Default Is A Singular Event, Not Continuing: NCLAT Sets Aside Insolvency Admission Against Deccan Chronicle Guarantor

The National Company Law Appellate Tribunal (NCLAT) at Chennai recently rejected a creditor's attempt to treat a loan default as a “continuing guarantee” to overcome limitation, holding that default under the Insolvency and Bankruptcy Code is a singular event that cannot be stretched to revive time-barred proceedings, especially where the demand notice itself records a specific date of default

A bench of Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain observed, “So far as we are concerned, having appreciated the arguments extended by the Ld. counsel for the parties, we are of the view that when the statute, quite in its explicit term, while consciously defining the default, has referred to in it the word 'when' and that has been used in context of debt 'whole or in part', it deals with a specific singular event of default, which has to be taken as to be a factor for the purposes of issuance of a notice and those factors are inclusive of a default of a whole amount or a partial amount.”

The tribunal was allowing an appeal filed by T. Venkatram Reddy, a personal guarantor to loans taken by Deccan Chronicle Holdings Limited from L&T Finance Limited, challenging the June 24, 2022 order of the National Company Law Tribunal, Hyderabad Bench, admitting him to insolvency proceedings.

The lender had extended a term loan of Rs 25 crore under a facility agreement in 2011. After the borrower defaulted, arbitration was invoked, and an award was passed in 2013, later upheld by the Bombay High Court.

In 2020, the lender issued a demand notice seeking to initiate insolvency proceedings against the guarantor, which the National Company Law Tribunal admitted in 2022.

Reddy argued that the proceedings were barred by limitation because the demand notice itself recorded the date of default as August 1, 2012, while the insolvency action was initiated only in 2020. He said the law allows three years from the date of default to start such proceedings.

He also challenged the lender's reliance on the concept of a continuing guarantee, arguing that the loan was a single disbursal and not a series of transactions that could extend the limitation.

The lender, on the other hand, argued that the guarantee was continuing in nature and that limitation could not be confined to a single date of default. It pointed to what it described as continuing liability and relied on the pendency of arbitration and execution proceedings, while also asserting that the guarantor's liability was coextensive with that of the borrower.

Rejecting these submissions, the tribunal held that the date of default mentioned in the demand notice cannot be altered to overcome limitation.

It said, “As the date of default in the instant case, since it has been mentioned in the demand notice as on 01.08.2012, that in itself has to be taken as to be a yardstick for the purposes of attracting the aspect of limitation for sustaining the proceedings under Section 95 of I & B Code.”

The bench found no material in the loan documents to support treating the default as continuing. It also held that the Code does not contemplate exclusion of time spent in arbitration or execution proceedings for computing limitations in such cases.

The tribunal added that even if the arbitral award of 2013 is treated as the starting point, the 2020 notice would still be beyond limitation. It observed, “Then at the most, determining the limitation in the light of the principles laid down in the matters of Dena Bank (Supra) where admittedly, the award herein was rendered on 15.03.2013. If we take up that cut-off period as to be the date of default itself, then too, issuance of a demand notice for first time on 20.01.2020 would be barred by Article 137 of the Limitation Act. ”

The tribunal ultimately allowed the appeal and set aside the order admitting insolvency proceedings against the guarantor.