Non-Production Of Guarantee Deed Not Fatal Where Loan Agreement Establishes Personal Guarantor's Liability: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Chennai has recently held that insolvency proceedings against a personal guarantor cannot be invalidated solely because a separate deed of guarantee has not been placed on record.

The tribunal ruled that where the guarantor's status and liability are evident from the loan agreement and other documents, the proceedings can indeed continue.

A bench of Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain delivered the ruling while dismissing an appeal filed by Raiz Basheerudeen, who challenged insolvency proceedings initiated against him as a personal guarantor of Furnace Fabrica (India) Ltd.

“The purpose of the deed of guarantee is to establish a liability, which will be restricted by the terms of the contract in an event of default by the principal borrower. But once the status of the Personal Guarantor itself is a fact, which stands determined and settled by the own conduct of the Personal Guarantor having signed the loan agreement, that itself will meet the object and the necessity of execution of the deed of guarantee.”, the tribunal observed.

The dispute arose from financial facilities extended by Tata Capital Financial Services Ltd to Furnace Fabrica in 2019. After the company defaulted and its account was classified as a non-performing asset, Tata Capital initiated insolvency proceedings against Basheerudeen in his capacity as a personal guarantor.

Basheerudeen challenged the proceedings on the ground that the deed of guarantee dated 30 May 2019 had not been produced before the tribunal. According to him, his liability as a personal guarantor could not be established in the absence of that document.

Tata Capital argued that Basheerudeen had signed the loan agreement as a guarantor and had never disputed that status. It maintained that non-production of the guarantee deed did not affect the proceedings because the loan documents themselves recorded his role as guarantor.

The tribunal noted that Basheerudeen had not denied executing the loan agreement. It also recorded that he had never alleged fraud in relation to his signatures appearing on the documents in his capacity as a personal guarantor.

Referring to the loan agreement, the tribunal noted that the document described Basheerudeen as a guarantor and contained provisions relating to the guarantee. The tribunal also noted that he had not disputed the existence of the guarantee documents.

“Therefore, in case under the given circumstances the very tenements of the deed of guarantee, and the purpose for which it is executed (that is to secure a loan), stands satisfied by the contents of the loan agreement itself, that itself will meet the object and the purpose of execution of the deed of guarantee, which is the case in the instant appeal where guarantor himself is the signatory to the loan agreement.”, the tribunal opined. 

The tribunal also referred to the Kerala High Court's decision in PJ Rajappan v. Associated Industries Private Limited, which held that courts should not adopt a hyper-technical approaach while determining a guarantor's liability

Applying that principle, the tribunal found that Basheerudeen's admissions, the loan agreement and the admitted letter of guarantee were sufficient to establish his status as a personal guarantor.

“When there is no plea of fraud ever raised in relation to the signature of the Applicant in the status of Personal Guarantor, appearing in the loan agreement itself, the Appellant now cannot deny the liability of his status as that being of a Personal Guarantor.”

Holding that the absence of a separate deed of guarantee did not vitiate the proceedings, the tribunal dismissed the appeal.