NCLT Dismisses Insolvency Petition Against Personal Guarantor Due to Non-Invocation of Guarantee

Hyderabad Bench of NCLT rules that demand notice alone does not constitute invocation of personal guarantee under Insolvency and Bankruptcy Code

In a significant ruling, the National Company Law Tribunal (NCLT), Hyderabad Bench II, has dismissed the insolvency petition filed by Canbank Factors Limited against Sri D. Rama Linga Raju, the personal guarantor for M/s. Vensa Laboratories Pvt Ltd. The tribunal, in its judgment dated October 16, 2025, emphasized that the invocation of personal guarantee is a mandatory requirement before initiating the Personal Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016.

The case emerged after the Corporate Debtor, M/s. Vensa Laboratories Pvt Ltd, defaulted on financial facilities availed from Canbank Factors Limited, a subsidiary of Canara Bank. Following the default, Canbank issued a Loan Recall Notice in December 2012, and subsequently, a Demand Notice in January 2024, seeking repayment of the outstanding amount of Rs. 5,09,43,004. However, the tribunal noted that while the Demand Notice was issued, it did not explicitly invoke the personal guarantee as per the terms laid out in the guarantee deed.

The judgment, delivered by Shri Rajeev Bhardwaj, Member (Judicial), and Shri Yogendra Kumar Singh, Member (Technical), highlighted the necessity of explicit invocation of guarantee for the liability of a personal guarantor to arise. The tribunal stated that a mere demand for payment does not equate to an invocation of the guarantee unless it specifically calls upon the guarantor to fulfill obligations under the guarantee deed.

The tribunal's decision was grounded in statutory provisions under Section 95 of the Insolvency and Bankruptcy Code, 2016, and Rule 3(1)(e) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, which define the requirements for a guarantor's liability. It was further supported by precedents from the National Company Law Appellate Tribunal (NCLAT), which stressed the need for proper invocation of personal guarantees.

In response to the judgment, the Financial Creditor argued that the demand notice was sufficient for initiating insolvency proceedings. However, the tribunal dismissed this contention, reiterating that the guarantee must be invoked in accordance with its terms before any insolvency process can commence against the guarantor.

The ruling also addressed procedural issues raised by the Personal Guarantor regarding authorization and service of the demand notice. The tribunal found that the Financial Creditor had not provided adequate proof of authorization for the filing of the application, and the service of the demand notice did not comply with mandatory requirements, further invalidating the proceedings.

This judgment serves as a reminder of the stringent requirements under the Insolvency and Bankruptcy Code for invoking personal guarantees, ensuring that creditors must adhere to the exact provisions of guarantee deeds before pursuing insolvency resolution processes against guarantors.

Bottom Line:

Insolvency and Bankruptcy Code, 2016 - Invocation of personal guarantee is mandatory for initiating Personal Insolvency Resolution Process - Demand notice under Form B cannot be treated as an invocation of guarantee unless explicitly calling upon the personal guarantor to discharge obligations under the guarantee deed.

Statutory provision(s):  

• - Insolvency and Bankruptcy Code, 2016 Section 95  
• - Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 Rule 3(1)(e)  
• - Contract Act, 1872 Section 128  

The tribunal's decision underscores the importance of creditors following procedural mandates, particularly in cases involving personal guarantees, thereby safeguarding the legal rights of guarantors under the Insolvency and Bankruptcy Code, 2016.

Canbank Factors Limited v. Sri D. Rama Linga Raju, (NCLT)(Hyderabad Bench - II) : Law Finder Doc Id # 2805845