SARFAESI Notice Counts As Valid Invocation Of Personal Guarantee: NCLT Mumbai

The National Company Law Tribunal at Mumbai has recently held that a notice issued under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002, which empowers a secured creditor to demand repayment of dues within sixty days prior to enforcing its security, can operate as a valid invocation of a personal guarantee when it contains a direct repayment demand addressed to the guarantor.

A coram of Judicial Member K R Saji Kumar and Technical Member Anil Raj Chellan said this conclusion followed from the terms of the guarantee deed, which required payment "two days after demand and without demur, merely upon the Bank sending to the Guarantors a demand.”

After examining the contents of the Section 13(2) notice issued on 21 November 2017, the Bench noted that although it was a statutory SARFAESI notice, “it also made a demand on the guarantors by addressing them to make payment within 60 days from the date of notice” and emphasised that “a mere demand on the guarantor satisfies the requirement specified in the deed of guarantee.”

The case arose from credit facilities granted by Solapur Janata Sahakari Bank Limited to Shetkari Sakhar Karkhana (Chandrapuri) Limited, including Short Term Other Security assistance of Rs 6 Crores sanctioned on 20 August 2015 and a cash credit pledge loan of Rs 9 Crores sanctioned on 19 March 2016.

Mukund Pandharinath Kulkarni furnished personal guarantees for these facilities through deeds executed on 21 September 2015 and 23 March 2016. After the accounts became non-performing in December 2016, the Bank issued a Section 13(2) notice demanding Rs 7.24 crores plus interest at 14.25 percent and additional interest of 3 percent from November 1,2017.

An arbitral award dated 11 March 2019 directed the corporate debtor, guarantors and mortgagors to “jointly and severally pay to the Financial Creditor an amount of Rs.7,24,11,423/- together with interest at the rate of 13.25% p.a. from the date 01.11.2017 till repayment or realisation of the entire amount.”

The Bank later initiated proceedings under Section 95 of the Insolvency Code seeking to commence the personal guarantor insolvency resolution process.

Kulkarni opposed the application and alleged forum shopping. He argued that the Bank had already invoked proceedings under the Multi State Co operative Societies Act. He also said the mortgaged commercial properties, which he estimated at about Rs 20 crore, fully secured the outstanding dues.

He contended that the insolvency application filed in late November 2021 was barred by limitation and submitted that the Section 13(2) notice cannot be construed as a notice of invocation of personal guarantee and was never served upon the Personal Guarantor.

He also argued that he was released from liability once the corporate debtor's resolution plan was approved, pointing to a clause stating that all security interests created in favour of the financial creditors would be cancelled and waived once they received payment to their satisfaction.

The tribunal rejected these objections.

On limitation, the tribunal relied on the arbitral award and cited the Supreme Court's ruling in Dena Bank v. C. Shivakumar Reddy, in which the Court held that an unsatisfied judgment, decree or arbitral award for payment of money gives rise to a fresh financial debt that allows a creditor to initiate insolvency proceedings.

On the effect of the resolution plan, the tribunal referred to Lalit Kumar Jain v. Union of India and noted the Supreme Court's holding that the approval of a corporate debtor's resolution plan does not automatically release a personal guarantor, since the guarantor's obligations arise from an independent contract and remain unaffected even if the principal borrower is discharged.

Holding that “a valid demand in respect of the deed of guarantee dated 21.09.2015 was made by the Financial Creditor in the notice issued under Section 13(2) of the SARFAESI Act,” the tribunal admitted the petition, initiating insolvency resolution process against Kulkarni. 

Case Name: Solapur Janata Sahakari Bank Limited vs Mukund Pandharinath Kulkarni

Case Number: C.P. (IB) NO. 275/MB/2022

For the Financial Creditor: Advocate Raina Birla.

For Resolution Professional: Advocate Dhananjaya Sud

For the Personal Guarantor: Advocate Jack Thalakottur