Personal Guarantor Liability Under IBC: Why Absence of a Separate Guarantee Deed Does Not Invalidate Section 95 Proceedings
Overview of the Dispute
The NCLAT Chennai recently pronounced a significant ruling in Raiz Bashirudeen Vs Tata Capital Financial Services Limited, addressing a core question that frequently arises in insolvency proceedings against personal guarantors: can the absence of a formally produced guarantee deed from the record be used to nullify proceedings initiated under Section 95 of the Insolvency and Bankruptcy Code, 2016?
The Appellate Tribunal, while dismissing the appeal, laid down important principles regarding what constitutes sufficient documentary evidence to establish the status of a personal guarantor and the extent of their liability under the Insolvency and Bankruptcy Code, 2016.
Background and Factual Matrix
M/s. Furnace Fabrica (India) Limited, the Corporate Debtor engaged in manufacturing structural metal products, tanks, reservoirs, and steam generators, approached Tata Capital Financial Services Limited — the Financial Creditor — in 2019 seeking financial assistance to sustain and expand its business operations.
The Financial Creditor extended a combined facility comprising a term loan and working capital assistance aggregating ₹39,60,00,000/- (Rupees Thirty-Nine Crore Sixty Lakhs Only). This included an initial facility of ₹36,00,00,000/- and an additional disbursement of ₹3,60,00,000/-. The entire facility was sanctioned vide a letter dated 30.05.2019, and the terms governing the arrangement were documented in a loan agreement executed between the parties on the same date.
The Corporate Debtor subsequently defaulted on its repayment obligations, following which its account was classified as a Non-Performing Asset (NPA). Upon default, the Financial Creditor initiated a series of formal communications:
- A demand notice dated 19.12.2022 was issued to the Corporate Debtor.
- This was followed by a loan recall notice dated 10.01.2023.
- Subsequently, a demand notice in Form B under
Section 95(4)(b)of the Code was issued on 14.02.2023, claiming an outstanding amount of ₹18,95,48,246.53/-, inclusive of applicable interest.
In a parallel and independent proceeding registered as CP(IB)/14/KOB/2023, the Corporate Debtor was admitted into the Corporate Insolvency Resolution Process (CIRP) by an order dated 01.11.2023. Following this admission, the Financial Creditor filed an application under Section 95 of the Code against the appellant — Raiz Bashirudeen — in his capacity as Personal Guarantor to the Corporate Debtor. This application was registered as CP (IBC)/31/KOB/2023 and was admitted by the NCLT through the impugned order dated 01.08.2024.
The Appeal Before NCLAT Chennai
Aggrieved by the order of admission, the appellant invoked Section 61 of the Insolvency and Bankruptcy Code, 2016 before the NCLAT Chennai, seeking to have the admission order set aside.
Primary Ground of Challenge
The appellant's challenge was essentially confined to a single, focused legal argument: that the deed of guarantee dated 30.05.2019, executed by the appellant and a co-guarantor, had not been placed on record before the Adjudicating Authority. In the absence of this document, the appellant contended:
- The extent of guarantee liability could not be determined or established.
- The status of the appellant as a Personal Guarantor remained legally unproven.
- The entire proceedings under
Section 95of the Code, having been initiated solely on the basis of a letter of guarantee, were therefore vitiated and unsustainable in law.
Key Argument of Appellant: Without the formal guarantee deed on record, neither the scope of liability nor the identity of the Personal Guarantor can be conclusively established, rendering the Section 95 proceedings legally infirm.