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Introduction
On 28th February 2025, the National Company Law Appellate Tribunal (‘NCLAT’) in the case of State Bank of India v. Mr Deepak Kumar Singhania1, clarified that 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 2019’) does not amount to a valid invocation of the purpose of initiating resolution proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). This ruling is a significant legal clarification concerning insolvency proceedings against personal guarantors. I an light of the above judgment, this article discusses the ambiguity of whether a statutory demand notice under Rule 7(1) of the Rules 2019 can be treated as an invocation of guarantee.
Brief Facts
The State Bank of India (“Appellant”) extended financial assistance to LML Limited (“Corporate Debtor”), for which Mr. Deepak Kumar Singhania (“Respondent”) executed a personal guarantee along with two other guarantors. Following the default of the corporate debtor, the company underwent liquidation as per the order dated 23.03.2018. Subsequently, the appellant issued a demand notice under Rule 7(1) of the Rules 2019 on 04.05.2022, demanding payment of Rs. 125.05 crore from the respondent. The appellant bank then filed an application under Section 95 IBC before the NCLT, 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 2019. Appellant 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
The pertinent issue was whether a statutory demand notice issued under Rule 7(1) of the Rules 2019 constitutes a valid invocation of the personal guarantee for initiating insolvency proceedings under Section 95 of the IBC. The NCLAT upheld the NCLT’s order and dismissed the appeal. It ruled that the statutory demand notice under Rule 7(1) of the Rules 2019 does not qualify as a valid invocation of the personal guarantee. The key legal principles established are as under:
Invocation of guarantee is a prerequisite
As per the terms of the deed, invocation of the guarantee as per the terms of the deed is a prerequisite for initiating the insolvency resolution process under Section 95 IBC. The Appellant, SBI argued that the demand notice under Rule 7(1) of the Rules 2019 issued in Form-B, should be treated as an invocation of the personal guarantee. However, the NCLAT held that a demand notice issued 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 invoking the guarantee is a separate contractual obligation that must be fulfilled before any claim against the guarantor can arise. Without proper invocation, no debt becomes due from the guarantor, and consequently, no default arises under the IBC.
The tribunal relied on the Supreme Court and NCLAT rulings in Syndicate Bank v. Channaveerappa Beleri2 and Archana Deepak Wani v. Indian Bank3, where the courts emphasised that a guarantor’s liability depends entirely 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 was previously reaffirmed in Pooja Ramesh Singh v. State Bank of India, where it was held by NCLAT that default on a guarantee arises only after it is invoked as contemplated in the deed of guarantee.
Further NCLAT reiterated that a personal guarantor can only be considered in default after the guarantee has been invoked, as default under Section 3(12) IBC 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 the SBI issued the Rule 7(1) demand notice, making its Section 95 application unsustainable.
‘Personal Guarantor’ under Section 5(22) IBC vs. ‘Guarantor’ under Rule 3(1)(e) of the Rules 2019
The NCLAT distinguishes between the definition of ‘Personal Guarantor’ under Section 5(22) IBC and ‘Guarantor’ under Rule 3(1)(e) of the Rules 2019. It concludes that Rule 3(1)(e) applies in cases under Section 95 since both provisions fall under Part III of the IBC, whereas Section 5(22) falls under Part II of the IBC. This distinction is significant because, under Rule 3(1)(e), a ‘Guarantor’ refers to a debtor who is a personal guarantor to a corporate debtor and whose guarantee has been invoked by the creditor but remains unpaid, either in full or in part.
The Definition of “Guarantor” Under Rule 3(1)(e) of the Rules 2019 requires dual conditions to be met and it is clarified by the judgment: (1) A personal guarantor to a corporate debtor AND
(2) A person whose guarantee has been invoked and remains unpaid.
The appellant 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.P4., 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.
Conclusion
The NCLAT’s ruling in SBI v. Deepak Kumar Singhania5 is a landmark decision that reinforces the necessity of adhering to both contractual and statutory requirements before initiating insolvency proceedings against personal guarantors. By clarifying that a demand notice under Rule 7(1) does not substitute the formal invocation of a guarantee, the judgment safeguards due process and prevents premature insolvency actions. This decision strengthens procedural discipline, ensuring that creditors follow proper legal channels while offering personal guarantors protection against unwarranted liability.
1 Company Appeal (AT) (Insolvency) No. 191 of 2025, NCLAT
2 (2006) 11 SCC 506
3 Company Appeal (AT) (Ins.) No.301 of 2023, NCLAT
4 (1969) 1 SCR 219
5 Company Appeal (AT) (Insolvency) No. 191 of 2025, NCLAT
