Subsequent Demand Notices Cannot Create Fresh Cause Of Action Against Personal Guarantor: NCLT Mumbai

On 23 April, the Mumbai Bench of the National Company Law Tribunal (NCLT) held that subsequent demand notices issued to a personal guarantor do not give rise to a fresh cause of action for initiating proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016, and that limitation must be computed from the first invocation of the guarantee.

Section 95 deals with the initiation of insolvency resolution process against a personal guarantor to a corporate debtor.

A Bench comprising Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar dismissed the application filed by Canara Bank against the personal guarantor of Ultra Drytech Engineering Ltd. It held:

“It is trite that a demand upon the personal guarantor to pay the outstanding due from the Principal Borrower constitutes the invocation of the personal guarantee executed by the personal guarantor and the limitation runs from the expiry of period specified in the first demand notice. Further, any subsequent demands after first notice of demand are not relevant for the purpose of determination of limitation.”

Canara Bank filed an application under Section 95(1) of the IBC against the personal guarantor of Ultra Drytech Engineering. The bank had extended credit facilities to the corporate debtor, which later defaulted in repayment, and issued a demand notice to the personal guarantor seeking recovery of over Rs. 42 crores. The Resolution Professional supported admission of the application.

The personal guarantor objected, submitting that the bank had already invoked the guarantee through a 2017 demand notice, and that the present proceedings were barred by limitation.

Canara Bank, in reply, stated that it issued a fresh demand notice in 2024 and argued that each demand constitutes a fresh invocation of the guarantee, giving rise to a new cause of action.

The NCLT examined the record and noted that the 2017 notice had been issued to both the principal borrower and the personal guarantors, calling upon them to discharge the dues. It also recorded that the corporate debtor entered the Corporate Insolvency Resolution Process (CIRP) in 2017 itself.

Rejecting the plea for a fresh cause of action, the Tribunal held that subsequent demands after the first notice are irrelevant for computing limitation. It observed:

“….the notice dated 25.01.2017 forms part of the application filed by the Applicant Creditor herein before DRT, which constitutes admission on part of the Applicant Creditor before a Court of Law as to the genuineness, including its contents, of the said document as well as its due service upon the notice(s) and such admission binds the applicant creditor. Accordingly, in our considered view, the limitation starts running from the expiry of 7 days from the date of receipt of said notice.”

Accordingly, the NCLT dismissed the application.