Acknowledgement by Principal Borrower Extends Limitation for Section 7 Proceedings Against Corporate Guarantors
- REEDLAW
- Jan 4
- 4 min read
REEDLAW Legal News Network reports: In a pivotal ruling, the National Company Law Appellate Tribunal (NCLAT), New Delhi, held that acknowledgment of debt by the principal borrower through revival letters, part-payments, and disclosures in audited balance sheets extended limitation under Section 18 of the Limitation Act for proceedings under Section 7 of the Insolvency and Bankruptcy Code against corporate guarantors, whose liability being co-extensive could not be treated as time-barred, particularly after the exclusion of the COVID-19 limitation period.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Mohd. Faiz Alam Khan (Judicial Member) and Mr. Arun Baroka (Technical Member), while adjudicating a batch of two Company Appeals and connected Interlocutory Applications, held that the acknowledgment of debt by the principal borrower through revival letters, part-payments, and disclosures in audited balance sheets extended limitation under Section 18 of the Limitation Act for proceedings under Section 7 of the Insolvency and Bankruptcy Code against corporate guarantors, whose liability being co-extensive could not be treated as time-barred, especially after exclusion of the COVID-19 limitation period.
The Appellate Tribunal first condoned the delay in refiling the appeals, having found the explanation regarding repeated registry objections and the temporary unavailability of the authorised representative to be satisfactory, particularly as the appeals themselves had been instituted within the prescribed period of limitation and the proceedings had already been initiated ex parte against the Respondents.
The appeals arose from orders of the Adjudicating Authority dismissing applications filed by the Financial Creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016, against the Corporate Guarantors of the Corporate Debtor on the ground of limitation. The record disclosed that credit facilities had been extended to the Corporate Debtor, whose account was classified as a non-performing asset, followed by restructuring arrangements which were not adhered to. The Corporate Debtor had thereafter executed a revival letter acknowledging its liability and had made periodic part-payments, with the last payment being made in August 2018. The Corporate Debtor was subsequently admitted into the corporate insolvency resolution process on a Section 7 application, while parallel applications against certain Corporate Guarantors were rejected as time-barred.
Upon examining the record, the Appellate Tribunal noted that acknowledgements of debt had been made by the Corporate Debtor through revival letters, continued part-payments, and disclosures in audited balance sheets for successive financial years. Placing reliance on Section 18 of the Limitation Act, 1963, and the law laid down by the Hon’ble Supreme Court in Laxmi Pat Surana v. Union Bank of India and Another, REEDLAW 2021 SC 03571, it was reiterated that acknowledgment of liability by the principal borrower within the subsisting period of limitation would extend limitation and would equally bind the guarantor, whose liability is co-extensive under Section 128 of the Indian Contract Act, unless the contract provides otherwise.
The Appellate Tribunal further relied upon the decision in Asset Reconstruction Company (India) Limited v. Bishal Jaiswal and Another, REEDLAW 2021 SC 04535, to reaffirm that entries in the books of account and audited balance sheets constitute valid acknowledgments in writing for the purposes of Section 18 of the Limitation Act and that the applicability of Sections 14 and 18 of the Limitation Act to proceedings under the Insolvency and Bankruptcy Code was no longer res integra. Reference was also made to the decision of the Appellate Tribunal in Pooja Ramesh Singh v. State Bank of India and Another, REEDLAW 2023 NCLAT Del 04610, wherein it was held that default by the principal borrower simultaneously triggers liability against the corporate guarantor in accordance with the scheme of the Code, subject to the terms of the guarantee.
It was also observed that the Adjudicating Authority had failed to take into account the binding directions of the Hon’ble Supreme Court in the suo motu proceedings, excluding the period from 15.03.2020 to 28.02.2022 for the purposes of limitation across all judicial and quasi-judicial proceedings. The Appellate Tribunal noted further inconsistency in the approach of the Adjudicating Authority, as similar applications filed by the same Financial Creditor against other Corporate Guarantors of the same Corporate Debtor had been admitted, while the present applications were dismissed on limitation.
In view of the continuous acknowledgements of debt reflected up to the financial year 2021–2022, the co-extensive nature of the guarantor’s liability, and the statutory exclusion of limitation during the pandemic period, the Appellate Tribunal held that the applications filed under Section 7 in 2023 were within limitation. It was concluded that the Adjudicating Authority had committed a patent illegality in rejecting the applications as time-barred. Accordingly, the impugned orders were set aside, the appeals were allowed, and the matters were remanded to the Adjudicating Authority for fresh adjudication after granting an opportunity of hearing to the parties, with the revived applications to be decided on merits.
Mr. Sarfaraz Khan, Advocate, represented the Appellant.
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