NCLAT ruled that the invocation of a guarantee is a mandatory pre-condition for initiating insolvency proceedings against a personal guarantor under Section 95 of the IBC.
On 28-02-2025, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, reviewed an appeal and held that the invocation of a personal guarantee is a mandatory precondition for initiating insolvency proceedings under Section 95 of the IBC, as per Rule 3(1)(e) of the 2019 Rules. The Tribunal clarified that the mere issuance of a Demand Notice under Rule 7(1) does not constitute invocation. Since the guarantee was not formally invoked before serving the Demand Notice, the application under Section 95 was rightly dismissed as non-maintainable.
The National Company Law Appellate Tribunal (NCLAT) adjudicated an appeal challenging the rejection of an application under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC) by the National Company Law Tribunal (NCLT), Allahabad Bench. The dispute arose from the financial facilities extended by the State Bank of India (SBI) to LML Ltd., wherein the Respondent, Deepak Kumar Singhania, along with two other personal guarantors, executed a Deed of Guarantee in favour of SBI. The Appellant argued that the issuance of a Demand Notice 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") should be deemed as an invocation of the guarantee, rendering the application under Section 95 maintainable.
The NCLT dismissed the application on the ground that SBI had failed to invoke the guarantee before issuing the Demand Notice, thereby failing to satisfy the conditions under Rule 3(1)(e) of the 2019 Rules. The NCLAT, in its analysis, distinguished between the definition of a 'Personal Guarantor' under Section 5(22) of the IBC and the requirements of Rule 3(1)(e), which mandates both that the individual must be a guarantor to a corporate debtor and that the guarantee must have been invoked. The Tribunal examined Rule 7 and observed that a Demand Notice under Section 95(4)(b) must be preceded by an actual invocation of the guarantee, which in this case had not occurred.
The Appellant sought to argue that the word 'and' in Rule 3(1)(e) should be read as 'or' to avoid an unreasonable interpretation, relying on Supreme Court precedents discussing contextual statutory interpretation. However, the Tribunal rejected this contention, affirming that both conditions in Rule 3(1)(e) must be satisfied. The Tribunal further analyzed the Deed of Guarantee, emphasizing that the guarantor's liability arises only upon demand by the lender following a default by the principal borrower. Since no formal invocation of the guarantee had been made prior to the Demand Notice, the Tribunal held that the Respondent could not be classified as a 'debtor' under the 2019 Rules.
The Tribunal also clarified that the requirement of invocation was not confined to applications under Section 94 but was equally applicable to those under Section 95. It emphasized that the determination of default, as required under Form B of the 2019 Rules, necessitates prior invocation of the guarantee. As the Appellant had failed to demonstrate such invocation, the appeal was dismissed, reinforcing the principle that invocation of a guarantee is a mandatory precondition for initiating the insolvency resolution process against a personal guarantor.
Mr. Brijesh Kumar Tamber, Mr. Vinay Singh Bist, Mr. Prateek Kushwaha, Ms. Arani Mukherjee, Mr. Sahas Bhasin and Mr. Yashu Rustagi, Advocates, represented the Appellant.
Mr. Ashish Makhija and Mr. Deep Bisht, Advocates, appeared for the Respondent.
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