Banks must strictly follow personal guarantee agreements: NCLT

In a landmark ruling, the National Company Law Tribunal (NCLT), Kochi Bench, has brought relief for three personal guarantors entangled in a high-stakes insolvency case. In the order that sends a clear message about the specifics of personal guarantee liabilities, the NCLT has dismissed the company petition filed by Canara Bank against Valsala TS, Stephen Logan, and PA Nazeeb, who were being pursued for a total debt exceeding Rs. 43.68 crore plus interest.

The case, which had been heard under a common order, stemmed from the insolvency of Savute Textiles Private Limited, which had been put into liquidation with a dismal liquidation value of just Rs 31.32 lakh against a staggering debt. The bank, in its petition, had sought to recover the entire outstanding amount from the three individuals who had provided personal guarantees for a loan extended to the corporate debtor.

However, the guarantors, through their legal counsels, mounted a spirited defense that ultimately convinced the tribunal. Central to their argument was the “material defect” in the bank’s demand notice. The guarantors’ counsels successfully argued that the bank’s demand for the full Rs 43.68 crore was flawed. The agreements stipulated a limited liability for each guarantor— Rs 1.5 crore each for Valsala TS and Stephen Logan, and Rs 18.5 crore for PA Nazeeb. By demanding the full amount, the bank failed to adhere to the terms of the guarantee agreements, rendering the demand notice defective and illegal.

“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,” the tribunal said in its order.

The tribunal’s ruling on July 9, 2025, also delved into several other key objections raised by the guarantors. The court found merit in the arguments that the bank had not properly invoked the personal guarantee before initiating insolvency proceedings, a crucial prerequisite for such an action. The bench also agreed that the application was time-barred, as the date of default should have been the date of guarantee invocation, not merely when the corporate debtor was declared a Non-Performing Asset (NPA).

Adding weight to the dismissal were the individual pleas of the guarantors. PA Nazeeb’s claim of fraud, forgery, and misrepresentation by the bank and the corporate debtor was taken seriously, as he maintained he was misled into signing the documents and was not a director of the company. The tribunal also considered the unique circumstances of Valsala TS, a 67-year-old woman with health issues, and the procedural lapse of the company petition being sent to an address that had already been auctioned by the bank.

In its final order, the NCLT emphasized the serious ramifications of the insolvency process on individual guarantors and their families, underscoring the importance of banks following due process and adhering strictly to the terms of guarantee agreements. The decision has been hailed as a significant victory for personal guarantors, highlighting the legal protections available to them and establishing a precedent for future cases where banks may overreach in their recovery efforts.

Also See: NCLT says IBC cannot be used to sidestep legitimate process of law