NCLT dismisses Canara Bank's Application u/s 95 of IBC on Failure to Prove Claimed Debt of 43 Cr [Read Order]

Canara Bank, Asset-Recovery Management Branch under Section 95 of the Insolvency & Bankruptcy Code, 2016

(‘the Code’) read with Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, to initiate the insolvency resolution process in respect of Smt. Valsala T S, Mr. Stephen Logan and Mr. P A Nazeeb, Personal Guarantors to M/s Savute Textiles Private Limited, the Corporate Debtor, for default of a debt amounting to Rs. 43,68,79,602/-plus further interest thereon from 01.01.2024.

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M/s Savute Textiles Private Limited, the Corporate Debtor, availed OD and PC/FDB/FDE Limit of Rs 20 Crores on various dates from 30.06.2014 to 31.01.2018. Total Amount of debt is a sum of Rs. 43,68,79,602/- (as on 31.12.2023) plus further interest from 01.01.2024 [OD Amount Rs. 37,04,36,657/- plus interest from 01.01.2024 and PC Amount Rs. 6,64,42,945/- plus interest from 01.01.2024].

The Applicant submitted that the Corporate Debtor defaulted on repayment of the credit facilities and was declared as a Non-Performing Asset (NPA) on 14.06.2019. Subsequent to the account becoming NPA, recovery actions were initiated against the borrower. The Creditor filed an Original Application bearing no. OA NO. 309/2021 before the DRT-1, Ernakulam. The Creditor submitted that the Corporate Debtor has further acknowledged their liability to the debts on 01.03.2017 & 21.01.2020.

A petition under section 9 of IBC, 2016, was filed by M/s. Sulpa International against the Corporate Debtor for defaulting payments was initiated, and this Tribunal was admitted the same vide order dated 11.03.2022, and Corporate Insolvency Resolution Process was initiated against the Corporate Debtor. Financial Creditor consequently filed their claim against the principal borrower with the Resolution Professional, and the same was admitted by the Resolution Professional. Subsequently, the Corporate Debtor was put into liquidation by this Tribunal vide its order dated 06.07.2023. The amounts to be paid to the Financial Creditor is reflected in the balance sheet of the Corporate Debtor.

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Due to non-payment of the default amount by the Corporate Debtor and in view of the co-extensive liability of the guarantors (respondents herein) under the Contract of guarantee, the Financial Creditor has filed against the Guarantors under Section 95(1) of IBC, 2016.

Originally, the Creditor failed to produce the Notice of Invocation of Guarantee along with these Company Petitions filed under Section 95 of IBC, 2016 and pursuant to the direction of the Tribunal and imposition of cost vide order dated 30.05.2025, the Creditor filed the Notice of Invocation of Guarantee dated 29.01.2024 against the guarantors, for the default of Rs. 43,68,79,602/-plus further interest thereon from 01.01.2024. The said Notice of Invocation of Guarantee and Proof of service of this notice was produced by way of a memo dated 03.06.2025.

It is submitted that the creditor served demand notices on the guarantors in Form B dated 11.03.2024 as required under Section 95(4)(b) of the Code read with Rule 7(1) of the Rules. The said demand notice was duly delivered to the Respondents, and proof of service of the demand notice is produced along with these Petitions.

This Tribunal directed the so-appointed RP to file his report within 10 days from the date of his appointment as RP of the Personal Guarantors 24.04.2025, recommending the acceptance of these petitions filed under Section 95 of IBC, 2016. Thus, the Resolution Professional, through his reports filed under Section 99 of IBC, 2016, in all the captioned Company Petitions, had recommended acceptance of the application filed under Section 95 of IBC.

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Respondent alleged that the Demand Notice dated 29.01.2024 for invocation of guarantee dated 29.01.2024 filed belatedly before this Tribunal by way of memo is illegal. Respondent has objected to taking the same on record. Respondent submitted that as per Rule 40 of the National Company Law Tribunal Rules 2016 ("NCLT Rules 2016"), which is given under Part IV of the Rules dealing with "General Procedure", states that parties to a proceeding shall not be entitled to produce before the Bench additional evidence, either oral or documentary.

Notice of Invocation is illegal and arbitrary as the Financial Creditor has already issued another notice of invocation through Section 13(2) Notice issued by the Financial Creditor to the respondent dated notices in February 2021, using a fraudulent guarantee agreement to all alleged guarantors. As evident, the respondent has attached a guarantee invocation sent on the same date to the respondent’s mother. Consequently, the deadline for the applicant to file this application has been running since February 2021.

It is alleged that the Creditor's reliance on the invocation notice dated 29.01.2024 is misplaced, as the enforceability of the alleged guarantee lapsed prior to 2024. The Applicant's prior knowledge of the default and failure to act within the limitation period. The loan account of Corporate Debtor was classified as a Non-Performing Asset (NPA) before 2021, as shown by the Section 13(2) notice under the SARFAESI Act, 2002, issued by the Applicant in 2021.

Respondent submitted that the acknowledgement of debt in the Balance Sheet by the Directors of the Corporate Debtor cannot be considered here as the respondent was never a Director of the CD. It is submitted that an Adjudicating Authority under the IBC is not a substitute forum for a collection of debt in the sense that it cannot reopen debts which are barred by law, or debts, recovery whereof have become time-barred.

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Demand Notice lacks supporting account statements to explain the increase in debt from 18 crores to 43 crores, even while considering interest or penalties. The Resolution Professional has also not verified these figures through the account statements. There is no clarification as to how the excess amount demanded applies to the respondent. The debt is hypothetical as the excess loans beyond the amount mentioned in the alleged guarantee agreement is not justified, as there is no consent from the respondent.

The demand notice issued is for the entire default amount. The liability as per the alleged guarantee agreement is limited to Rs. 18.50 crores; however, the Financial Creditor has extended further loans, without the consent of the Respondent, as is evidenced by the lack of any amended guarantee agreement. Hence, the said notice is defective and non-compliant with the procedural requirements of the Rules.

Counsel for the Petitioner bank submitted that as the amount claimed in the Demand Notice is more than the threshold limit so it would not affect the guarantor in any manner and the Petition on that account is not defective. The court observed that the insolvency and bankruptcy process under the Insolvency and Bankruptcy Code, 2016, has serious ramifications on individual guarantors, against whom such process has been initiated. It affects not only those persons but their families and all other persons with whom the guarantors have financial dealings.

The tribunal viewed that “Once the process under the Insolvency and Bankruptcy Code has been triggered against a person, the other third parties would have no other option but to participate in such process or to relinquish their alleged rights.” So, the proceedings have their effects and consequences in rem, though at initiation proceedings are in personam. So, the guarantors as well as creditors must be very conscious and vigilant about the steps taken by either side.

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There is no stipulation in the Demand Notice about the limited liability of the guarantors, nor is there any indication that guarantors would be liable to pay only to the extent of their guarantee, though the borrower is liable to pay the entire sum due. In the absence of any such stipulation or clarification, it cannot be said that there was a valid demand.

The Petitioner being a premier leading banking institution having its own legal department, such type of patent error/mistake from their part would render the entire process invalid and it would affect the rights, peace of mind and financial dealings of other third parties who have no connection with the mistake committed by the Petitioner Bank.

It is the duty of the Resolution Professional to prima facie consider the limitation aspect. Though the Resolution Professional has no right to decide the limitation of a matter, certainly, he has to apprise the Adjudicating Authority about the aspect of limitation involved in a given matter.

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During the pendency of the captioned Company Petitions, Counsel for the Financial Creditor submitted that he intended to produce the Guarantee Agreement subsequently executed by the Guarantors for enhanced credit facilities. Such documents, however, were neither produced before the Resolution Professional nor at the time of filing of stage.

A two-member bench of Madhu Sinha, Member (Technical) and Shri. Vinay Goel, Member (Judicial) held that “Despite providing ample opportunity, the petitioner bank has failed to satisfy the bench on the amount mentioned in the demand notice (Rs. 43,68,79,602/-) in all the cases. The computation of the amount claimed in all three demand notices was never explained.”

The Tribunal viewed that while the guarantors in all the cases mentioned a limiting amount of the guarantor’s liability, the bank has simply demanded from them the amount of the loan outstanding in the principal borrower's account. The Petitioner is allowed to approach the Tribunal after raising a valid demand through fresh Demand Notices in accordance with law in its own discretion and subject to the Limitation Act provisions and dismissed the writ petition.

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