The recent judgment of the National Company Law Appellate Tribunal (“NCLAT”) in State Bank of India v. Deepak Kumar Singhania (2025) ibclaw.in 153 NCLAT, has clarified an important point of law regarding insolvency proceedings against personal guarantors. The judgment resolves ambiguity on whether a statutory demand notice under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (“Rules”) can be treated as an invocation of guarantee. The Tribunal has unequivocally held that a demand notice under Rule 7(1) of the Rules serves only as a statutory prerequisite before initiating insolvency proceedings but does not constitute an invocation of the guarantee itself. The decision holds that before initiating insolvency resolution process against a personal guarantor under Section 95 of the Insolvency and Bankruptcy Code, 2016 (“Code”), the creditor must first invoke the guarantee as per the terms of the deed of guarantee. Without such invocation, the insolvency proceedings are not maintainable.

Facts of the Case

The State Bank of India (“SBI”) extended financial assistance to LML Limited, for which Mr. Deepak Kumar Singhania executed a personal guarantee along with two other guarantors. Following the default of LML Limited, the company underwent liquidation as per the order dated 23.03.2018. Subsequently, SBI issued a demand notice under Rule 7(1) of the Rules on 04.05.2022, demanding payment of Rs. 125.05 crore from Singhania. SBI then filed an application under Section 95 of the Code before the National Company Law Tribunal, Allahabad Bench, which was dismissed on the ground that the guarantee had not been invoked prior to issuance of the demand notice under Rule 7(1) of the Rules. SBI challenged this dismissal before the NCLAT, arguing that the demand notice itself should be treated as an invocation of the guarantee, a contention that was ultimately rejected by the Appellate Tribunal.

Key Legal Principles Established by the Judgment

Invocation of Guarantee as per Terms of the Deed of Guarantee is a Prerequisite for Initiating Insolvency Resolution Process Under Section 95 of the Code

The NCLAT ruled that a creditor must first invoke the personal guarantee as per the terms of the deed of guarantee for an application under Section 95 of the Code to be entertained. Without invocation, there is no due debt against the guarantor, and therefore, no default occurs. The Tribunal emphasized that a guarantee is a contractual obligation, and liability on the guarantor arises only when the creditor formally invokes it. This ruling is in line with previous Supreme Court decisions, which have emphasized that a guarantor’s liability depends entirely on the terms of the contract. For instance, in Syndicate Bank v. Channaveerappa Beleri (2006) 11 SCC 506, the Supreme Court held:

“A guarantor’s liability depends upon the terms of his contract. A “continuing guarantee” is different from an ordinary guarantee. There is also a difference between a guarantee which stipulates that the guarantor is liable to pay only on a demand by the creditor, and a guarantee which does not contain such a condition. ……. We have referred to these aspects only to underline the fact that the extent of liability under a guarantee as also the question as to when the liability of a guarantor will arise, would depend purely on the terms of the contract.”

Therefore, unless a guarantee explicitly provides for automatic liability, formal invocation remains a necessary step before any legal action against the guarantor can proceed. This principle was previously reaffirmed in Pooja Ramesh Singh v. State Bank of India (2023) ibclaw.in 280 NCLAT, where the NCLAT held that default on a guarantee arises only after it is invoked as contemplated in the Deed of Guarantee.

A Demand Notice Under Rule 7(1) of Rules is Not Equivalent to Invocation of Guarantee

The Appellant, SBI argued that the demand notice under Rule 7(1) of the Rules, issued in Form-B, should be treated as an invocation of the personal guarantee. SBI contended that since this notice demanded payment within 14 days, it effectively constituted an invocation of the guarantee, fulfilling the prerequisite for initiating insolvency proceedings against the personal guarantor under Section 95 of the Code. However, the NCLAT rejected this argument, holding that a demand notice under Rule 7(1) serves only as a statutory requirement before initiating insolvency proceedings and does not replace the contractual requirement of formally invoking the guarantee. The Tribunal emphasized that invocation of the guarantee is a separate contractual action, which must be carried out in accordance with the terms of the Deed of Guarantee before any claim against the guarantor can arise. Without such invocation, there is no due debt from the guarantor, and consequently, no default under the Code.

Furthermore, NCLAT reiterated that a personal guarantor can only be considered in default after the guarantee has been invoked, as default under Section 3(12) of the Code refers to the non-payment of a debt that has already become due. Since the guarantee was never invoked, no debt was due from the personal guarantor at the time SBI issued the Rule 7(1) demand notice, making its Section 95 application unsustainable.

The Definition of “Guarantor” Under Rule 3(1)(e) of the Rules Requires Both Conditions to be Met

The judgment clarifies that, under Rule 3(1)(e) of the Rules, a “guarantor” is defined as:

A personal guarantor to a corporate debtor AND

A person whose guarantee has been invoked and remains unpaid.

SBI contended that the word “and” should be read as “or”, so that a person could be treated as a guarantor even if the guarantee was not invoked. NCLAT rejected this argument, holding that both conditions must be satisfied. The Tribunal relied on the Supreme Court’s ruling in Ishwar Singh Bindra v. State of U.P. (1969) 1 SCR 219, where the Court noted that “and” can sometimes be read as “or,” but only where the context makes this necessary. However, in this case, reading “and” as “or” would defeat the legislative intent and create liabilities for personal guarantors on debts that have not become due.

The Appellate Tribunal’s judgment reinforces that, as per Section 3(12) of the Code, “default” means non-payment of a debt that has become due. A personal guarantor only becomes liable after the creditor invokes the guarantee and demands payment. If the guarantee is not invoked, the debt is not “due” from the guarantor, and therefore, no “default” exists.

Implications of the Judgment

Creditors must ensure they first invoke the guarantee as per the guarantee deed before proceeding under Section 95 of the Code. A Rule 7(1) demand notice alone does not suffice. Failing to comply with this legal requirement could result in dismissal of insolvency applications, as seen in the present case. For personal guarantors, this ruling provides protection against premature insolvency proceedings where the guarantee has not been properly invoked. It reaffirms the principle that a guarantor cannot be held liable unless the creditor follows the due contractual and legal processes.

Conclusion

The NCLAT’s ruling in SBI v. Deepak Kumar Singhania is a landmark decision that reinforces the need to follow due process in insolvency proceedings against personal guarantors. The judgment makes it clear that:

Guarantee invocation is a mandatory precondition for insolvency proceedings.

Demand notices under Rule 7(1) do not replace the requirement of guarantee invocation.

The definition of “guarantor” under Rule 3(1)(e) requires both conditions (being a guarantor AND an invoked guarantee) to be fulfilled.

Author: Anuj Shah, Counsel, DMD Advocates