Personal Insolvency Proceedings Under Section 95 IBC Require Prior Invocation of Guarantee: NCLAT
- 15 minutes ago
- 3 min read
The REEDLAW Legal News Network reports: In a significant ruling on personal guarantor insolvency, the NCLAT clarified that insolvency proceedings against a personal guarantor under the Insolvency and Bankruptcy Code, 2016, cannot be initiated unless the guarantee is first invoked in accordance with the contractual terms. Setting aside the admission order, the Appellate Tribunal held that default by a guarantor does not arise merely upon issuance of a statutory demand notice and that invocation of the guarantee is a mandatory pre-condition for maintaining proceedings under Section 95 of the Code.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising a Judicial Member and a Technical Member, examined the guarantee deed, the statutory scheme under Sections 95, 99 and 100 of the Code, and the Personal Guarantor Rules, 2019. It held that a Resolution Professional’s report is recommendatory in nature and does not bind the Adjudicating Authority, which must independently assess statutory compliance. The Tribunal concluded that treating Form B notice as a substitute for the invocation of the guarantee amounted to a misapplication of law, warranting interference in appellate jurisdiction.
The Appellate Tribunal held that issuance of a demand notice in Form-B under the 2019 Personal Guarantor Rules does not, by itself, amount to invocation of a guarantee. The Bench observed that the liability of a personal guarantor crystallises only upon invocation as per the guarantee deed, and that delegated legislation cannot override this substantive contractual and statutory requirement.
The appeal was preferred under Section 61 of the Insolvency and Bankruptcy Code, 2016, challenging the order whereby the Adjudicating Authority admitted an application filed under Section 95 of the Code and initiated personal insolvency proceedings against the personal guarantor. The Appellant contended that the guarantee had never been invoked in accordance with the terms of the guarantee deed and that issuance of a demand notice in Form B under Rule 7(1) of the 2019 Rules could not substitute invocation of the guarantee.
It was argued that under Rule 3(1)(e) of the 2019 Rules, a personal guarantor becomes a “debtor” only after invocation of the guarantee and failure to pay thereafter. The Appellant relied upon the decisions of the Appellate Tribunal in Pooja Ramesh Singh v. State Bank of India and Another, REEDLAW 2023 NCLAT Del 04610, decided on 28.04.2023, and State Bank of India v. Deepak Kumar Singhania, REEDLAW 2025 NCLAT Del 02576, decided on 28.02.2025, to contend that default of a guarantor arises only upon demand as contemplated by the guarantee deed.
The Respondent contended that issuance of a demand notice under Rule 7(1) itself constituted sufficient compliance and that the application under Section 95(4) was maintainable upon non-payment within fourteen days. Reliance was placed on Dilip B. Jiwrajka v. Union of India and Others, REEDLAW 2023 SC 11575, and Kerala State Electricity Board v. Thomas Joseph, (2023) 11 SCC 700, to argue that delegated legislation must be read harmoniously with the parent statute.
The Appellate Tribunal, after analysing Sections 3(11), 3(12), 95(4) and 100 of the IBC, read with Rules 3(1)(e) and 7 of the 2019 Rules, held that default of a personal guarantor arises only after invocation of the guarantee as per the contract. The Tribunal concluded that Form B demand notice could not be equated with the invocation of the guarantee and that the Resolution Professional had failed to examine this foundational requirement. Accordingly, the admission of the application under Section 95 was held to be legally unsustainable.
Ms. Manju Bhuteria, Sr. Advocate, along with Ms. Shreya Choudhary, Ms. Prachi Grover, Mr. Ashish Choudhury and Mr. Abhishek Arora, Advocates, represented the Appellant.
Mr. Partha Sil and Mr. Utkarsh Dwivedi, Advocates, appeared for the Respondents.
This is premium content available to our subscribers.
To access the full content related to this article — including the complete judgment, detailed legal analysis, ratio decidendi, headnotes, cited case laws, and updates on relevant statutes and notifications — we invite you to subscribe to REEDLAW’s premium research platform.
Click here to Subscribe and unlock exclusive access to structured legal analysis, judicial summaries, and a comprehensive legal research database.
REEDLAW Legal Intelligence & Research is India’s most trusted legal publishing and research platform, empowering professionals with structured judicial insights and authoritative legal intelligence since 1985.
The platform offers comprehensive resources spanning Corporate Insolvency, Bankruptcy, Company Law, SARFAESI, Debt Recovery, Contract, MSMEs, Arbitration, Banking, and Commercial Laws. Through curated journals like IBC Reporter and Bank CLR, and an advanced Online Legal Research Database, REEDLAW simplifies complex legal research for professionals, institutions, and academia across India.
Comments