On-Demand Guarantee Default Crystallises at Invocation, Not NPA Classification: NCLT Mumbai Admits IBC Petition Against Personal Guarantor
Background and Overview
The NCLT Mumbai Bench recently adjudicated a significant petition filed by Canara Bank Limited under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 (IBC), read with Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019. The petition sought initiation of the Insolvency Resolution Process (IRP) against the personal guarantor of Frost International Limited, with the alleged default amount standing at ₹671,56,76,843.68.
The petition was filed on 08.11.2024, and the respondent personal guarantor was Sanjana Uday Desai, who had executed a personal guarantee in connection with credit facilities extended by Canara Bank to the Corporate Debtor. The case raised critical questions around the determination of the date of default under an on-demand guarantee, the computation of the limitation period, the effect of admission of claims in CIRP proceedings, and the consequences of non-disclosure of material documents by the financial creditor.
Parties and Factual Background
The Corporate Debtor and Credit Facilities
Frost International Limited (the Corporate Debtor) is a public limited company incorporated on 17.05.1995, bearing CIN U05001MH1995PLC243081, with its registered office at Bandra Kurla Complex, Mumbai. The company had an authorised share capital of ₹1,00,00,00,000/- and a paid-up share capital of ₹74,92,62,120/-.
Canara Bank had sanctioned the following credit facilities to the Corporate Debtor:
- Fresh Fund Based Working Capital Limit of ₹5 Crore and Non-Fund Based Working Capital Limits of ₹150 Crore vide sanction letter dated 07.01.2014 bearing reference no. PCB/I/CR-249/S-1/2014/AJ.
- ₹130 Crore towards working capital vide sanction letter dated 21.07.2014 bearing reference no. 1042/5020/SL/FROST/2014.
A supplemental working capital consortium agreement and a supplemental joint deed of hypothecation, both dated 12.05.2014, were executed between the parties. The repayment of these facilities was secured, among other things, by personal guarantees executed by eleven guarantors, including Sanjana Uday Desai.
The Deed of Guarantee
A Deed of Guarantee dated 12.05.2014 was jointly executed by all the guarantors. Clause 1 of the Deed of Guarantee reads:
"If at any time default shall be made by the Borrower in payment of the principal sum (not exceeding Rs 3236 crores. (Rupees Three thousand two hundred and thirty six crores only) together with interest, costs, charges, expenses and/or other money for the time being due to the Lead Bank in respect of or under the abovementioned credit facilities or any of them the Guarantors shall forthwith on demand pay to the Lead Bank the whole of such principal sum (not exceeding Rs 3236 crores. (Rupees three thousand two hundred and thirty six crores only) together with interest, cost, charges, expenses and/or any other money as may be then due to the Lead Bank..."
Clause 7 further provided that the Lead Bank was entitled to treat the guarantors as principal debtors for all payments guaranteed. Clause 8 explicitly designated the guarantee as a continuing guarantee covering all amounts advanced to the Corporate Debtor.
Procedural History
SARFAESI Notices
- A notice dated 01.09.2018 (First Invocation Notice) was issued under
Section 13(2)of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), calling upon the Corporate Debtor and all personal guarantors, including Sanjana Uday Desai, to pay the outstanding dues within five days of receipt. - A subsequent notice dated 21.09.2019 (Second Invocation Notice) under
Section 13(2)of the SARFAESI Act was also issued upon the Corporate Debtor and personal guarantors.