The Guwahati Bench of the National Company Law Tribunal (NCLT) has clarified that, for maintaining an application under Section 95 of the Insolvency and Bankruptcy Code against a Personal Guarantor, the Financial Creditor must establish not only the existence of a guarantee but also valid invocation of that guarantee by a specific contractual demand and a subsisting legally enforceable default against the guarantor. A demand notice in Form B under Rule 7(1) of the Personal Guarantor Rules is only a procedural requirement prior to filing and does not amount to invocation of the guarantee.
Further, where the material relied on to extend liability or limitation is not executed by, addressed to, or attributable to the respondent guarantor, such material cannot be used either to continue guarantor liability for enhanced facilities or to extend limitation under Section 18 of the Limitation Act, added the Tribunal.
The NCLT also clarified that although the Respondent’s status as guarantor in respect of the original 2008 facility could not be completely disputed, that by itself was insufficient for admission of the Section 95 application in the absence of proof of invocation, enforceable default, continuity of liability for subsequent facilities, and filing within the prescribed limitation period. Accordingly, the Tribunal broadly concurred with the Resolution Professional’s recommendation to reject the application, and held that the requirements of Section 95 of the Code had not been fulfilled, that no default could be said to have arisen qua the Personal Guarantor, and that the application was not maintainable.
The Division Bench comprising Rammurti Kushawaha (Judicial Member) and Yogendra Kumar Singh (Technical Member) observed that it had jurisdiction under Section 60(2) of the Code because insolvency proceedings of the Corporate Debtor were pending before the same Adjudicating Authority. It identified the principal issue as whether the Respondent could be proceeded against as a Personal Guarantor within the meaning of Section 95 and whether a legally enforceable debt and default had been established against her. The Tribunal also recorded that the demand notice under Rule 7(1), though initially returned unserved by post, was thereafter published in English and Assamese newspapers, and sufficient proof of service was produced before it.
On merits, the Tribunal found that the Respondent had admittedly executed the Letter of Guarantee dated May 20, 2008 for the original cash credit facility of Rs. 145 lakhs. However, the Applicant failed to produce cogent material showing that she continued to execute guarantee documents or expressly reaffirm liability after her resignation on March 31, 2009. The Tribunal further noted that the compromise approval dated Feb 14, 2018, extension of repayment dated June 25, 2020, and proposal for revival of OTS dated Nov 07, 2022 neither contained her signature nor attributed liability to her, and instead referred to other guarantors while excluding her.
The Tribunal attached significance to the SARFAESI demand notice dated Nov 12, 2011, observing that it was not addressed to the Respondent and that it specifically named only four other personal guarantors as liable towards the facilities. The omission of the Respondent from that statutory notice weighed against the Applicant’s present case that she continued to remain liable as Personal Guarantor.
The Tribunal also accepted the contention that the guarantee had never been validly invoked. It held that liability against a personal guarantor crystallises only upon issuance of a specific contractual demand invoking the guarantee, and that the Form B notice under Rule 7(1) is merely a procedural prerequisite for filing under Section 95. Since no prior invocation of the guarantee deed dated May 20, 2008 had been shown, no default within the meaning of Section 3(12) of the Code could be said to have arisen against the Respondent.
Briefly, the Financial Creditor, UCO Bank, filed an application under Section 95 of the Insolvency and Bankruptcy Code, 2016 against Mallika Barooah as Personal Guarantor to M/s Berial Engineers Private Limited, alleging default in repayment of Rs. 148.67 crores. The Bank relied on the initial cash credit facility sanctioned on May 20, 2008, subsequent enhancements and related guarantee documents, the DRT proceedings, the compromise order, the Recovery Certificate dated Apr 11, 2018, later extension proposals, and a demand notice issued under Rule 7(1) of the Personal Guarantor Rules. The Corporate Debtor had already undergone insolvency proceedings before the same Tribunal, and the application was therefore filed before the Guwahati Bench under Section 60(2) of the Code.
The Resolution Professional examined the application and recommended rejection under Section 99. He took the view that although the Respondent had figured as a guarantor in relation to the sanction letter dated May 20, 2008, she was not named as a guarantor in the subsequent sanction letters from Aug 01, 2009 onwards and had not signed the continuing letters of guarantee thereafter. The RP therefore opined that the application did not satisfy the requirements of Section 95 insofar as liability as Personal Guarantor was concerned.
The Respondent opposed the application on multiple grounds. She contended that no notice invoking the personal guarantee had ever been issued to her; that the Rule 7(1) demand notice could not be treated as invocation of guarantee; that the SARFAESI demand notice was not addressed to her; that she had resigned as director on March 31, 2009; and that the compromise approval, extension of repayment, revival proposal and related settlement documents neither bore her signature nor attributed liability to her.
Appearances:
- Chamaria, Adv., M. N. Deka, Adv., for Petitioners
- A. Sarkar, Adv., for Respondents