2026 (2) TMI 741 - AT - IBC

Continuing guarantee invocation cannot be supplied by Form B; prior demand and resultant default are required before insolvency proceedings.

A demand notice in Form B cannot substitute for a prior invocation where the guarantee is a continuing on demand guarantee: the statutory scheme requires ... Invocation of guarantee - demand notice in Form B under Rule 7(1) of the Personal Guarantor Rules, 2019 - definition of 'guarantor' in Rule 3(1)(e) of the Personal Guarantor Rules, 2019 - requirement of default by guarantor at the time of issuance of Form B - Whether the demand notice issued u/s 7(1) of the 2019 Rules may be considered as notice for invocation of guarantee for the purpose of filing an application by a creditor u/s 95 of the Code? - Invocation of guarantee - demand notice in Form B under Rule 7(1) of the Personal Guarantor Rules, 2019 - HELD THAT:-It is evident that the guarantor within the meaning of 2019 Rules suggest a debtor who is a personal guarantor to a CD and in respect of whom guarantee has been invoked by the creditor and the same has remained unpaid either in full or in part. A perusal of the Rule 1(1) would reflect that demand notice under clause (b) of sub-section (4) of Section 95 is required to be served on the guarantor demanding payment of the amount of default in form B. Sub- Section (4) of Section 95 as stated earlier refers to the documents pertaining to the debts owed by the debtor to the creditor and Rule 7 (1) of 2019 Rules contemplates service of demand notice under clause (b) of sub-section (4) on the guarantor, demanding payment of the amount of default in form B. A conjoint reading of Section 95(4) and Rule 7 of 2019 Rules would indicate the complete mechanism and requirements necessary to move an application under Section 95 of the Code against Guarantor. This Appellate Tribunal comprising three Hon’ble Members has clearly laid down the law that it would be mandatory on the part of the Financial creditor to invoke the guarantee before issuing a notice under Rule 7(1) in Form B of 2019 Rules and also that default before issuance of such notice must exist on the part of the guarantor and has therefore rejected the submissions as canvassed by the Appellant by holding that the notice given under Rule 7(1) of 2019 Rules is not a notice for the purpose of invoking the guarantee. Interpretation of Section 95(4) of the Insolvency and Bankruptcy Code, 2016 - It is an admitted position that no notice for the purpose of invocation of guarantee prior to issuance of notice under Rule 7(1) of 2019 Rules has been given by the financial creditor/ Respondent in the instant case and keeping in view the aforesaid facts and circumstances we do not want to take any other view which has been taken by coordinate Benches of this Appellate Tribunal in the aforesaid cases and hold that there is no default in absence of any notice of invocation and therefore, the Adjudicating Authority appears to have committed a mistake in admitting the petition and the impugned order for the reasons mentioned herein before is required to be set aside and is accordingly set aside and as a result, the appeal is allowed. Before parting with the judgment we consider it necessary to place on record the conduct of the concerned officials/officers of the financial creditor-UCO Bank in filing the application under Section 95 of the Code against the guarantor-appellant, without invoking the guarantee. In our considered opinion this lapse on the part of the officials/officers of the Bank is required to be brought in the knowledge of the top officials of the UCO Bank. Thus, a copy of this judgment be also forwarded to the Chairman UCO Bank for information. Issues: (i) Whether a demand notice issued in Form B 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 can be treated as a notice invoking a continuing guarantee for the purpose of initiating proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016.Analysis: The statutory scheme requires that an application under Section 95 of the Insolvency and Bankruptcy Code, 2016 be accompanied by particulars demonstrating (inter alia) the debt owed by the debtor, failure to pay within fourteen days of service of a notice of demand and relevant evidence of default. Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 prescribes service of a demand notice under clause (b) of sub-section (4) of Section 95 in Form B. Rule 3(1)(e) of the 2019 Rules defines 'guarantor' as a person in respect of whom the guarantee has been invoked by the creditor and remains unpaid in full or part. The definitions of 'debt' and 'default' in Sections 3(11) and 3(12) of the Code indicate that debt must be due and default is non-payment when the debt is due and payable. The deed of guarantee in the case is a continuing on-demand guarantee which makes the guarantor liable only upon demand in terms of the guarantee deed. Coordinate decisions of this Tribunal have held that where the deed of guarantee makes liability contingent on a demand, default on the part of the guarantor arises only after invocation/demand as per the guarantee, and that notice in Form B under Rule 7(1) is not a separate substitute for a prior invocation when the guarantee requires an explicit demand. Applying these principles to the admitted facts that no separate invocation/demand preceded issuance of Form B, the requirement that the guarantor's liability be invoked before initiating Section 95 proceedings is not satisfied.Conclusion: Issue (i) is answered in favour of the appellant. A demand notice in Form B under Rule 7(1) of the 2019 Rules cannot be treated as a notice invoking a continuing guarantee where the deed of guarantee requires a distinct invocation; in absence of prior invocation and resultant default by the guarantor, initiation of proceedings under Section 95 is impermissible.