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of <h1>Bank's Section 95 application dismissed as demand notice under Rule 7(1) cannot substitute proper guarantee invocation</h1> NCLAT Principal Bench dismissed the appeal by a banking institution against rejection of its Section 95 application. The court held that a demand notice ... Valid service of notice - Rejection of application u/s 95 filed by the State Bank of India - failure to satisfy the mandatory pre-requisite for issuing a legally valid demand notice under Rule 7(1) for filing such application - Whether the Demand Notice issued under Rule 7(1) of the 2019 Rules can be considered as Notice for invocation of guarantee for the purposes of filing Section 95 Application by a Creditor? HELD THAT:- The requirement of date, when the default occurred, itself contemplate the default by Guarantor, when Application is filed against Guarantor. Obviously, the default has to be of the Guarantor and mentioning of date when the default occurred, itself contemplate default on the part of Guarantor, i.e. invocation of guarantee as per Deed of Guarantee. Thus, non-mention of requirement of whether guarantee has been invoked and proof thereof, is inconsequential, since the date when default occurred is specifically asked for. This Tribunal in Archana Deepak Wani vs. Indian Bank [2023 (4) TMI 1081 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI] has held that liability of the Guarantor must be determined strictly in terms of the Deed of Guarantee. Another judgment, which has been relied by learned Counsel for the Respondent is judgment of this Tribunal in Pooja Ramesh Singh vs. State Bank of India [2023 (5) TMI 17 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI], where it was held that default in the guarantee arises only when after the guarantee has been invoked. Thus, default shall arise on the part of Guarantor only when Demand Notice is issued, as contemplated in the Deed of Guarantee. The submission of the Appellant that Notice under Rule 7 (1) issued in Form-B to the Guarantor, demanding repayment of the default amount, has to be treated as Notice for invoking guarantee, cannot be accepted. Default before issuance of Notice under Rule 7(1), must exist on the part of the Guarantor. Hence, the submission of the Appellant that Notice under Rule 7, sub-rule (1) is a Notice, invoking the guarantee, is rejected. Conclusion - The application under Section 95 is not maintainable due to the failure to invoke the guarantee as required by the contractual terms and the statutory framework. There is no error in the order of the Adjudicating Authority, rejecting Section 95 Application filed by the SBI. There is no merit in the Appeal. The Appeal is dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered was whether the Demand Notice issued 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 (2019 Rules) can be considered as a notice for invocation of guarantee for the purposes of filing an application under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC) by a creditor.2. ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and Precedents:The legal framework involves Section 95 of the IBC, which allows a creditor to initiate an insolvency resolution process against a personal guarantor. The 2019 Rules, particularly Rule 7, outline the process for serving a demand notice on the guarantor. The definition of 'guarantor' under Rule 3(1)(e) of the 2019 Rules requires that the guarantee be invoked and remain unpaid. The Court also considered the definition of 'personal guarantor' under Section 5(22) of the IBC and the definitions of 'debt' and 'default' under Section 3 of the IBC.Court's Interpretation and Reasoning:The Court interpreted that the demand notice under Rule 7(1) is intended to demand payment of an amount already in default. The Court emphasized that the default by the guarantor must exist prior to the issuance of the demand notice. The Court rejected the appellant's argument that the demand notice itself serves as an invocation of the guarantee. Instead, the Court held that the invocation of the guarantee is a separate contractual obligation that must be fulfilled before a default can be established.Key Evidence and Findings:The Court noted that the guarantee was executed on 28.03.2005, and the deed explicitly required a demand for payment to be made to invoke the guarantee. The appellant failed to demonstrate that the guarantee was invoked prior to issuing the demand notice in Form-B. The Court also considered the statutory definitions and the requirement for the demand notice to specify the date of default, which presupposes that a default has already occurred.Application of Law to Facts:The Court applied the statutory definitions and the terms of the deed of guarantee to conclude that the demand notice under Rule 7(1) cannot serve as a notice for invocation of the guarantee. The Court found that the appellant did not fulfill the requirement of invoking the guarantee as per the contractual terms, which is necessary to establish a default and proceed under Section 95 of the IBC.Treatment of Competing Arguments:The Court rejected the appellant's argument that the word 'and' in the definition of 'guarantor' under Rule 3(1)(e) should be read as 'or' to avoid an absurd result. The Court held that such an interpretation would be contrary to the statutory scheme and the legislative intent. The Court also dismissed the appellant's reliance on the definition of 'personal guarantor' under Section 5(22) of the IBC, as it was not applicable to the initiation of insolvency proceedings against a personal guarantor.Conclusions:The Court concluded that the demand notice under Rule 7(1) cannot be considered as a notice for invocation of the guarantee. The application under Section 95 was not maintainable due to the lack of invocation of the guarantee, and the appeal was dismissed.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning:'Guarantor with regard to whom guarantee has not been invoked, shall not be a Debtor and no default can be committed by Guarantor, unless guarantee is invoked as per the terms of Deed of Guarantee.''The insolvency resolution process against a Guarantor, against whom debt has not become due, is not understandable.'Core Principles Established:The Court established that the invocation of a guarantee is a prerequisite for establishing a default under the IBC. The demand notice under Rule 7(1) cannot substitute for the invocation of a guarantee. The statutory definitions and contractual terms must be adhered to strictly.Final Determinations on Each Issue:The Court determined that the application under Section 95 was not maintainable due to the failure to invoke the guarantee as required by the contractual terms and the statutory framework. The appeal was dismissed, and the order of the Adjudicating Authority was upheld.
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