Petition U/S 7 Of IBC Against Corporate Guarantor Cannot Be Admitted Unless Valid Delivery Of Guarantee Invocation Notice Is Established, Rules NCLAT Mumbai
Pranav B Prem
The National Company Law Tribunal (NCLT) Mumbai Bench, comprising Hon'ble Reeta Kohli (Judicial Member) and Hon'ble Madhu Sinha (Technical Member), has ruled that an insolvency application under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC") against a corporate guarantor cannot be admitted unless the valid delivery of the demand-cum-guarantee invocation notice is established. The Tribunal emphasized that only when the delivery is proven can the default on the part of the corporate guarantor be said to have arisen.
Brief Facts
The Corporate Debtor, Grevek Investments and Finance Private Limited, is a company incorporated under the Companies Act, 1956, and acted as a corporate guarantor for Starwort Engineers Pvt Ltd. ("Principal Borrower") under an Inter Corporate Deposit Agreement ("ICD Agreement") entered into with the Financial Creditor. The Financial Creditor extended the debt repayment deadline to November 10, 2022, through a letter dated November 8, 2021. However, the Principal Borrower defaulted on repayment. Subsequently, a Settlement Agreement dated February 15, 2023, was executed between the Financial Creditor and the Principal Borrower to amicably settle the debt. Despite this, the Principal Borrower again failed to meet the repayment obligations.
As per the Financial Creditor, the demand-cum-invocation notice was issued, yet both the Principal Borrower and the Corporate Guarantor failed to discharge their obligations. This default was also recorded with the National E-Governance Services Ltd (NeSL), confirming the Corporate Debtor as a guarantor under the ICD Agreement. Consequently, a Section 7 petition was filed against the Principal Borrower before the NCLT Mumbai Bench on February 12, 2024, which was admitted via order dated July 16, 2024. Following this, the present application was filed against the Corporate Guarantor.
Contentions of the Parties
Financial Creditor's Submissions
The Financial Creditor argued that:
Clause 5.2 of the Settlement Agreement explicitly states that the Borrower continued to remain liable under the ICD Agreement upon the occurrence of an event of default.
The execution of the Settlement Agreement did not absolve the Corporate Debtor from its obligations as a guarantor.
The demand-cum-invocation notice was issued, making the Corporate Guarantor liable.
Corporate Debtor's Submissions
The Corporate Debtor countered these claims by asserting that:
The ICD Agreement had been extended periodically and was ultimately replaced by the Settlement Agreement dated February 15, 2023.
Recital G of the Settlement Agreement demonstrated that it was executed in full and final settlement of the ICD Agreement.
The Corporate Debtor was not obligated to guarantee payments under the Settlement Agreement, and thus, the petition was not maintainable.
The demand-cum-invocation notice was invalid and improperly served, thereby preventing the invocation of the corporate guarantee.
Tribunal's Observations
The NCLT, after reviewing the clauses of the Guarantee Agreement, observed that the corporate guarantee of the Corporate Debtor remained effective until the outstanding liability to the Financial Creditor was fully satisfied. The Tribunal noted that Clause 6 permitted modifications to the ICD Agreement without requiring the Corporate Guarantor to be a party, and the Settlement Agreement was a byproduct of this clause. Consequently, the Corporate Debtor remained liable despite not being a signatory to the Settlement Agreement.
The Tribunal further held that since the guarantee was invoked on demand, the default date would be January 1, 2024, only if the notice of invocation was legally valid. Clause 23 of the Guarantee Agreement specifies the proof of delivery requirements, stating that delivery must be established either through postal records or by a certificate issued by a responsible officer of the lender.
However, the Tribunal noted that the Financial Creditor had failed to furnish such evidence or contest this issue effectively in its reply or submissions while addressing the Corporate Guarantor’s contention. The Tribunal held that "Since the demand notice was never purportedly delivered to the Corporate Guarantor, the corporate guarantee never got invoked by the financial creditor in terms of the guarantee agreement which forms the basis of this petition, the default by corporate guarantor cannot be established."
Verdict
In light of the above findings, the NCLT Mumbai Bench dismissed the insolvency application filed under Section 7 of the IBC against the Corporate Guarantor, reiterating that a validly delivered demand-cum-invocation notice is a precondition for establishing default against a guarantor under the IBC.
Appearance
For the Petitioner: Adv. Revathy Chettiyar (PH)
For the Respondent: --
Cause Title: M/s, Q West Infrastructure Pvt. Ltd. Vs M/s Grevek Investments & Finance Pvt. Ltd.
Case No: C.P. 260/IB/MB/2024
Coram: Hon’ble Reeta Kohli [Member (Judicial)], Hon’ble Madhu Sinha [Member (Technical)]
[Read/Download order]
