In a significant ruling on the interplay between statutory demand notices and invocation of personal guarantees under the IBC, the New Delhi Bench of the National Company Law Tribunal (NCLT) has dismissed Canara Bank’s Section 95 application against Karan A Chanana, holding that a Form B notice under Rule 7(1) of the PG Rules is a statutory prerequisite and not an invocation of the guarantee itself.
The NCLT held that the invocation of a guarantee is governed by the terms of the Deed of Guarantee, and in the present case, the Guarantee Deed dated Aug 28, 2015 expressly provided that the guarantee shall be invoked upon a demand being made by the Applicant Bank.
The NCLT also reiterated the settled legal position that a demand notice issued in Form B under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019 is a statutory requirement and cannot be treated as an invocation of the personal guarantee.
The Coram consisting Justice Jyotsna Sharma (Judicial Member) and Anu Jagmohan Singh (Technical Member) observed that mere submissions in the reply, without any supporting evidence for serious allegations like fraud and misrepresentation, do not render the Deed of Guarantee invalid. The Bench noted that it is settled law that the cause of action under a Section 95 petition arises on invocation of the guarantee, pursuant to which the Personal Guarantor becomes a debtor, and the invocation of a guarantee is governed by the terms of the Deed of Guarantee itself. In the present case, the Guarantee Deed dated Aug 28, 2015 expressly provides that the guarantee shall be invoked upon a demand being made by the Applicant Bank.
The Tribunal further noted that the first communication for recalling the amount of debt from the Personal Guarantor was by way of a statutory demand notice in Form B, and nothing was placed on record to show that there was any invocation of the guarantee or recall of the amount prior to Feb 19, 2022. The Tribunal also noted that the core question that arose for determination was whether the demand notice issued under Rule 7(1) of the PG Rules, 2019 constitutes a valid invocation of the Guarantee, and whether default on the part of the Personal Guarantor should exist prior to the issuance of the demand notice under Rule 7(1).
Applying this settled position of law, the NCLT observed that the demand notice issued under Rule 7(1) in Form B is a statutory requirement and cannot be construed as an invocation of the guarantee. In the present case, no material was placed on record to establish that the guarantee was invoked or that any recall of the outstanding amount was made prior to the statutory demand notice in Form B under Rule 7(1) dated Feb 19, 2022.
Briefly, Canara Bank, the Financial Creditor, filed an application under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 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 against Karan A Chanana, the Personal Guarantor of the Corporate Debtor, Amira Pure Foods Private Limited, seeking to initiate insolvency resolution proceedings against him for an outstanding debt of Rs. 425.93 crores.
The Corporate Debtor, Amira Pure Foods Private Limited, had approached Canara Bank from time to time for grant of certain credit facilities for its business activities. Against these working capital facilities, the Personal Guarantor, Karan A Chanana, executed a combined Guarantee Agreement in favour of the Applicant Bank. The Principal Borrower defaulted in repayment of the outstanding dues, and consequently, the account of the Principal Borrower was classified as a Non-Performing Asset (NPA). Subsequently, Corporate Insolvency Resolution Proceedings (CIRP) were initiated against Amira Pure Foods Private Limited.
Thereafter, the Applicant Bank issued a demand notice in FORM B under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019, to the Personal Guarantor, Karan A Chanana, calling upon him to recall and pay the outstanding loan amount along with further interest. Since the Personal Guarantor failed to pay the outstanding dues, the petition under Section 95 was filed by the Applicant Bank.
The Respondent/Personal Guarantor objected to the maintainability of the application on two specific grounds: first, that the combined Deed of Personal Guarantee was obtained by fraud and misrepresentation and was therefore null and void, with the matter being pending before the competent court; and second, that the application was barred by limitation, since the loan account of the Corporate Debtor was classified as NPA on Oct 27, 2017, whereas the guarantees were invoked only on Feb 19, 2022.
