Personal Guarantor Cannot Avoid Liability By Claiming No Personal Benefit From Loan: NCLT Indore

The Indore Bench of the National Company Law Tribunal (NCLT) on 9 September held that a personal guarantor cannot avoid liability under a guarantee merely by claiming that he derived no personal or pecuniary benefit from the loan facilities availed by the corporate debtor.

A Bench comprising Judicial Member Brajendra Mani Tripathi and Technical Member Man Mohan Gupta admitted an insolvency application filed by The Cosmos Co-operative Bank Ltd. against Rajendra Singhal, personal guarantor of Labhanshi Multitrade Private Limited. It observed:

“Under Section 128 of the Indian Contract Act, 1872, the liability of a surety is co-extensive with that of the principal debtor, and under Section 127, anything done, or any promise made, for the benefit of the principal debtor is sufficient consideration to the surety for giving the guarantee. Whether the guarantor personally derived a benefit is immaterial to the enforceability of the guarantee.”

The bank had sanctioned cash credit and term loan facilities of Rs. 2,150 lakh and five term loans aggregating Rs. 530 lakh to Labhanshi Multitrade between 2019 and 2022. To secure repayment, Singhal executed continuing deeds of guarantee along with other guarantors. The corporate debtor's account was classified as a Non-Performing Asset on 12 September 2024.

Subsequently, the bank issued a notice under Section 13(2) of the SARFAESI Act on 25 October 2024 to the corporate debtor and its guarantors, including Singhal. The notice demanded repayment within 60 days and expressly invoked the personal guarantees.

Upon non-payment, default occurred on 25 December 2024. The bank served a further demand notice on 2 May 2025, but no payment was made. It thereafter filed the application under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC), claiming a total debt of Rs. 23.97 crore.

The Resolution Professional appointed by the Tribunal confirmed the validity of the invocation, existence of default and recommended admission of the application under Section 100 IBC.

Singhal objected that the application was premature and unmaintainable, contending that the guarantee had never been validly invoked. He argued that the SARFAESI notice related only to enforcement of security interest and could not substitute invocation of a personal guarantee. He also contended that he had derived no personal benefit from the loan facilities and that the quantum of debt had not been proved.

The Tribunal found that the principal issue was whether the guarantee had been validly invoked. It noted that the deeds were continuing guarantees payable on demand and that Clause 4 provided that a demand by the bank would constitute sufficient notice. The guarantees did not prescribe any particular mode or form of invocation.

It held that the SARFAESI notice dated 25 October 2024 was addressed to Singhal in his capacity as guarantor, demanded repayment and expressly invoked the guarantee. It therefore found that the guarantee had been validly invoked and that default occurred upon non-payment.

Further, the Bench observed that Singhal's alleged lack of personal benefit from the loan facilities was immaterial under Sections 127 and 128 of the Contract Act, as the liability of a surety is co-extensive with that of the principal debtor. It also found that the application was filed within the limitation period, having been instituted in June 2025.

Accordingly, the NCLT admitted the application and initiated the insolvency resolution process against Singhal. It imposed a moratorium for 180 days and confirmed MVK IPE LLP as the Resolution Professional.