SARFAESI Notice Not Invocation Of Personal Guarantee For Insolvency: NCLT Jaipur

The National Company Law Tribunal (NCLT) at Jaipur has held that a SARFAESI notice cannot, by itself, amount to invocation of a personal guarantee for initiating insolvency proceedings against a personal guarantor.

A bench of Judicial Member Reeta Kohli and Technical Member Kavita Bhatnagar observed that enforcement of security interest under the SARFAESI Act and invocation of a personal guarantee are “conceptually and legally distinct.”

The tribunal observed, “Merely because a SARFAESI notice may have been addressed to borrower and guarantor for enforcement of security interest, it does not automatically follow that the guarantee stood invoked for the purpose of personal insolvency proceedings under Section 95 of the Code.”

The tribunal further held that prior invocation is mandatory. It observed, "Rule 3(1)(e) explicitly requires that the guarantee must have been invoked and must remain unpaid. This requirement cannot be diluted or bypassed.”

The ruling came while rejecting Bank of Baroda's insolvency plea against Amit Prakash Gupta, personal guarantor of U.N. Automobiles Pvt Ltd. The company is already undergoing corporate insolvency resolution proceedings before the tribunal.

The Bank of Baroda submitted that the corporate debtor had originally availed credit facilities from the State Bank of India. These facilities were later taken over by the bank. It further submitted that Gupta had executed multiple guarantee deeds securing the facilities.

Following defaults by the corporate debtor, recovery proceedings were initiated before the Debts Recovery Tribunal in Jaipur. The parties then entered into a one-time settlement. The bank submitted that the settlement failed due to non-compliance, reviving the liability.

The bank later issued a demand notice to Gupta before filing the insolvency application. The resolution professional recommended admission of the plea. The RP relied on loan documents, guarantee deeds, recovery certificate, demand notice and other material to conclude that debt and default stood established.

Gupta opposed the proceedings, arguing that the guarantee had never been validly invoked before the insolvency filing. He contended that neither the SARFAESI notice nor the pre-insolvency demand notice could amount to invocation of the guarantee. He also pointed out that the SARFAESI notice relied upon had already been quashed by the DRT Jaipur.

The tribunal observed that the bank had not specifically pleaded that the guarantee was invoked through the SARFAESI notice. It held that invocation of a guarantee is a distinct contractual act requiring a clear demand upon the guarantor to discharge the debt.

It also rejected the bank's reliance on the recovery certificate issued in DRT proceedings.

"Recovery Certificate is the result of adjudication or consent before a recovery forum. Its purpose is to certify the amount recoverable and enable recovery in accordance with the applicable law. However, invocation of guarantee is not the same as adjudication of liability. Invocation is a demand borne out of a contract. It is the creditor's act of calling upon the guarantor to perform his obligation under the contract of guarantee.” the tribunal observed.

The tribunal further held that the pre-insolvency demand notice was merely a procedural requirement. It could not replace the prior invocation of the guarantee.

Holding that no valid invocation had been established before the filing of the insolvency application, the tribunal rejected the plea. It also lifted the interim moratorium.

For RP: Advocates Prabhansh Sharma, Nagendra Singh Adha, Sristhi and Rohini

For FC: Advocates Shivangshu Naval and Akanksha Noval

For PG: Advocates Karan Pratap Singh, Nishant Saraf and Rishika Pareek