NCLT Kochi: Insolvency Cannot Be Initiated Against Corporate Guarantor Under Section 7 Without Prior Invocation of Guarantee
Pranav B Prem
The National Company Law Tribunal (NCLT), Kochi Bench, has held that a financial creditor cannot directly trigger insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, against a corporate guarantor without first invoking the guarantee in accordance with the contract and without proceeding against the principal borrower. In consequence, the tribunal refused to initiate the Corporate Insolvency Resolution Process (CIRP) against Inditrade Capital Limited and dismissed the petition filed by Arthan Finance Private Limited.
A Bench of Judicial Member Vinay Goel and Technical Member Madhu Sinha observed that the liability of a guarantor cannot be put into motion under the Code in the absence of a legitimate invocation of the corporate guarantee. The Bench stated that “the petitioner cannot be permitted to rely upon an earlier issued demand notice, and the petitioner cannot be allowed to file a petition under Section 7 of the Code directly against the guarantor upon commission of default by the principal borrower without invoking the guarantee in terms of the contract as per law.”
Background
Arthan Finance, a Non-Banking Financial Company, had sanctioned a credit facility of ₹1.50 crore to Inditrade Rural Marketing Limited for invoice financing. The repayment obligations were secured through a corporate guarantee executed by Inditrade Capital Limited. The facility was later restructured on 3 September 2024 into a term loan of approximately ₹1.02 crore, accompanied by the execution of a fresh corporate guarantee. Arthan Finance claimed that the account was classified as a non-performing asset on 31 March 2025 and asserted outstanding dues exceeding ₹1.07 crore, prompting the filing of the Section 7 petition against the guarantor.
Opposing the petition, Inditrade Capital argued that the alleged default amount was artificially inflated to meet the statutory threshold of ₹1 crore through the inclusion of penal charges and GST, and further contended that ₹15 lakh held as cash collateral had not been adjusted. More significantly, it was argued that no invocation of the guarantee was ever made after the restructuring, and therefore no crystallised liability existed under the guarantee agreement.
Arthan Finance countered that invocation of guarantee was not necessary as the guarantor’s liability was co-extensive with that of the borrower under Section 128 of the Contract Act and relied on multiple precedents to argue that a financial creditor may directly proceed against the guarantor. It also asserted that multiple reminders and a demand due statement dated 4 October 2024 were issued to both IRML and the guarantor.
Tribunal’s Findings
The Tribunal examined whether the guarantee was validly invoked after the restructuring, treating this issue as fundamental to the adjudication of the petition. It noted that while a demand notice dated 11 July 2024 was issued to the principal borrower and guarantors, this notice preceded the restructuring and was not treated as invocation of the later guarantee agreement. The Tribunal observed that the restructuring on 3 September 2024 amounted to a novation of contract, and upon such novation, a fresh invocation of guarantee was necessary to establish default by the guarantor.
Referring to the terms of the guarantee agreement executed on 3 September 2024, the Tribunal emphasised that the guarantor was required to make payment “on each demand by AFPL from time to time”, indicating that invocation of the guarantee was a contractual prerequisite to enforce liability. It held that without such invocation, the creditor could not unilaterally trigger insolvency against the guarantor.
The Bench held that reliance on the earlier demand notice was legally impermissible after restructuring, stating that “reliance on the earlier demand notice is bad in the eyes of law.” It further noted that insolvency proceedings have serious consequences in rem and cannot be pursued unless the guarantor is first given an opportunity to discharge liability after a valid invocation of guarantee.
Holding that Arthan Finance filed the petition without invoking the corporate guarantee executed on 3 September 2024, the Tribunal concluded that the petition was premature and not maintainable. It therefore dismissed the Section 7 application against Inditrade Capital Limited without entering into the merits of the other objections raised by the respondent. The Tribunal clarified that Arthan Finance would be free to initiate action under Section 7 after ensuring a legally valid invocation of the guarantee, if it intends to pursue the remedy.
Appearance
For Petitioner: Advocate Sachin Patil
For Respondent: Advocate Akhil Suresh
Cause Title: Arthan Finance Private Limited vs Inditrade Capital Limited
Case No: CP (IB)/27/KOB/2025
Coram: Judicial Member Vinay Goel, Technical Member Madhu Sinha
