NCLT Mumbai Upholds Validity of Personal Guarantee Despite Defects in Security Title

NCLT Mumbai Upholds Validity of Personal Guarantee Despite Defects in Security Title

Introduction

The National Company Law Tribunal (NCLT), Mumbai Bench, Court VI, has held that any defect in the title of the security does not vitiate the personal guarantee, duly executed, specifically when the person admits the execution.

Factual Background

The personal guarantor, Rinki Prakash Kumar, filed an application under Rule 11 of the NCLT Rules, 2016, praying for dismissal of the Section 95 petition filed by the financial creditor. The applicant contended that the financial creditor advanced a loan facility to the company upon mortgage of 3 flats as collateral, which were later found to be sold to multiple third-party purchasers prior to the mortgage.

Procedural Background

The applicant alleged that the guarantees were obtained without disclosure of defects, violating Sections 17 to 19 of the Indian Contract Act, making the guarantee voidable. The applicant also highlighted that it didn't receive any demand notice from the financial creditor under Section 95(4) of the IBC.

Issues

1. Effect of Defect in Security Title: Whether a defect in the title of the security vitiates the personal guarantee.

2. Maintainability of Petition: Whether the petition filed by the personal guarantor is maintainable.

Reasoning & Analysis

The Justice Nimesh Sharma (Member-Judicial) and Sameer Kakar (Member-Technical) observed that the submissions made by the applicant make it clear that the company availed the loan facility and the personal guarantee was executed by him. The bench held that any defect in the title of the security does not vitiate the personal guarantee, duly executed, specifically when the person admits the execution.

Decision

The NCLT dismissed the petition, holding that it is non-maintainable. The bench also observed that since no appeal was filed against the admission of the Section 95 petition, the order attains finality.

Implications

The decision clarifies the effect of defects in security title on personal guarantees and the maintainability of petitions filed by personal guarantors.

In this case the applicant was represented by Mr. Agam H Maloo along with Mr. Arif Bhati, Advocates.