Separate 'Invocation of Notice' Not Mandatory If Creditor's Demand Establishes Liability: NCLT Indore

The Indore Bench of the National Company Law Tribunal (NCLT) has held that a separate document expressly titled “invocation of guarantee” is not necessary to initiate insolvency proceedings against a personal guarantor if the creditor's communications clearly demand payment and establish liability under the guarantee.

A Bench of Judicial Member Brajendra Mani Tripathi and Technical Member Man Mohan Gupta admitted an application under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC), filed by Toyota Financial Services India Limited against Vidhi Rajpal, personal guarantor of Rajpal Abhikaran Private Limited, for an outstanding debt of Rs. 11.05 crore. It observed:

“The absence of a separate document bearing the heading “invocation of guarantee” is not, by itself, decisive if the Applicant's communications clearly demanded payment from the guarantor and asserted liability under the guarantee. The Deed of Guarantee must be read as a whole. If the guarantee deed permits the creditor to demand payment upon default of the borrower, a demand calling upon the guarantor to pay the outstanding dues may constitute invocation, even if the communication is not styled as a formal “invocation notice.””

Toyota Financial Services submitted that it had extended multiple inventory funding facilities and retail term loans to the corporate debtor. To secure these facilities, Vidhi Rajpal executed a Deed of Guarantee on 2 November 2016, undertaking liability for repayment.

After the corporate debtor defaulted, its account was classified as a non-performing asset on 17 November 2017. Toyota Financial Services subsequently issued a demand notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, on 2 November 2018.

The corporate debtor was admitted into the corporate insolvency resolution process (CIRP) on 26 March 2021. Toyota Financial Services later issued a statutory demand notice dated 11 October 2021 under the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

The Resolution Professional (RP), after examining the application, reported compliance with Section 95 of the IBC and found that the corporate debtor had defaulted, the creditor had invoked the personal guarantee through its demand communications, and the guarantor had failed to discharge the liability. The RP recommended admitting the application under Section 100 of the Code.

Vidhi Rajpal challenged the authority of the person who instituted the proceedings and questioned the maintainability of the application. She argued that Toyota Financial Services had not produced any document formally invoking the guarantee and that a demand notice under Section 13(2) of the SARFAESI Act could not constitute such invocation.

She also alleged that the RP had mechanically reproduced the contents of the application without independently verifying its particulars. Further, she contended that developments in the corporate debtor's CIRP, including approval of a resolution plan, had not been properly disclosed.

On the issue of authorisation, the Bench noted that Vidhi Rajpal had produced no evidence showing that the authority relied upon by the creditor was invalid or had been revoked. It held that technical objections could not override substantive documents establishing the debt, default and guarantee.

On invocation, the Tribunal observed that proceedings under Section 95 require the creditor to establish the debt, the guarantor's liability and the default. It noted that Toyota Financial Services had issued communications demanding payment from the guarantors, including Vidhi Rajpal, and subsequently issued the statutory demand notice under the Personal Guarantor Rules.

It also noted that Vidhi Rajpal had neither discharged the liability nor produced evidence of repayment despite repeated communications and opportunities provided by the RP.

The Bench clarified that a notice under Section 13(2) of the SARFAESI Act could not automatically be treated as a statutory demand notice under the IBC. However, the validity of the invocation had to be assessed by examining the substance of the creditor's communications and the surrounding circumstances, rather than the title of any individual document.

It further rejected the allegations of bias against the RP. It held that approval of a resolution plan in the corporate debtor's CIRP did not automatically extinguish the personal guarantor's liability unless the plan or applicable law operated to release or discharge that liability.

Accordingly, the NCLT admitted the application under Section 95 of the IBC and initiated the insolvency resolution process against Vidhi Rajpal under Section 100, imposing a moratorium under Section 101 of the Code.