Claim Filed In Borrower Insolvency Not A Demand On Personal Guarantor, Cannot Trigger Insolvency: NCLT Kolkata

The National Company Law Tribunal (NCLT) at Kolkata has recently held that merely filing a claim in the borrower's insolvency proceedings cannot be treated as a demand on the personal guarantor, reiterating that a guarantee must be formally invoked in accordance with its terms before insolvency proceedings can be initiated against a guarantor.

On this reasoning, the tribunal dismissed UCO Bank's application seeking insolvency proceedings against the personal guarantor of Swarnganga Gold Traders Pvt. Ltd.

The coram of Judicial Member Bidisha Banerjee and Technical Member Siddharth Mishra explained that a guarantor's liability does not arise automatically on default by the borrower and is governed strictly by the guarantee deed.

Summarising settled precedents, the tribunal observed, “Liability of a guarantor would be strictly in terms of the Deed of Guarantee. If the Deed of Guarantee specifies that the guarantee is payable on demand, the Guarantor's liability will arise only if a Demand Notice is issued and served upon the Guarantor and the Guarantor defaults in repaying the debt. Hence, there has to be a prior invocation of guarantee.”

The dispute arose from credit facilities granted in 2008 to Swarnganga Gold Traders Pvt. Ltd. under a consortium arrangement of banks, backed by personal guarantees.

The account was classified as a non-performing asset in 2013, after which UCO Bank initiated recovery proceedings under the SARFAESI Act. The corporate borrower later underwent insolvency proceedings, which concluded in March 2018 with the approval of a resolution plan and payments to lenders.

In March 2024, UCO Bank relied on Form B, a standardised claim form used by operational creditors to submit proof of debt during the insolvency of the borrower, and thereafter filed a Section 95 application before the NCLT seeking to initiate insolvency proceedings against the personal guarantor.

The guarantor opposed the plea, contending that no contractual demand invoking the guarantee had ever been issued and that the application was barred by limitation.

Accepting these objections, the tribunal clarified that statutory steps taken in insolvency or recovery proceedings cannot substitute a contractual demand under a guarantee.

Relying on State Bank of India vs. Deepak Kumar Singhania (2025) , It held, “Notice under Form – B, sent under Rule 7 of the IBBI (Insolvency and Bankruptcy Board of India) is not to be treated as a notice invoking guarantee.”

Applying the same reasoning to recovery proceedings, the NCLT added that “Notice under Section 13(2) of the SARFAESI Act does not amount to an invocation of guarantee.”

Since UCO Bank failed to show that the guarantee was ever validly invoked, and because a Section 95 application is governed by a three year limitation period, the tribunal held the plea to be time barred and dismissed the application.

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