NCLAT: Inclusion Of Guarantor/Director In SARFAESI Notice Does Not Invalidate Invocation Of Personal Guarantee

Introduction

The National Company Law Appellate Tribunal (NCLAT) has clarified an important aspect of debt recovery jurisprudence under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act). The Tribunal held that the mere inclusion of a guarantor or director in a SARFAESI demand notice, along with the principal borrower, does not invalidate the invocation of a personal guarantee. This ruling reinforces the principle that substantive enforcement rights of secured creditors should not be defeated by procedural or technical objections relating to notice issuance.

Background and Legal Framework

The SARFAESI Act empowers secured creditors, primarily banks and financial institutions, to enforce their security interests without the intervention of courts or tribunals once a borrower defaults. The enforcement mechanism commences with the issuance of a demand notice under Section 13(2) of the Act, calling upon the borrower to discharge its liability within the prescribed period. Upon failure to comply, the creditor may proceed with measures under Section 13(4), including taking possession of secured assets or effecting their sale.

In practice, where loans are backed by personal guarantees, banks frequently issue SARFAESI notices not only to the principal borrower but also to guarantors and, in some cases, directors who have executed such guarantees. This gave rise to a legal contention that addressing the notice to guarantors or directors, in addition to the borrower, constitutes a procedural irregularity that could vitiate the invocation of the guarantee and subsequent enforcement actions.

Issue Before the NCLAT

The central issue before the NCLAT was whether the invocation of a personal guarantee could be rendered invalid solely on the ground that the SARFAESI notice was also issued to the guarantor or director along with the borrower. The appellant contended that such inclusion amounted to an improper exercise of powers under the SARFAESI Act and therefore invalidated the enforcement proceedings.

Findings and Reasoning of the Tribunal

The NCLAT rejected the contention and held that the mere inclusion of a guarantor or director in a SARFAESI notice does not invalidate the invocation of the personal guarantee or subsequent enforcement actions. The Tribunal emphasised that the purpose of a notice under Section 13(2) is to inform concerned parties of the borrower’s default and the creditor’s intention to enforce its security interests. So long as the statutory requirements of the SARFAESI Act are complied with, the inclusion of additional stakeholders such as guarantors does not prejudice their rights.

The Tribunal further observed that procedural objections cannot be permitted to override substantive rights, particularly in a statutory framework designed to ensure expeditious recovery of public money. Unless the borrower or guarantor demonstrates actual prejudice or violation of a mandatory statutory provision, enforcement actions cannot be invalidated on technical grounds.

Significance of the Ruling

The decision aligns with the broader legislative intent of the SARFAESI Act, which seeks to ensure timely and effective enforcement of security interests while minimising judicial interference. By prioritising substance over form, the NCLAT has prevented defaulters from exploiting procedural technicalities to delay or frustrate recovery proceedings. The ruling also provides clarity to banks and financial institutions on the permissibility of issuing notices to guarantors and directors in appropriate cases.

Conclusion

The NCLAT’s ruling reaffirms that procedural aspects of SARFAESI notice issuance must be interpreted in a manner that supports, rather than undermines, the statutory objective of efficient debt recovery. By holding that the inclusion of guarantors or directors in SARFAESI notices does not invalidate the invocation of personal guarantees, the Tribunal has strengthened creditor enforcement rights and discouraged litigation based on hyper-technical objections. This decision shall serve as a useful precedent for lenders, guarantors, and corporate borrowers in understanding the scope and effect of SARFAESI notices in guarantee enforcement proceedings.