Debt Acknowledgement in Balance Sheets Extends Limitation Against Guarantor under Section 95 IBC
- REEDLAW
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REEDLAW Legal News Network reports: In a pivotal ruling concerning personal guarantor liability under the Insolvency and Bankruptcy Code, the Appellate Authority affirmed that acknowledgement of outstanding dues within the corporate debtor’s balance sheets constituted a valid acknowledgement under Section 18 of the Limitation Act. It was further observed that since the personal guarantee continued to subsist, the limitation period against the guarantor stood duly extended, thereby rendering proceedings initiated under Section 95 of the IBC legally maintainable.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Yogesh Khanna (Judicial Member) and Mr. Indevar Pandey (Technical Member), while adjudicating a Company Appeal, held that acknowledgement of liability in successive balance sheets of the corporate debtor operated as a statutory acknowledgement under Section 18 of the Limitation Act. The Tribunal further observed that the personal guarantee was continuing in nature and had not been discharged or revoked contractually or otherwise, and therefore, the limitation stood extended against the guarantor, enabling valid initiation of proceedings under Section 95 of the IBC.
The appeal had been filed challenging the order by which the Section 95 application against the personal guarantor had been dismissed on the ground of limitation. The Adjudicating Authority had taken the view that successive debt acknowledgements reflected in financial statements could not extend limitation since such balance sheets were not personally signed by the guarantor. The dispute arose from multiple sanctioned credit facilities extended to the Corporate Debtor between 2009 and 2015, for which corresponding deeds of guarantee had been executed, reaffirming the continuing liability of the guarantor across each enhancement of the facility.
The loan account had been classified as NPA on 28.05.2016, and a demand-cum-recall notice invoking guarantee obligations had been issued on 30.09.2016, requiring payment within seven days. Default had occurred on 07.10.2016, and thereafter, recovery proceedings had commenced before the DRT, followed by the initiation of CIRP of the Corporate Debtor in July 2017. The Financial Creditor had lodged its claim, and subsequent audited financial statements reflected continued outstanding liabilities.
The Section 95 petition, filed in 2021, had been supported by a report of the Resolution Professional recommending initiation of insolvency resolution proceedings based on acknowledgements contained in successive balance sheets. During appellate proceedings, the Appellant submitted that the limitation period stood extended through these acknowledged liabilities, which, in view of express clauses in the guarantee deed and principles under Section 128 of the Contract Act, were binding on the guarantor. It was asserted that acknowledgement by the principal borrower was acknowledgement on behalf of the guarantor, and the financial statements placed on record remained unchallenged throughout CIRP.
The Respondent, however, had opposed the appeal on the ground that the guarantee had not been invoked in accordance with contractual terms and that the limitation expired from the date of initial default, i.e., 07.10.2016. It was argued that no acknowledgement attributable to the guarantor existed within the limitation period and that the balance sheets could not legally operate against the guarantor.
The Appellate Tribunal held that the guarantee executed in 2015 was a continuing guarantee and remained operative until lawfully revoked. By examining clauses of the guarantee deed, the Tribunal observed that any admission or acknowledgement of liability by the Corporate Debtor bound the guarantor as if made by him, thereby contractually extending the limitation. It found that financial statements from FY 2016–17 until FY 2019–20 clearly acknowledged the outstanding debt and, when read with clauses 12 and 19 of the guarantee deed, such acknowledgements validly extended limitation against the guarantor.
The Tribunal further held that the demand notice dated 30.09.2016, which was addressed to both borrower and guarantor, amounted to a valid invocation of the guarantee. Having held that the limitation stood extended contractually and further stood extended by the Supreme Court’s suo motu exclusion period, the Tribunal concluded that the Section 95 petition filed in October 2021 was well within the limitation. Accordingly, the appeal was allowed, and the matter was remitted for further proceedings.
Mr. Harshit Khare, Mr. Praful Saini and Mr. Ajay Agrawal, Advocates, represented the Appellant.
Mr. Vijayesh Atre and Ms. Aarya Chhangani, Advocates, appeared for the respondent.
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