Liability Of Personal Guarantor Arises Only Upon Demand Made In Accordance With Guarantee Deed: NCLT Hyderabad

The National Company Law Tribunal (NCLT), Hyderabad Bench-II, has recently ruled that the liability of the personal guarantor to the corporate debtor arises only upon a valid demand being made in strict accordance with the terms of the guarantee deed. The bench of Rajeev Bhardwaj (Member-Judicial) and Yogendra Kumar Singh (Member-Technical) observed that, “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” means a debtor who is a personal guarantor to a corporate debtor, in respect of whom the guarantee has been invoked by the creditor and remains unpaid in full or in part. Therefore, the debt becomes due against the guarantor only upon invocation of the guarantee.” Background of the Case The corporate debtor availed the financial facility from the Canbank Factors Limited (applicant). For the said loan, Sri D Rama Linga Raju (Respondent) was named as the personal guarantor. The corporate debtor defaulted in the repayment of the loan, leading to the NPA classification of its account. Thereafter, the corporate debtor acknowledged the loan and offered a one-time settlement to the financial creditor. Meanwhile, the financial creditor instituted a recovery suit, being COS before the Special Court, City Civil Court, Hyderabad. Thereafter, the financial creditor issued the demand notice in Form B under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, to the respondent (personal guarantor), calling upon him to unconditionally repay the outstanding debt. However, the respondent failed to repay or respond to the said notice. Accordingly, the present application was filed by the financial creditor under Section 95 of the IBC, 2016. Ruling of the NCLT The NCLT observed that the invocation of guarantee was not made against the personal guarantors. It ruled that the demand notice issued in the Form B under Rule 7(1) cannot be treated as an invocation of guarantee, as it is merely a demand for payment of defaulted money, and it does not call upon the personal guarantor to discharge his obligation under guarantee. Relying on the ruling of State Bank of India v. Mr. Deepak Kumar Singhania, Company Appeal (AT) (Insolvency) No. 191 of 202 and Asha Basantilal Surana v. State Bank of India & Ors, Company Appeal (AT) (Insolvency) No. 84 of 2025, the bench ruled that the liability of the personal guarantor arises only upon demand being made in accordance with the guarantee deed. Accordingly, the NCLT dismissed the application while holding that the guarantee was not invoked by the financial creditor, therefore, debt cannot be said to have become due from the guarantor. Case Name: Canbank Factors Ltd. Vs. Sri D. Rama Linga Raju Case No.: Company Petition IB/44/95/HDB/2024 For the Petitioner: Mr. Dishit Bhattacharjee. For the Respondent: Mr. Rajashekar Rao Salvaji. Coram: Rajeev Bhardwaj (Member-Judicial) and Yogendra Kumar Singh (Member-Technical) Order Date: 16.10.2025Click Here To Read/Download The Order

Liability Of Personal Guarantor Arises Only Upon Demand Made In Accordance With Guarantee Deed: NCLT Hyderabad

Mohd.Rehan Ali

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