NCLAT upheld SBI’s right to invoke the personal guarantee and initiate insolvency proceedings against the guarantors under Section 95 of the IBC.
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 two appeals filed by the personal guarantors and held that the liability of a personal guarantor under Section 128 of the Indian Contract Act, 1872, is coextensive with that of the principal debtor. The tribunal ruled that the invocation of the guarantee by the respondent bank, acting as the COR Lenders’ Agent, was valid under the terms of the Personal Guarantee Agreement and CORLA. It affirmed the maintainability of the Section 95 application, as the debt remained unpaid, and upheld the bank’s authority to initiate insolvency proceedings against the guarantors, rejecting the appellants' contentions.
The National Company Law Appellate Tribunal (NCLAT) adjudicated two appeals filed by Shri Amit Dineshchandra Patel and Shri Rahul Arunprasad Patel, challenging the admission of a Section 95(1) application under the Insolvency and Bankruptcy Code, 2016 (IBC) by the State Bank of India (SBI). The appeals were directed against the order dated 17.05.2024, whereby the Adjudicating Authority admitted the insolvency resolution process against the appellants as personal guarantors. Given the identical factual and legal matrix of both appeals, the tribunal confined its deliberation to Company Appeal No. 1826 of 2024.
The dispute stemmed from a financing arrangement involving Shirpur Power Private Limited, which had availed loans from a consortium of lenders, including SBI, Bank of Baroda, and IDBI Bank, under the Common Loan Agreement (CORLA) dated 09.02.2016. To secure the loan, the appellants executed a Personal Guarantee Agreement (PGA) in favour of SBI Cap, which was appointed as the Security Trustee under the Security Trustee Agreement dated 21.09.2015. Following a default in repayment, SBI classified the borrower’s account as a non-performing asset (NPA) on 29.11.2017 and issued a loan recall notice on 10.05.2018. SBI subsequently invoked the personal guarantees on 02.06.2018 and issued a demand notice on 20.10.2020 under Rule 7(1) of the Insolvency and Bankruptcy Rules, 2019, before filing the Section 95 application.
The appellants contended that the Adjudicating Authority had rendered a non-speaking and unreasoned order and argued that the personal guarantees were executed in favour of SBI Cap as a Security Trustee rather than in favour of the individual lenders. It was submitted that the unilateral invocation of the guarantee by SBI was invalid, as neither the PGA nor CORLA conferred any authority upon an individual lender to invoke the guarantee independently. The appellants further alleged procedural infirmities in the filing of the Section 95 application, including the lack of proper authorization and supporting affidavits.
SBI, in response, asserted that the guarantee was executed for the benefit of all COR lenders, and once the principal borrower defaulted, the bank was well within its rights to invoke the guarantee and initiate insolvency proceedings against the personal guarantors. SBI emphasized that the invocation and subsequent demand notice were in consonance with the terms of the PGA and CORLA. The bank further contended that the application was duly filed by an authorized officer under the provisions of the SBI Act and relevant regulations.
The key issues before the NCLAT were whether SBI had the authority to invoke the personal guarantee independently and whether the Section 95 application was maintainable. The tribunal scrutinized the terms of the CORLA and PGA, particularly the definitions of "COR Lender" and "COR Lenders," to determine whether an individual lender was competent to initiate insolvency proceedings against the guarantors. The tribunal upheld the Adjudicating Authority’s order, affirming that the Corporate Debtor’s default led to its classification as an NPA and the subsequent admission into CIRP. It reiterated the principle under Section 128 of the Indian Contract Act, 1872, that a guarantor’s liability is coextensive with that of the principal debtor. Given that the appellants had executed a binding guarantee agreement and the debt remained unpaid, the Section 95 application was held to be maintainable.
The tribunal rejected the appellants' contention that the guarantee could not be enforced due to the absence of an express request from the guarantors for loan disbursement. It further held that the appellants, having executed the Personal Guarantee Agreement and the Credit and Security Agreements, were bound by their terms. SBI, as the COR Lenders’ Agent, was found to have the authority to invoke the guarantee. The tribunal also dismissed the appellants' reliance on the Rakshit Dhirajlal Joshi v. IDBI Bank Limited, REEDLAW 2022 NCLAT Del 11529 case, clarifying that there was no dispute among the consortium members regarding SBI’s authority to file the Section 95 application. Additionally, the challenge to the authority of the Assistant General Manager to file the application was rejected, as the Gazette notification established that officers of SMGS-IV and above were duly authorized. In light of these findings, the NCLAT dismissed both appeals, affirming the Adjudicating Authority’s decision, and no costs were awarded.
Mr. Arjun Sheth, Ms. Kriti Kothari and Ms. Henna George, Advocates, represented the Appellant.
Mr. Prateek Kumar, Ms. Raveena Rai and Mr. Siddhant Grover, Advocates, appeared for Respondent No. 1.
Mr. Karan Valecha, Advocate, appeared for for Respondent No. 2.
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