NCLT Dismisses Arthan Finance's Insolvency Petition Against Inditrade Capital Over Uninvoked Guarantee

Tribunal Rules Invocation of Guarantee is Essential Before Initiating Insolvency Proceedings

In a significant ruling, the National Company Law Tribunal (NCLT), Kochi Bench, has dismissed an insolvency petition filed by M/s. Arthan Finance Private Limited against M/s. Inditrade Capital Limited. The tribunal held that the invocation of the corporate guarantee is a mandatory prerequisite before initiating proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016.

The case involved a credit facility extended by Arthan Finance to Inditrade Rural Marketing Limited, with Inditrade Capital Limited acting as the corporate guarantor. Arthan Finance alleged that Inditrade Capital, as the guarantor, failed to fulfill its obligations, prompting the finance company to seek the initiation of Corporate Insolvency Resolution Process (CIRP) against Inditrade Capital.

The tribunal, comprising Shri. Vinay Goel and Smt. Madhu Sinha, emphasized that a valid invocation of the guarantee, as stipulated in the contract, is essential before proceeding with insolvency actions against a guarantor. The judges highlighted that the liability of a guarantor is co-extensive with the principal debtor under Section 128 of the Indian Contract Act, 1872, but it necessitates a formal demand on the guarantor post-default.

Arthan Finance's reliance on a previous demand notice issued before the restructuring and execution of a new guarantee agreement was deemed insufficient. The tribunal pointed out that after the restructuring on September 3, 2024, no subsequent demand notice was served on Inditrade Capital, thus invalidating the insolvency petition.

The tribunal's decision underscores the legal principle that insolvency proceedings cannot proceed without first giving the guarantor an opportunity to address the default through a formal invocation of the guarantee. The tribunal dismissed the petition, allowing for the possibility of re-filing should Arthan Finance comply with the necessary legal procedures for invoking the guarantee.

This ruling serves as a crucial reminder to financial creditors about the procedural requirements when dealing with corporate guarantors under the Insolvency and Bankruptcy Code.

Bottom Line:

Insolvency and Bankruptcy Code - Section 7 petition against corporate guarantor - Invocation of guarantee prior to filing petition is mandatory as per law and contractual terms.

Statutory provision(s): Section 7 of the Insolvency and Bankruptcy Code, 2016, Section 128 of the Indian Contract Act, 1872

M/s. Arthan Finance Private Limited v. M/s. Inditrade Capital Limited, (NCLT)(Kochi Bench) : Law Finder Doc Id # 2812493