Calling Personal Guarantor A “Director” In SARFAESI Demand Notice Does Not Invalidate Invocation Of Guarantee: NCLAT
Pranav B Prem
The National Company Law Appellate Tribunal has held that merely describing a personal guarantor as a “Director” in a demand notice issued under Section 13(2) of the SARFAESI Act does not invalidate the invocation of a personal guarantee, so long as the notice clearly calls upon the guarantor to discharge the outstanding liability in terms of the guarantee deed. The Tribunal emphasised that the decisive factor is not the description used for the addressee, but the substance and content of the demand made in the notice.
The appeal was decided by a Bench comprising Mohd. Faiz Alam Khan, Judicial Member, and Naresh Salecha, Technical Member. The Bench observed that “whether a guarantee may be invoked by giving notice under Section 13(2) of the SARFAESI Act depends on the terms of the guarantee and the content of the notice. If the notice clearly demands payment from the personal guarantor in terms of the guarantee, it can be treated as an invocation of the guarantee.”
The dispute arose out of credit facilities granted by Union Bank of India to Green World International Pvt. Ltd. pursuant to sanction letters issued in 2013 and 2015. In connection with these facilities, the appellant, Ujwal Gupta, executed a deed of personal guarantee on 1 March 2013, undertaking to discharge the borrower’s liabilities jointly and severally. Upon default by the borrower, the loan account was classified as a non-performing asset on 30 January 2016.
Following the default, the bank issued a demand notice dated 29 February 2016 under Section 13(2) of the SARFAESI Act to the corporate debtor and its guarantors, calling upon them to clear the outstanding dues within 60 days. Subsequently, insolvency proceedings were initiated against the personal guarantor under Section 95 of the Insolvency and Bankruptcy Code, 2016, which were admitted by the NCLT, New Delhi. Aggrieved by the initiation of personal insolvency proceedings, the guarantor preferred an appeal before the NCLAT.
The principal contention of the appellant was that his personal guarantee had never been validly invoked. He argued that the Section 13(2) notice described him as a “Director” of the company and not as a “personal guarantor,” and therefore could not be treated as a demand invoking the guarantee. On this basis, he challenged the maintainability of the insolvency proceedings initiated against him under the Code.
The Tribunal rejected this contention. It noted that a perusal of the Section 13(2) notice showed that it clearly referred to the credit facilities extended to the corporate debtor, recorded persistent default despite repeated demands, and specifically called upon the addressees to discharge the outstanding liability within a stipulated period. The Tribunal observed that the language of the notice left no ambiguity as to the nature of the demand, which was directed towards recovery of dues arising out of the loan transaction secured by the personal guarantee.
The NCLAT also examined the terms of the guarantee deed and found that it did not prescribe any special format, mode, or procedure for invocation of the guarantee. The deed merely required issuance of a demand notice calling upon the guarantor to pay the outstanding dues. In such circumstances, the Tribunal held that a notice demanding payment within a fixed timeframe, clearly indicating the liability sought to be enforced, was sufficient to constitute invocation of the guarantee.
Relying on its earlier decision in Asha Basantilal Surana vs State Bank of India, the Tribunal reiterated that a demand notice issued under Section 13(2) of the SARFAESI Act can amount to a valid invocation of a personal guarantee if the demand is in consonance with the terms of the guarantee agreement. It held that the addition of the word “Director” after the appellant’s name did not alter his legal status as a personal guarantor or dilute the effect of the demand made under the notice.
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The Tribunal further held that once the notice clearly called upon the appellant to discharge the liability arising from the credit facilities extended to the corporate debtor, the guarantee stood validly invoked. It found no illegality in the initiation of insolvency proceedings against the personal guarantor and rejected the argument that the proceedings were vitiated on account of defective invocation. Accordingly, the NCLAT dismissed the appeal, upheld the order of the NCLT admitting the insolvency application under Section 95 of the Code, and permitted the insolvency proceedings against the personal guarantor to continue.
Appearance
For Appellant: Advocates Palash S. Singhai, Sonam Sharma and Harshal Sareen.
For Respondent: Advocates Viren Sharma, Yash Srivastava and Naveli Garg for R-1; Shivam Gautam for R-2.
Cause Title: Ujwal Gupta v Union Bank of India and Anr.
Case Number: Company Appeal (AT) (Ins) No. 2001 of 2024
Coram: Mohd. Faiz Alam Khan, Judicial Member, and Naresh Salecha, Technical Member
