned in 2011 by Union Bank of India to L.R. Builders Pvt. Ltd., a company linked to the Pawan Gupta family. The sanction letter explicitly stated “Guarantors: NIL”, listing Pawan Gupta and his brother Kamal Gupta merely as co‑borrowers. Despite this, Charm Investments Pvt. Ltd., which later acquired the debt through assignment, filed an application under Section 95 of the Insolvency and BankruptcyCode (IBC) a provision applicable only to personal guarantors of corporate debtors.

The National Company Law Tribunal (NCLT) had accepted the plea and appointed a Resolution Professional under Section 99. Gupta appealed, arguing that no Deed of Guarantee or Letter of Invocation existed and that the creditor’s claim was based on false representations.

Counsel for Pawan Gupta argued that the very initiation of insolvency proceedings under Section 95 of the IBC was without jurisdiction because he was never a personal guarantor.The sanction letter and subsequent assignment agreements all recorded “Guarantors: NIL”, proving no guarantee was ever executed. In DRT proceedings too, he was treated only as a co‑borrower, not a guarantor.

Appellant stressed that reliance on promissory notes and board minutes to imply an oral guarantee was legally untenable, since a borrower cannot guarantee his own debt. Citing UV Asset Reconstruction v. Electrosteel Casting Ltd. and A.V. Papayya Sastry v. Govt. of A.P., counsel maintained that the order was obtained through fraud and misrepresentation, making it void ab initio and liable to be set aside.

On the other hand Counsel for Charm Investments argued that Pawan Gupta was both a co‑borrower and guarantor, having signed documents like the Demand Promissory Note and Take Delivery Letter, which showed his promise to repay. They maintained that even without a formal guarantee deed, these records and board minutes of 18.11.2011 established his role as guarantor.

They stressed that jurisdictional objections should be decided only at the Section 100 IBC stage, not prematurely during appointment of a Resolution Professional, citing Dilip B. Jiwrajka v. Union of India and NCLAT rulings like C.L. Sharma v. Bank of Maharashtra.

After hearing the submission the appellate bench, comprising Chairperson Justice Ashok Bhushan and technical member Indevar Pandey noted that all contemporaneous documents,including the bank’s sanction letter, DRT filings, and assignment agreements,recorded “Guarantors: NIL.” It also observed that the creditor later admitted in its own rectification application that no guarantee deed had ever been filed before the NCLT.

Citing the Supreme Court’s decision in the tribunal held that orders obtained through fraud or misrepresentation are void ab initio (invalid from the beginning).

Since the Section 95 proceedings were founded on a false claim of guarantee, the NCLAT declared the NCLT’s order unsustainable and set it aside.

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