Personal Guarantor's Liability Can't Exceed Contractual Limit: NCLT Kochi Dismisses Petitions U/S 95 IBC For Defective Demand Notices
The National Company Law Tribunal (NCLT), Kochi Bench comprising Smt. Madhu Sinha (Technical Member) and Shri. Vinay Goel (Judicial Member) has held that where a guarantee agreement expressly limits the liability of the personal guarantor, any demand notice or invocation of guarantee which seeks to recover an amount exceeding such capped liability is invalid and cannot form the basis...
The National Company Law Tribunal (NCLT), Kochi Bench comprising Smt. Madhu Sinha (Technical Member) and Shri. Vinay Goel (Judicial Member) has held that where a guarantee agreement expressly limits the liability of the personal guarantor, any demand notice or invocation of guarantee which seeks to recover an amount exceeding such capped liability is invalid and cannot form the basis for initiating insolvency proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016.
The Tribunal held that a material inconsistency between the terms of the guarantee agreement and the demand or invocation notice renders the demand notice defective in law. In the absence of a valid and legally tenable demand, the condition precedent for triggering the insolvency process against personal guarantors under Section 95 of the IBC is not satisfied.
Brief Facts
Canara Bank (“Financial Creditor”) filed the three Company Petitions under Section 95 of the Insolvency and Bankruptcy Code, 2016, against Smt. Valsala T S, Mr. Stephen Logan, and Mr. P A Nazeeb, who had each executed personal guarantees in respect of the debt owed by M/s Savute Textiles Private Limited (Corporate Debtor). The Corporate Debtor had availed OD and PC/FDB/FDE limits of ₹20 Crores from 30.06.2014 to 31.01.2018. Total Amount of debt was alleged to be Rs. 43,68,79,602/- (as on 31.12.2023) plus further interest from 01.01.2024. The date of default was 14.06.2019.
The Creditor initiated recovery proceedings before DRT-I, Ernakulam and filed a Section 9 IBC application against the Corporate Debtor, which led to the initiation of the Corporate Insolvency Resolution Process (“CIRP”) on 11.03.2022. The Corporate Debtor was placed under liquidation by order dated 06.07.2023.
Due to non-repayment by the Corporate Debtor, Canara Bank invoked the co-extensive liability of the personal guarantors and filed the Company Petitions. Pursuant to the Tribunal's direction on 30.05.2025, the Bank filed the invocation notice dated 29.01.2024 and proof of service dated 03.06.2025. The Bank also served Form B demand notices dated 11.03.2024.
Vide order dated 09.04.2025, the Tribunal appointed Mr. Balakrishnan Baburajan as the Resolution Professional (“RP”) under Section 97 of IBC. The RP filed reports on 24.04.2025 recommending admission of the petitions. In each case, the RP noted that the personal guarantees were irrevocable and limited to ₹1.5 Crores (in CPs 1 and 2) and ₹18.5 Crores (in CP 3), although the Bank had demanded the full defaulted sum of ₹43.68 Crores. The RP stated that the Bank did not submit any document apportioning the guaranteed amount vis-à-vis the total debt claimed.
Observations
The Tribunal noted that as per section 128 of the IBC, a guarantor's liability is co-extensive with the Corporate debtor, unless it is otherwise provided by the contract. It held that the terms of the guarantee would govern the extent of liability.
The Tribunal noted that the liability of Smt. Valsala T. S. and Mr. Stephen Logan was limited to Rs. 1.5 crore each, and Mr. P.A. Nazeeb to Rs. 18.5 crore as per the respective guarantee agreements. It noted, however, that the Financial Creditor demanded Rs. 43.68 crores plus interest from each of the guarantors, which is contrary to the terms of the guarantee agreements. Thus, it held that the Bank erred in claiming the entire amount from the personal guarantors.
The Tribunal further observed that there was an inconsistency between the terms of the guarantee agreement and the demand or invocation notice. In case Nos. CP (IBC)/1/KOB/2025 & CP (IBC)/2/KOB/2025, the date of the Guarantee Agreement was stated as 31.01.2018, whereas with Notice of invocation of guarantee, dated 29.01.2024, referred to a different date. In this regard, the Tribunal observed that:
“There should be synchronization between the guarantee agreement and the demand notice or the invocation notice. Any variation or inconsistency would render the demands invalid. Such a material defect in the demand notice/invocation notice would bar the initiation of any process under Section 95 of the IBC, 2016.”
The Tribunal criticized the Petitioner bank for failing to justify the figure of Rs. 43.68 crores or provide any break-up of the alleged dues. “Despite ample opportunity, the bank failed to satisfy the Bench on the amount mentioned in the demand notice. This makes the demand invalid and inadmissible”, the bench remarked.
The Tribunal observed that “Where a personal guarantee agreement limits the liability of the guarantor, any demand notice or invocation which claims an amount in excess of such agreed liability, without specifying the guarantor's limited liability, is invalid. Consequently, such a defective demand notice cannot trigger insolvency proceedings under Section 95 of the IBC.”
The Tribunal strongly criticized the conduct of the Petitioner Bank, observing:
“The Petitioner being a premier leading banking institution having its own legal department, such type of patent error/mistake from their part would render the entire process invalid and it would affect the rights, peace of mind and financial dealings of other third parties who have no connection with the mistake committed by the Petitioner Bank.”
The Tribunal dismissed all three Company Petitions and granted liberty to the Petitioner to issue fresh demand notices subject to limitation.
Case Title: Canara Bank vs. Smt. Valsala T S
Case No.: CP (IBC)/1/KOB/2025 & CP (IBC)/2/KOB/2025 & CP (IBC)/3/KOB/2025
For the Petitioner: Mr.Akhil Suresh.
For Respondents (Smt. Valsala T S and Mr. Stephen Logan): Ms. Ammu Charles.
For Respondent (Mr. P A Nazeeb): Ms. Liza Meghan Cyriac.
Order delivered on: 09.07.2025.