NCLT Mumbai Rules, Date Of Default For Guarantors Is When Guarantee Is Invoked, Not When Loan Turns NPA
Pranav B Prem
The National Company Law Tribunal (NCLT), Mumbai Bench, has clarified that for personal guarantors, the date of default is the date on which the guarantee is invoked rather than the date on which the borrower’s loan account is classified as a Non-Performing Asset (NPA). The coram comprising Judicial Member K.R. Saji Kumar and Technical Member Anil Raj Chellan delivered the ruling while hearing a personal insolvency application filed by Bhavna Ravi Matta, who had furnished a personal guarantee to the loans availed by North American Mercantile India Pvt. Ltd.
The applicant had initially mentioned the date of default as 9 December 2019, relying on the date on which the loan account was declared an NPA. However, the Tribunal held that this approach was incorrect because, in the case of personal guarantors, the relevant date is the date the guarantee stands invoked. The Tribunal observed that the guarantee was considered invoked through the demand notice issued under Section 13(2) of the SARFAESI Act on 25 February 2020, which required the guarantor to pay within sixty days. Therefore, the default date was held to be 25 April 2020, the date on which the statutory notice period expired.
The Tribunal noted in its order that for personal guarantors, the invocation of the guarantee is the operative trigger for determining limitation. It emphasised that the SARFAESI demand notice, which called upon the applicant to clear the dues within the prescribed statutory period, clearly signified the invocation of the guarantee. Consequently, the insolvency application filed on 24 September 2022 was held to be within the three-year limitation period.
The financial creditor’s debt was later assigned to Asrec (India) Ltd., which opposed the admission of the application. Asrec contended that the insolvency proceedings were being used as a shield to frustrate recovery efforts initiated under the SARFAESI Act. They argued that enforcing the security interest outside the IBC process would yield a higher recovery and that the CIRP mechanism should not be used to obstruct or delay those proceedings. The applicant, however, maintained that she had executed the personal guarantees on two occasions and that the liability arising from the borrower’s default remained outstanding. Since neither the borrower nor the guarantor had made any payment following the invocation of the guarantee, she sought to initiate the personal insolvency process in accordance with law.
Rejecting the objections raised by Asrec, the Tribunal observed that proceedings under Section 94 of the Insolvency and Bankruptcy Code operate as an independent statutory mechanism, and the pendency of SARFAESI proceedings cannot legally inhibit a personal guarantor from initiating insolvency proceedings. The Tribunal held that there was nothing on record to suggest that any amount had been paid by the borrower or the guarantor after the issuance of the SARFAESI notice and therefore accepted the computation of debt and default as furnished.
The Tribunal also took note of the report filed by the Resolution Professional under Section 99 of the Code, which recommended admission of the application. Since the earlier Resolution Professional’s Authorisation for Assignment (AFA) had expired, the Tribunal appointed Mr. Kushal Jajodia as the new Resolution Professional to conduct the insolvency process. It directed the initiation of the statutory moratorium, the issuance of public notices, the collection and verification of creditor claims, and the preparation of a repayment plan. The applicant was also directed to deposit ₹2,00,000 towards the initial costs of the insolvency process.
Finding the application complete and within limitation, the Tribunal formally admitted the personal insolvency application and ordered commencement of the insolvency resolution process.
Appearance
For Applicant: Advocate Manoj Kumar Mishra
For Respondent: Advocate Ayush Kothari along with Advocate Shreyansh Desai instructed by V. Deshpande & Co
Cause Title: Bhavna Ravi Matta
Case No: C.P. (IB) No. 1043/MB/2022
Coram: Judicial Member K.R. Saji Kumar, Technical Member Anil Raj Chellan
