Personal Guarantor Insolvency Under IBC: What to Do When the Bank Invokes Your Guarantee

When your company took its working capital loan, the bank asked you to sign a personal guarantee. Most promoters and directors sign it without much thought. Years later the company defaults, and a letter arrives invoking your guarantee and demanding the entire outstanding amount from you personally.

What follows can move on several fronts at once. The bank can file a case against you before the Debts Recovery Tribunal (DRT), take SARFAESI action against any property you mortgaged, and apply to the National Company Law Tribunal (NCLT) under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC) to start insolvency proceedings against you.

The law also changed in 2026. Personal guarantors used to get an automatic stay on all recovery the moment an insolvency application was filed. Since 26 May 2026, they no longer do. Below we explain what the bank can do, how a personal guarantor insolvency works today, and what you should do when the invocation letter arrives.

Your Liability as a Personal Guarantor

Under Section 128 of the Indian Contract Act, 1872, a guarantor’s liability is co-extensive with that of the borrower unless the guarantee deed says otherwise. The bank does not have to recover from the company first. It can proceed against you directly once the company defaults and the guarantee is invoked.

Your company’s insolvency does not release you either:

• The Section 14 moratorium in the company’s insolvency protects only the company. The Supreme Court held in State Bank of India v. V. Ramakrishnan (2018) that it does not stop proceedings against a personal guarantor.
• If the company’s resolution plan is approved and the bank takes a haircut, you can still be pursued for the balance. In Lalit Kumar Jain v. Union of India (2021), the Supreme Court held that approval of a plan does not discharge the guarantor.
• The argument that the bank changed the terms of the loan without your consent, and so released you under Section 133 of the Contract Act, does not work where the change came through a resolution plan.

If you pay the bank, you step into its shoes against the company. Since 26 May 2026, though, a new Explanation to Section 14(3)(b) of the IBC stops a guarantor from proceeding against the company while its own insolvency moratorium is running.

How a Bank Starts Insolvency Against a Personal Guarantor

Personal guarantors to corporate debtors are covered by Part III of the IBC, and their cases are heard by the NCLT, not the DRT. The process runs like this:

1. Demand notice. The bank serves a demand notice on you. If you do not pay within 14 days, it can apply to the NCLT under Section 95.
2. Resolution professional. The NCLT has a resolution professional (RP) appointed. You do not get a hearing at this stage. The Supreme Court upheld this in Dilip B. Jiwrajka v. Union of India (2023), holding that the RP only gathers facts and does not decide anything.
3. RP’s report. Under Section 99, the RP examines the application and recommends whether it should be admitted or rejected. You can show the RP that the debt has been repaid, and you can place your objections and documents on record.
4. Admission hearing. Under Section 100, the NCLT decides whether to admit the application. This is where you get a hearing, and where defences such as a guarantee that was never invoked, a wrong amount or a time-barred claim are argued.

You can also file for your own insolvency under Section 94. Many guarantors did this in the past for the protection it gave them. That protection has now been withdrawn, as explained next.

The 2026 Change: No More Interim Moratorium

Until May 2026, filing an application under Section 94 or 95 triggered an interim moratorium under Section 96. Every legal action against the guarantor in respect of any debt stopped, from the day of filing until the NCLT decided whether to admit. Because admission often took years, guarantors could hold off DRT cases, suits and arbitration for a long time.

The IBC (Amendment) Act, 2026 inserted sub-section (4) into Sections 96 and 124. From 26 May 2026, the interim moratorium does not apply to a personal guarantor to a corporate debtor.

Guarantors with older applications argued that their protection should continue. The courts have rejected that:

• In Tata Capital Financial Services Ltd. v. Neel Motors LLP (24 July 2026), the Bombay High Court held that the amendment applies to applications that were already pending, so the interim moratorium ended on 26 May 2026 for those guarantors too.
• In IDBI Trusteeship Services Ltd. v. Manish Jain (19 August 2026), the Delhi High Court took the same view and allowed a suit against a guarantor to proceed.
• The Insolvency and Bankruptcy Board of India (IBBI) issued a circular on 21 September 2026 recording that position for Sections 96 and 124.

In practice, filing for insolvency no longer buys a guarantor time. The bank can keep its DRT case, suit, arbitration and SARFAESI action going while a Section 95 application is pending.

What Happens Once the Application Is Admitted

Admission still brings protection. Under Section 101, a moratorium of 180 days starts on admission. Legal actions against you in respect of your debts are stayed, and you cannot transfer or sell your property during that period.

The RP then invites claims from all your creditors, not only the bank that filed. You work with the RP to prepare a repayment plan, and it goes to a meeting of creditors. The plan needs the approval of more than three-fourths in value of the creditors present and voting, and then the NCLT’s approval.

If no plan is approved, or the plan fails, you or your creditors can apply for bankruptcy. A bankruptcy order vests your estate in a bankruptcy trustee and brings disqualifications, including a bar on acting as a director of a company or taking part in its management.

What to Do When the Bank Invokes Your Guarantee

1. Read the invocation letter against the guarantee deed. Check that the guarantee was actually invoked in the manner the deed requires, that the amount claimed is within any cap in the deed, and that interest has been charged correctly. An NCLT bench has dismissed a Section 95 application because the guarantee had not been invoked, so the guarantor was not in default.
2. Reply in writing. Dispute any wrong figure and ask for a statement of account. Your reply goes on record and becomes part of your defence before the RP and the NCLT.
3. Map every proceeding against you. A SARFAESI notice under Section 13(2) on your mortgaged property gives you 60 days to raise objections, and the bank must reply to them. A DRT original application, a Section 95 application and a cheque bounce complaint can all run at the same time, and each has its own deadlines.
4. Check limitation. A claim against a guarantor is generally subject to a three-year limitation period, and courts look at when the guarantee was invoked and when the default occurred. A written acknowledgment of the debt restarts the clock, so be careful about what you sign or write while negotiating.
5. Do not move assets. Transferring property to family members or selling it cheaply after the default can be challenged as an undervalued or preferential transaction, and it weakens any settlement or repayment plan you later offer.
6. Consider settlement early. Most guarantor cases end in a one-time settlement with the bank. Without the interim moratorium, the bank has less reason to wait, but a credible offer made before admission, backed by documents, still carries weight. A Section 95 application can be withdrawn before admission if the bank agrees.
7. Engage with the RP if a Section 95 application is filed. Give the RP your documents and objections before the Section 99 report is filed. A guarantor who stays silent at this stage loses the best chance to have the application rejected.

Talk to a Lawyer for Personal Guarantors in Delhi

Raizada Law Associates advises promoters, directors and other personal guarantors in Delhi NCR on insolvency proceedings before the NCLT, cases before the DRT and banking disputes. We review the guarantee deed and the invocation, respond to the bank and the resolution professional, and negotiate settlements. Frequently Asked Questions