NCLT Mumbai: Notice To Corporate Debtor Recalling Loan Facility Not A Demand on Guarantor

NCLT Mumbai: Notice To Corporate Debtor Recalling Loan Facility Not A Demand on Guarantor

The National Company Law Tribunal (NCLT) Mumbai bench, consisting of Justice K. R. Saji Kumar (Judicial Member) and Mr. Sanjiv Dutt (Technical Member), ruled that a notice issued to a Corporate Debtor recalling a loan facility does not amount to a demand on the Corporate Guarantor.

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

On October 30, 2018, due to payment defaults, SBI classified the Principal Borrower's loan account as a Non-Performing Asset (NPA). Subsequently, on April 10, 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, with a bank guarantee outstanding of Rs. 8.10 crores as of March 31, 2019, within sixty days.

Upon failure to repay the specified amounts, SBI initiated a Corporate Insolvency Resolution Process (CIRP) against the Principal Borrower under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), which remains pending. Concurrently, exercising its right to initiate simultaneous action against the corporate guarantor under the IBC, SBI filed a CIRP application against Navjeevan Tyres Private Limited before the NCLT Mumbai.

The NCLT Mumbai dismissed the application, concluding that a notice to the Corporate Debtor recalling the loan facility does not constitute a demand on the Corporate Guarantor.

The Tribunal found the CIRP petition to be unmaintainable, stating that the Financial Creditor had not made any specific demand for debt repayment or invoked the guarantee against the Corporate Debtor. Referencing the Supreme Court's ruling in Syndicate Bank v. Channaveerappa Beleri & Ors., it was noted that a guarantor's liability is contingent upon the terms of their contract. In this case, Clause 1 of the Guarantee Agreement dated May 23, 2014, specified that the guarantee was unconditionally payable to the Financial Creditor upon demand. Thus, the Corporate Debtor's liability would arise only upon a formal demand from the Financial Creditor.

The Tribunal further noted that the legal notice dated October 8, 2018, sent to the Principal Borrower and guarantors, including the Corporate Debtor, requesting payment within ten days, did not refer to the guarantee agreements and was not sent to the correct address. This improper service led to the non-invocation of the guarantee.

The NCLT highlighted that SBI's legal notice dated April 10, 2019, issued under Section 13(2) of the SARFAESI Act, 2002, was addressed solely to the Principal Borrower and did not indicate an intent to invoke the corporate guarantee. It also referred to a related case, State Bank of India v. Shaliwahan Farms Pvt. Ltd., where the Tribunal ruled that sending a notice to the corporate debtor to recall the loan facility does not equate to a demand on the guarantor.

Additionally, the Tribunal ruled that the paper publication of the demand notice dated April 22, 2019, under Section 13(2) of the SARFAESI Act, 2002, served as a substitute service and did not reference the guarantee agreements. Citing the Supreme Court's decision in Neerja Realtors Private Limited v. Janglu (dead) Through Legal Representatives, which stated that substitute service by publication is invalid unless primary service attempts have failed, the NCLT ruled that proper service was not demonstrated, making the publication invalid.

In conclusion, the NCLT Mumbai determined that there was no evidence that SBI had made a demand on the Corporate Debtor/Guarantor by invoking the guarantee, or that the Corporate Debtor had defaulted under the Guarantee Agreements. Therefore, the prerequisite condition for initiating CIRP under Section 7 of the IBC was not satisfied, rendering the CIRP application unmaintainable.