NCLAT Sets Aside Insolvency Process Against HNGIL Guarantor, Says Compromise Didn't Waive Guarantee Invocation

The National Company Law Appellate Tribunal (NCLAT) at Delhi has recently set aside the NCLT Kolkata's order admitting DBS Bank's Section 95 application against Mukul Somany, a personal guarantor of Hindustan National Glass & Industries Ltd, holding that the bank had not invoked the guarantee before initiating insolvency proceedings.

The appellate tribunal reiterated that where a guarantee deed requires a demand by the lender, invocation of the guarantee is a mandatory pre-condition before issuing a demand notice in Form B and filing proceedings under Section 95 of the Insolvency and Bankruptcy Code.

DBS Bank had extended a foreign currency loan to Hindustan National Glass & Industries Ltd (HNGIL) in 2011. A Facility Agreement was executed on September 28, 2011. Deeds of guarantee were executed on October 13, 2015 by the Somany brothers in favour of the bank.

In 2018, a Memorandum of Understanding dated August 27 and a Compromise and Settlement Agreement dated September 25 were entered into between the borrower, guarantors and secured creditors.

After default, the bank filed a Section 7 CIRP application against HNGIL on February 3, 2020. On February 27, 2020, it issued a demand notice in Form B under Rule 7(1) of the 2019 Rules to the personal guarantors. A Section 95 application was filed on October 15, 2020.

The NCLT Kolkata admitted the Section 95 application on May 3, 2024. That order was challenged before the NCLAT.

Before the appellate tribunal, Somany argued that under the terms of the guarantee deed, the guarantor's liability arose only “upon the demand of the Bank,” and that no separate notice invoking the guarantee had been issued prior to the Form B notice. It was contended that the only notice on record was the Form B notice itself.

Examining the guarantee deed, the tribunal observed:

“The provision of guarantee thus, clearly contemplated issuance of demand notice i.e. invoking the guarantee for demanding any amount.”

It noted that while a Form B notice had been issued, no prior invocation of the guarantee had been shown.

Allowing the appeal, a bench of Chairperson Justice Ashok Bhushan and technical members Barun Mitra and Arun Baroka held:

“We, thus, are of the view that clauses of guarantee deed, as noticed above, were not modified or superseded by Compromise and Settlement Agreement or MoU. The liability of the guarantor was thus on demand being made by the Bank, hence, invocation of guarantee was necessary before issuing demand notice under Form B."

The bank had argued that the 2018 Compromise and Settlement Agreement dispensed with the requirement of fresh invocation and that upon default the guarantors became liable automatically. The tribunal rejected that submission, stating:

“We are unable to accept the submission of the Counsel for the Respondent that after Compromise and Settlement Agreement dated 25.09.2018, there was no necessity to invoke the guarantee deed.”

Drawing on its earlier ruling in State Bank of India vs. Mr. Deepak Kumar Singhania, the tribunal noted:

“Default before issuance of Notice under Rule 7(1), must exist on the part of the Guarantor. Hence, we reject the submission of the Appellant that Notice under Rule 7, sub-rule (1) is a Notice, invoking the guarantee.”

Setting aside the May 3, 2024 admission order, the tribunal clarified that dismissal of the Section 95 application “shall not preclude the Financial Creditor to take such proceeding as permissible in law.”