NCLT Mumbai: Liability Of The Corporate Debtor Shall Arise Only When Demand Made By The Financial Creditor On The Corporate Debtor/ Guarantor

NCLT Mumbai: Liability Of The Corporate Debtor Shall Arise Only When Demand Made By The Financial Creditor On The Corporate Debtor/ Guarantor

The National Company Law Tribunal (NCLT) Mumbai bench comprising Justice K. R. Saji Kumar (Judicial Member) and Sanjiv Dutt (Technical Member) held that notice to Corporate Debtor recalling loan facility doesn't constitute Demand on Corporate Guarantor.

Background Facts

The State Bank of India (SBI), as the financial creditor, provided various credit facilities to Deogiri Infrastructure Private Limited (the Principal Borrower). Navjeevan Tyres Private Limited (the Corporate Debtor) furnished a corporate guarantee to SBI for the repayment of the Principal Borrower's outstanding dues.

Due to default in payments, SBI categorized the loan account of the Principal Borrower as a Non-Performing Asset (NPA) on 30.10.2018. Subsequently, on 10.04.2019, SBI issued a notice under Section 13(2) of the SARFAESI Act, 2002, to the Principal Borrower, demanding full repayment of Rs. 33.22 crores, along with an outstanding bank guarantee of Rs. 8.10 crores as of 31.03.2019, within sixty days.

Following the Principal Borrower's failure to repay the aforementioned amounts, SBI initiated a Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), which is currently ongoing. Concurrently, exercising its right to take action against the corporate guarantor under the IBC, SBI filed a CIRP application against Navjeevan Tyres Private Limited before the National Company Law Tribunal (NCLT) in Mumbai.

NCLT Verdict

The NCLT Mumbai rejected the application, ruling that a notice sent to the Corporate Debtor recalling the loan facility did not constitute a demand on the Corporate Guarantor. The Tribunal concluded that the CIRP petition was not maintainable because the Financial Creditor had not formally demanded repayment of the debt or invoked the guarantee against the Corporate Debtor. It cited the Supreme Court's decision in Syndicate Bank vs. Channaveerappa Beleri & Ors., emphasizing that the guarantor's liability hinges on the terms of their contract. Specifically, Clause 1 of the Guarantee Agreement dated 23.05.2014 stipulated that the guarantee would become payable to the Financial Creditor upon demand. Therefore, the liability of the Corporate Debtor would only arise upon such a demand being made by the Financial Creditor.

Additionally, the Tribunal noted that the legal notice dated 08.10.2018, which was sent to the Principal Borrower and the guarantors, including the Corporate Debtor, demanding payment within 10 days, did not reference the guarantee agreements and was not served to the correct address. This improper service rendered the notice ineffective for invoking the guarantee.

The NCLT Mumbai highlighted that SBI's legal notice dated 10.04.2019 under Section 13(2) of the SARFAESI Act, 2002 was directed solely to the Principal Borrower and did not indicate any intent to invoke the corporate guarantee. It referenced a similar case, State Bank of India v. Shaliwahan Farms Pvt. Ltd., where the Tribunal dismissed a petition on the grounds that issuing a notice to the corporate debtor to recall the loan facility does not constitute a demand on the guarantor.

Additionally, the Tribunal determined that the publication of its demand notice dated 22.04.2019 under Section 13(2) of the SARFAESI Act, 2002 through newspaper publication was intended as alternative service and did not mention the guarantee agreements. Citing the Supreme Court's decision in Neerja Realtors Private Limited vs. Janglu (dead) Through Legal Representatives, it emphasized that substitute service by publication is invalid unless attempts at primary service have failed. The NCLT concluded that proper service had not been demonstrated, rendering the publication invalid.

In summary, the NCLT Mumbai observed that there was no evidence that SBI had demanded payment from the Corporate Debtor/Guarantor by invoking the guarantee or that the Corporate Debtor had defaulted on its obligations under the Guarantee Agreements. Consequently, since the prerequisite condition for initiating CIRP under Section 7 of the IBC had not been met, the CIRP application was deemed unenforceable.