Invocation of Guarantee Necessary Before Sending IBC Notice?

Section 128 of the Indian Contract Act, 1872 stipulates: “The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.

Thus, it was understood that once the principal borrower has defaulted, and an IBC petition is being filed for the principal borrower, relevant steps may also be taken against the guarantor for initiation of the guarantor's insolvency proceedings simultaneously. 

The Turning Point — SBI v. Deepak Kumar Singhania (2025, NCLAT)

In February 2025, the NCLAT in State Bank of India v. Deepak Kumar Singhania changed the ground reality.

What Happened

  • SBI had lent to LML Ltd., which defaulted and went into liquidation.

  • The guarantor, Deepak Kumar Singhania, had executed a guarantee in 2005.

  • SBI sent a Form B demand notice under Rule 7(1) of the PG Rules, 2019, but did not separately invoke the guarantee deed.

  • The NCLT rejected SBI’s Section 95 IBC application, holding it was not maintainable without invocation.

  • NCLAT held that a statutory demand under the PG Rules cannot substitute for invocation of the guarantee.

The Ruling

  • Rule 3(1)(e) defines “guarantor” as someone who has (i) executed a guarantee, and (ii) whose guarantee has been invoked but remains unpaid.

  • Therefore, both conditions must be met before proceedings under Section 95 can be filed.

  • A Rule 7(1) demand notice is only a statutory step, not a contractual invocation of the guarantee deed.

Practical Impact

  • Invocation mandatory – Before sending an IBC notice to a guarantor, creditors must first invoke the guarantee as per the guarantee deed.

  • Form B ≠ Invocation – A statutory demand under Rule 7(1) cannot replace invocation.

  • Check the contract – Many guarantees contain specific notice clauses; non-compliance may render IBC proceedings defective.

  • Best practice – Issue both:

    1. First step- Guarantee invocation letter (as per contract), and

    2. Second step- IBC demand notice (Form B under PG Rules).

Conclusion

While earlier case law suggested invocation might not be strictly necessary, SBI v. Deepak Kumar Singhania (2025) has added an extra step to compliance- invocation of the guarantee is a prerequisite before proceeding under Section 95 of the IBC against personal guarantors.

The aforementioned ruling has been criticized for creating procedural hurdles and undermining the commercial purpose of the IBC. 

However, until any Supreme Court order comes up, as of now, creditors should treat contractual invocation and statutory demand as two separate steps, for minimizing the risk of dismissal at admission stage.

Author’s Opinion

While the NCLAT’s ruling is legally grounded, it raises important concerns:

  1. Dilution of Section 128 – By making invocation a pre-condition, the ruling undermines the principle of co-extensive liability, which makes guarantors liable immediately upon borrower default.

  2. Redundancy in Procedure – Treating statutory demand and invocation as separate creates duplication without substantive benefit. Both are essentially demands to pay.

  3. Frustration of IBC Objectives – The IBC was designed for time-bound resolution. Adding another technical requirement enables guarantors to stall proceedings on procedural grounds.

  4. Narrow Reading of PG Rules – Rule 3(1)(e) could have been interpreted harmoniously with Section 128 of the Contract Act and Section 95 of the IBC, treating statutory demand as sufficient invocation.

As a practitioner, I believe the Singhania ruling reflects a form-over-substance approach. Insolvency law must prioritize commercial realities and creditor rights, not procedural traps.

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