In the regime of insolvency and bankruptcy law in India, the question of when and how the liabilities of Personal Guarantors crystallize has become increasingly significant. Recent judgments by the National Company Law Appellate Tribunal ("NCLAT") in Shantanu Jagdish Prakash v. State Bank of India & Ors. (Company Appeal (AT)(Ins.) 1609 of 2024), Mavjibhai Nagarbhai Patel v. State Bank of India & Anr. (Company Appeal (AT) (Ins.) Nos. 1702, 1711 & 1712 of 2024), Asha Basantilal Surana v. State Bank of India & Ors. (Company Appeal (AT) (Ins.) No. 84 of 2025), and Pooja Ramesh Singh v. State Bank of India (Company Appeal (AT) (Ins.) No. 329 of 2023), have brought greater clarity to the legal framework governing the invocation of personal guarantees and determining when such liability truly arises. This article examines these developments, highlighting the principle of co-extensive liability of the Principal Borrower and the Guarantor under Section 128 of the Indian Contract Act, 1872, and explaining how Demand Notices serve as the critical trigger for the enforcement of a Guarantor's liability.
Co-Extensive Liability Under Section 128 of the Indian Contract Act
Section 128 of the Indian Contract Act, 1872, lays down that "the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract." This means that the Guarantor's obligation to repay the debt arises alongside that of the Principal Borrower, unless the contract provides otherwise. However, the Hon'ble NCLAT clarified in these judgments that although the liability of the Principal Borrower and the Personal Guarantor is co-extensive, the point at which such liability becomes enforceable depends on the terms of the Deed of Guarantee. In practice, although the Guarantor's liability corresponds to that of the Principal Borrower, it becomes actionable only when the creditor formally invokes the Guarantee by issuing a Demand Notice in accordance with the Deed of Guarantee.
Invocation of Guarantee is necessary, and Demand Notice Issued in terms of Section 94(4)(b) of the IBC cannot be treated as an Invocation of Guarantee
The Hon'ble NCLAT in Deepak Kumar Singhania (Supra) held that invocation of the Guarantee is a mandatory pre-requisite for initiating insolvency proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016 ("IBC"). The Hon'ble Tribunal in the captioned judgment further clarified that a 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 Debtor) Rules, 2019, does not constitute invocation of the Guarantee. Therefore, the invocation of Guarantee of the Personal Guarantee is required to trigger the Guarantor's liability and that without prior invocation, no default exists on part of the Guarantors/Personal Guarantors.
Demand Notice Issued under Section 13(2) of the SARFAESI ACT Tantamount to Invocation of Guarantee
The Hon'ble NCLAT has now settled the legal proposition as to whether a notice issued under Section 13(2) of the SARFAESI Act can constitute the invocation of a personal guarantee. In the matter of Shantanu Jagdish Prasad (Supra), the Hon'ble NCLAT upheld the maintainability of the Section 95 petition which was filed on the basis of the Demand Notice issued under Section 13(2) of the SARFAESI Act, which was addressed to the Corporate Debtor, including that to the Personal Guarantors. The Hon'ble NCLAT in the captioned matter held that the notice, by specifically referring to the Personal Guarantor and calling upon the Guarantor to discharge the borrower's liability, satisfied the condition required under the Deed of Guarantee and therefore constitutes a valid invocation of the Guarantee. The Hon'ble Tribunal further emphasized that substance must prevails over form; what matters is whether the notice clearly communicates to the Guarantor the demand to pay under the Guarantee, thereby crystallizing the Guarantor's liability.
Thereafter, the Hon'ble NCLAT in the matter of Mavjibhai Nagarbhai Patel (Supra) held that the liability of a personal guarantor stands crystallized upon issuance of a demand notice under Section 13(2) of the SARFAESI Act, wherein the creditor specifically calls upon the personal guarantor to make payment in accordance with the terms of the deed of guarantee. The Hon'ble Tribunal further observed that the specific mention of the guarantor's name and the categorical demand for repayment in such a notice satisfies the contractual requirement of invocation of the guarantee, thereby making a petition under Section 95 of the IBC maintainable.
Similarly, the Hon'ble NCLAT in the matter of Asha Basantilal Surana (Supra), relying on its earlier judgment in the matter of Mavjibhai Nagarbhai Patel (Supra), reiterated that the issuance of Demand Notice under Section 13(2) of the SARFAESI Act to the Guarantor, specifically demanding payment, operates as an invocation of Personal Guarantee and triggers the Guarantor's liability in terms of the provision enshrined under IBC.
Way Forward
The recent pronouncements by the Hon'ble NCLAT have significantly clarified the legal contours surrounding the invocation of Personal Guarantees, particularly in the context of Demand Notices issued under Section 13(2) of the SARFAESI Act and proceedings of Personal Guarantors under the provisions of IBC. However, given the evolving jurisprudence in the said area, it is imperative for creditors or legal practitioners to exercise heightened diligence.
Creditors should ensure that invocation notices are carefully drafted to explicitly address the Guarantors, clearly demanding payment in accordance with the terms of the Deed of Guarantee. This will mitigate the risk of procedural challenges and ensure that the proceedings under Section 95 of the IBC are not held non-maintainable on mere grounds of defective invocation or non-invocation of Personal Guarantee.
Conclusion
The liability of the Personal Guarantor, though co-extensive with that of the Principal Borrower, becomes actionable only upon proper invocation of the Guarantee in accordance with the terms of the Deed of Guarantee. The recent judgments of the Hon'ble NCLAT have clarified that while a Demand Notice issued in terms of Section 95(4)(b) read with Rule 7(1) of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019 is insufficient, a formal Demand Notice is to be issued to the Personal Guarantor to invoke its Guarantee and the date on which said Notice shall be considered as the date of default for the said Personal Guarantor. The Hon'ble NCLAT further clarified that a Demand Notice issued under Section 13(2) of the SARFAESI Act, when specifically addressed to the Guarantor and demanding payment under the Deed of Guarantee constitutes a valid invocation. This crystallizes the Guarantor's liability. These developments highlight that it is the substance and intent of the notice rather than its form alone that ultimately determines its legal effect.
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