NCLT Hyderabad: Personal Guarantor’s Liability Arises Only After Proper Invocation Of Guarantee, Demand Notice Alone Insufficient

NCLT Hyderabad: Personal Guarantor’s Liability Arises Only After Proper Invocation Of Guarantee, Demand Notice Alone Insufficient

Introduction

The National Company Law Tribunal (NCLT), Hyderabad Bench-II, has clarified that a personal guarantor’s liability to a corporate debtor arises only when the guarantee is invoked in strict conformity with the terms of the guarantee deed. The ruling underscores the importance of procedural compliance in invoking guarantees before initiating insolvency proceedings against guarantors. The bench comprising Rajeev Bhardwaj (Member-Judicial) and Yogendra Kumar Singh (Member-Technical) observed that under Rule 3(1)(e) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, a guarantor becomes liable only upon invocation of the guarantee that remains unpaid in full or part.

Factual Background

The corporate debtor had availed financial facilities from Canbank Factors Limited, the applicant in the case. To secure the said loan, Sri D. Rama Linga Raju, the respondent, executed a personal guarantee in favour of the financial creditor. Subsequently, the corporate debtor defaulted in repayment, leading to the classification of its loan account as a Non-Performing Asset (NPA). Despite acknowledging the debt and proposing a one-time settlement, repayment was not completed. Consequently, the financial creditor initiated recovery proceedings before the Special Court, City Civil Court, Hyderabad.

Procedural Background

Following the default, the financial creditor issued a demand notice in Form B under Rule 7(1) of the IBC (Personal Guarantors Rules, 2019), calling upon the respondent to repay the outstanding dues. When the guarantor failed to respond or pay, the creditor filed an application under Section 95 of the Insolvency and Bankruptcy Code, 2016, seeking initiation of insolvency proceedings against him.

Issues

1. Whether a financial creditor can initiate insolvency proceedings against a personal guarantor without a valid invocation of the guarantee.

2. Whether the demand notice under Rule 7(1) constitutes sufficient invocation of the personal guarantee.

Contentions of the Parties

For the Petitioner (Canbank Factors Ltd.): The creditor argued that the demand notice issued in Form B was sufficient to constitute invocation of the guarantee and that the guarantor’s failure to respond amounted to a default, making him liable under the IBC.

For the Respondent (Personal Guarantor): The respondent contended that no valid invocation of the guarantee had occurred as per the terms of the deed. The demand notice merely demanded repayment but did not specifically call upon the guarantor to perform his obligation under the guarantee agreement. Hence, the debt was not due from him.

Reasoning and Analysis

The tribunal noted that the invocation of the guarantee is a precondition for a creditor to proceed against a personal guarantor. Referring to Rule 3(1)(e) of the Personal Guarantors Rules, the bench emphasized that the guarantor becomes a “debtor” only when the guarantee is invoked and remains unpaid. The NCLT found that the Form B demand notice could not be treated as an invocation of the guarantee since it did not specifically call upon the guarantor to discharge his contractual obligation. It merely demanded repayment of the loan. The bench relied on key precedents — State Bank of India v. Deepak Kumar Singhania, Company Appeal (AT) (Insolvency) No. 191 of 2023, and Asha Basantilal Surana v. State Bank of India & Ors, Company Appeal (AT) (Insolvency) No. 84 of 2025 to reinforce that the liability of a personal guarantor arises only when a demand is made in accordance with the terms of the guarantee deed.

Implications

This ruling reinforces procedural discipline in invoking personal guarantees before proceeding under the IBC. It ensures that creditors cannot mechanically initiate insolvency proceedings against guarantors without first fulfilling contractual conditions. The judgment also offers protection to guarantors from premature insolvency actions and underscores the need for precise invocation clauses in guarantee deeds.

In this case the petitioner was represented by Mr. Dishit Bhattacharjee, Advocate. Meanwhile the respondent was represented by Mr. Rajashekar Rao Salvaji, Advocate.