Statutory Demand v. Contractual Invocation: NCLAT Reiterates Rule in Personal Guarantor Insolvency

Introduction

In State Bank of India v. Deepak Kumar Singhania[i], the National Company Law Appellate Tribunal, New Delhi (‘NCLAT’) examined an important issue under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) pertaining to the initiation of insolvency proceedings against personal guarantors. The issue before the NCLAT was whether a demand notice under r. 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (‘2019 Rules’) could be treated as sufficient invocation of the personal guarantee for the purpose of filing an application under s. 95 of the IBC.  

Brief Facts

• The State Bank of India ('Appellant') had extended financial assistance to LML Ltd., the corporate debtor ('CD'). As part of the credit arrangement, a deed of personal guarantee dated 28.03.2005 was executed by Mr. Deepak Kumar Singhania, the Respondent, along with two other individuals. The guarantee stipulated that the guarantors would be liable to pay the outstanding dues of the borrower upon demand in the event of any default.

• Following persistent non-compliance by the borrower, the CD’s loan account was classified as a non-performing asset (NPA), and a Corporate Insolvency Resolution Process (CIRP) was initiated. However, no resolution plan materialised, and consequently, the CD was ordered into liquidation on 23.03.2018.

• During the pendency of the liquidation proceedings, the Appellant issued a demand notice under r. 7(1) of the 2019 Rules on 04.05.2022 to the Respondent in Form-B, demanding repayment of Rs 125.05 crore. Upon receiving no response, the Appellant filed an application under s. 95 of the IBC against the personal guarantor on 28.05.2022.

• The Adjudicating Authority initially appointed a Resolution Professional but later rejected the application on 28.11.2024 on the ground that the guarantee had not been invoked prior to the issuance of the demand notice under r. 7(1), thereby failing to meet the statutory preconditions required for filing such an application.

• The Authority held that the Respondent could not be treated as a ‘guarantor’ under r. 3(1)(e) of the 2019 Rules, and thus, the application under s. 95 was not maintainable. Aggrieved by such an order, the Appellant challenged it before the  NCLAT.

Held

• The NCLAT dismissed the appeal filed by the Appellant and affirmed the order of the Adjudicating Authority. It held that a demand notice issued under r. 7(1) of the 2019 Rules could not have been construed as a notice invoking the personal guarantee. The Tribunal emphasized that the liability of a guarantor arises only when the guarantee is invoked as per the terms of the deed of guarantee. In the present case, Clauses 2 and 21 of the guarantee deed clearly stipulated that the guarantor’s liability would arise upon a specific demand from the lender. Since Appellant did not issue any such invocation prior to sending the statutory demand notice, the respondent’s liability had not crystallized at the relevant time.

• Further, the Tribunal clarified that under r. 3(1)(e) of the 2019 Rules, a person qualifies as a ‘guarantor’ only when two cumulative conditions are met, firstly, the individual must be a personal guarantor to a CD; and secondly, the guarantee must have been invoked and remain unpaid. The Appellant’s argument that the word ‘and’ in the definition should be read disjunctively as ‘or’ was rejected. The Tribunal observed that a literal interpretation of the term ‘guarantor’ was consistent with the legislative intent and statutory framework of the IBC. It further noted that Form-B, used for issuing the r. 7(1) notice requires disclosure of the date of default, which necessarily presupposes a prior invocation of the guarantee.

• In conclusion, the Tribunal held that the absence of any prior invocation of the guarantee rendered the s. 95 application premature and legally unsustainable. Since there was no existing default attributable to the guarantor at the time of issuance of the demand notice, the statutory requirements under the IBC and 2019 Rules were not satisfied. Accordingly, the appeal was dismissed.

Our Analysis

This ruling is pivotal in shaping the procedural contours of insolvency applications against personal guarantors under the IBC. It emphasizes a principle often reiterated in commercial jurisprudence contractual terms govern liability, and statutory processes must conform to such terms.

By holding that the statutory demand notice under r. 7(1) is insufficient to invoke a personal guarantee, the NCLAT reinforces the critical difference between the contractual invocation of a guarantee and statutory initiation of insolvency proceedings. This distinction is fundamental to maintaining contractual integrity and preventing arbitrary or premature insolvency actions against individuals.

The Tribunal’s rejection of the Appellant’s plea to read ‘and’ as ‘or’ in r.  3(1)(e) demonstrates judicial restraint and respect for legislative intent. Had the Tribunal accepted Appellant’s argument, it could have led to a slippery slope where insolvency proceedings might be initiated without establishing any real liability of the guarantor, thus undermining the protective rationale behind procedural safeguards in the IBC.

Additionally, this case aligns with the broader judicial approach that underscores the necessity of proper invocation of guarantees in line with the contract. The ruling clarifies that forms and procedural formats (such as Form-B) are not mere formalities; they encapsulate substantive preconditions, such as prior default and invocation, that must be met before initiating insolvency. Creditors must, therefore, carefully distinguish between a statutory demand for payment and a contractual invocation of liability.

In conclusion, this judgment is a robust reaffirmation of procedural discipline under the IBC and serves as an important precedent for financial institutions initiating proceedings against personal guarantors. It ensures that such proceedings are not initiated mechanically or prematurely, and that individual liabilities are firmly anchored in the guarantees they have contractually agreed to.

End Note

[i] 2025 SCC OnLine NCLAT 461.

Authored by Pranav Dabas, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.