Invocation of personal guarantee required before treating guarantor as debtor; failure to invoke invalidated admission order.

The deed of guarantee makes guarantor liability contingent on a formal demand/invocation; express clauses require invocation in a specified manner, and a subsequent settlement/MoU did not displace that requirement, so invocation is necessary before proceedings. The Form B dated 27.02.2020 and Rule 7(1) notice do not, without separate compliance with the deed, constitute invocation; consequently the guarantee was not invoked before filing the Section 95(1) application and the admission order was set aside. The creditor remains free to invoke the guarantee correctly and pursue remedies thereafter.

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Issues: (i) Whether the deed of guarantee dated 13.10.2015 contemplates invocation of the guarantee by the financial creditor before instituting any proceeding against the personal guarantor; (ii) If yes, whether the financial creditor invoked the personal guarantee before filing the Section 95(1) application.

Issue (i): Whether the deed of guarantee dated 13.10.2015 contemplates invocation of guarantee by the financial creditor before taking any proceeding against the personal guarantor.

Analysis: The guarantee deed contains express clauses (Clause 2, Clause 14 and Clause 32) that make guarantor liability contingent on demand by the Bank and prescribe the manner of making a demand. The Compromise and Settlement Agreement/MoU acknowledged the guarantees but did not expressly or by necessary implication alter the demand/invocation mechanism in the original deed. Clause 2.1 of the Compromise and Settlement Agreement acknowledges outstanding facilities and restates guarantor obligations but does not, on its terms, eliminate the requirement of invocation placed by the original guarantee deed. Clause 2.2 (suspension of existing events of default) preserves lenders' rights to invoke defaults in future, confirming that prior invocation requirements remain relevant.

Conclusion: The deed of guarantee contemplates invocation of the guarantee (issuance of demand) by the financial creditor before proceedings against the personal guarantor.

Issue (ii): If invocation is required, whether the financial creditor invoked the personal guarantee prior to filing the Section 95(1) application.

Analysis: The record shows issuance of a demand notice in Form B dated 27.02.2020, but no separate evidence of prior invocation of the guarantee as required by the deed of guarantee. The Tribunal's prior authority (State Bank of India v. Deepak Kumar Singhania) and Rule 3(1)(e) of the 2019 Rules were considered: a personal guarantor becomes a debtor for purposes of Section 95 only where guarantee has been invoked and remains unpaid. The Form-B requirement of dates when debt was due and default occurred presupposes default of the guarantor, which in turn arises only upon invocation consistent with the guarantee terms; Form-B cannot be treated as a substitute for invocation absent compliance with the deed.

Conclusion: The financial creditor did not invoke the personal guarantee prior to issuing the Form B demand and filing the Section 95(1) application; therefore invocation did not occur before filing.

Final Conclusion: Because the guarantee had to be invoked before initiating proceedings under Section 95 and the financial creditor did not invoke the guarantee prior to issuing the Form B demand and filing the Section 95 application, the admission order dated 03.05.2024 admitting the Section 95 application is unsustainable; the appeals are allowed. The decision does not preclude the financial creditor from taking such proceedings as may be permissible in law after valid invocation.

Ratio Decidendi: Where a personal guarantor's liability under a deed is triggered by a demand/invocation, a financial creditor must invoke the guarantee in accordance with its terms before a default by the guarantor can be said to exist for purposes of initiating proceedings under Section 95; a notice under Rule 7(1)/Form B does not, without more, constitute invocation of the guarantee.

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