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Rajendra Singhal Cannot Escape Guarantee Liability Despite No Personal Benefit:
In a significant ruling that reinforces the binding nature of personal guarantees, the (NCLT) has held that a personal guarantor cannot avoid liability merely by asserting that he derived no personal or pecuniary benefit from the loan facilities availed by the corporate debtor. The tribunal admitted an under , filed by against Rajendra Singhal, the personal guarantor of . The decision underscores the principle that a is co-extensive with that of the principal debtor, regardless of the guarantor’s individual gain.
The bench, comprising Judicial Member Brajendra Mani Tripathi and Technical Member Man Mohan Gupta, categorically rejected the guarantor’s defense that the guarantee had not been validly invoked and that his lack of personal benefit rendered the guarantee unenforceable. The ruling serves as a reminder to guarantors and lenders alike that the statutory framework governing guarantees under the , leaves little room for such arguments.
The Financial Arrangement and Default
The Cosmos Co-operative Bank had sanctioned significant credit facilities to between 2019 and 2022. These included a cash credit facility of ₹2,150 lakh and five term loans aggregating ₹530 lakh. To secure these advances, the corporate debtor executed loan documents, and Rajendra Singhal, along with other guarantors, executed .
The account of the corporate debtor was classified as a on . Following this classification, the bank issued a notice under on . The notice was addressed to both the corporate debtor and the guarantors, including Singhal, demanding repayment within 60 days and expressly invoking the personal guarantees.
When no payment was made, a default occurred on . The bank served a further demand notice on , but the amount remained unpaid. Consequently, the bank filed an application under Section 95 of the IBC in , claiming a total outstanding debt of ₹23.97 crore. The appointed Resolution Professional verified the validity of the invocation and the existence of default, recommending admission of the application under .
The Guarantor’s Objections
Rajendra Singhal opposed the admission of the on several grounds. First, he contended that the application was premature and unmaintainable because the guarantee had never been validly invoked. He argued that the SARFAESI notice was intended only for enforcement of security interest and could not substitute a formal invocation of the . Second, he asserted that he derived no personal or pecuniary benefit from the loan facilities, implying that the guarantee should not be enforced against him. Third, he claimed that the quantum of debt had not been properly proved.
The Tribunal’s Reasoning
The NCLT focused on the core issue: whether the guarantee had been validly invoked. It examined the and found that they were payable on demand. Clause 4 of the deeds provided that a demand by the bank would constitute sufficient notice of invocation. The tribunal noted that the guarantees did not prescribe any particular mode or form of invocation, leaving the bank free to invoke through a clear demand.
The bench held that the SARFAESI notice dated was addressed to Singhal in his capacity as guarantor, demanded repayment, and expressly invoked the guarantee. Therefore, the guarantee was validly invoked, and the default occurred upon non-payment within the stipulated period.
On the issue of personal benefit, the tribunal observed:
“Under , the liability of a surety is co-extensive with that of the principal debtor, and under Section 127, anything done, or any promise made, for the benefit of the principal debtor is sufficient to the surety for giving the guarantee. Whether the guarantor personally derived a benefit is immaterial to the of the guarantee.”
This statement reaffirms a well-established principle of contract law: a guarantee is a contract of suretyship where the flows to the principal debtor, not necessarily to the guarantor. The guarantor’s motive or lack of personal gain is irrelevant to the binding nature of the guarantee.
The tribunal also dismissed the objection regarding , noting that the application was filed in , well within the period of from the date of default (December 2024) and the earlier demand.
Admission of Insolvency and
Consequently, the NCLT admitted the application and initiated the insolvency resolution process against Rajendra Singhal. It imposed a for 180 days under , which prohibits the institution or continuation of any legal proceedings against the personal guarantor during this period. The tribunal confirmed as the Resolution Professional to carry out the process.
Legal Implications for Guarantors and Lenders
The ruling has several important implications. For personal guarantors, it eliminates the hope of escaping liability by arguing that they did not personally benefit from the loan. This aligns with the purpose of personal guarantees, which are often required precisely because the guarantor is not the direct beneficiary but has a relationship with the corporate debtor—such as being a director, shareholder, or family member.
For lenders, the judgment provides clarity that a valid invocation of a guarantee can be made through a SARFAESI notice if that notice clearly demands payment from the guarantor and expressly invokes the guarantee. It also reinforces that the IBC framework can be used effectively against personal guarantors without waiting for separate proceedings under the SARFAESI Act.
The decision also highlights the importance of carefully drafted guarantee deeds. The tribunal noted that the continuing deeds did not prescribe a specific mode of invocation, which allowed the bank’s notice to suffice. Lenders should ensure their guarantee documents contain clear language on how invocation can occur.
Conclusion
The ’s ruling in is a decisive affirmation of the of sureties under the Indian Contract Act. By rejecting the “no personal benefit” argument, the tribunal has closed a potential loophole that could have weakened the of personal guarantees. The initiation of insolvency proceedings against Singhal underscores the IBC’s reach to personal guarantors, a key feature of the code’s design to ensure credit discipline. Legal professionals advising guarantors or lenders should take note of this judgment as it reinforces the rigorous standards applied by NCLT benches in insolvency matters.
