Acknowledgment Of Debt By Corporate Debtor Is Acknowledgment By Guarantor, Extends Limitation: NCLAT

The National Company Law Appellate Tribunal (NCLAT) has recently held that acknowledgment of debt in a corporate debtor's financial statements extends the limitation period against personal guarantors, setting aside an order of the National Company Law Tribunal (NCLT) which had dismissed insolvency proceedings as time-barred.

“We note that an acknowledgement made by a company in its balance sheet has the effect of extending the period of limitation for the purpose of Section 18 of the Limitation Act, 1963. And that such a position has been settled in the judgment of the Hon'ble Supreme Court in the matter of Asset Reconstruction Co. (India) Ltd. v Bishal Jaiswal”, the tribunal said.

It added, "Furthermore, we also note that any acknowledgement made by the principal borrower would be deemed to be an acknowledgement by the guarantors"

A bench of Judicial Member Justice Mohd. Faiz Alam Khan and Technical Member Arun Baroka was hearing appeals filed by Phoenix ARC Pvt. Ltd., which had acquired the loan account of Raj Poly Products Ltd. from Janata Sahakari Co-operative Bank under an assignment agreement.

The corporate debtor had been granted credit facilities aggregating to Rs 14 crore by the original lender, which were secured by personal guarantees executed by the respondents. Following default, the lender issued a demand notice dated April 12, 2018 under Section 13(2) of the SARFAESI Act, calling upon the corporate debtor and the personal guarantors to discharge the outstanding liability within 60 days.

Phoenix ARC subsequently initiated insolvency proceedings against the personal guarantors under Section 95 of the Insolvency and Bankruptcy Code in October 2023. The NCLT, however, dismissed the application, holding that the limitation commenced after expiry of 60 days from the SARFAESI notice and expired on 29.05.2022 after applying the Supreme Court's extension of limitation on account of Covid-19.

Before the appellate tribunal, Phoenix ARC contended that a notice issued under Section 13(2) of the SARFAESI Act is only a statutory step to enforce a security interest and cannot be treated as an invocation of a personal guarantee. It argued that the guarantees were invoked only through subsequent demand notices issued in 2022 and 2023, and that limitation stood extended due to acknowledgment of debt in the corporate debtor's financial statements.

The respondents contended that the demand notice dated April 12, 2018, was also addressed to them in their capacity as personal guarantors and specifically called upon them to discharge their liability. This, therefore, constituted invocation of the guarantee, making the application filed in 2023 barred by limitation.

The appellate tribunal held that whether a demand notice under Section 13(2) of the SARFAESI Act amounts to invocation of a personal guarantee depends on the terms of the guarantee and the contents of the notice.

“The invocation of personal guarantee has to be in accordance with the terms of the Guarantee Agreement which is a settled law. Clause 7 of the Guarantee Agreement does not require any particular mode and manner of the demand notice. When demand notice is issued against the personal guarantor asking the personal guarantor to discharge its liabilities, the guarantee stands invoked. Whether notice under Section 13(2) in a particular case invoked the guarantee or not depends on the words and intent of the notice.”, the tribunal observed.

The tribunal, however, found that the corporate debtor had acknowledged its liability in its financial statements for the year ending March 31, 2020, including in the auditor's report filed with the Registrar of Companies.

It held that such acknowledgment extends limitations under Section 18 of the Limitation Act and applies equally to personal guarantors.

On this basis, the tribunal held that a fresh limitation period commenced from December 31, 2020. After applying the Supreme Court's directions excluding the period between March 15, 2020, and February 28, 2022, the limitation period extended beyond the filing of the application in October 2023.

The tribunal also held that proceedings under the Insolvency and Bankruptcy Code are independent of proceedings under the SARFAESI Act and can run concurrently.

“We note that the proceedings under SARFAESI and the proceedings under the IBC Code are independent proceedings and can run concurrently and there is no bar in holding the proceedings against the Personal Guarantor, even if the Personal Guarantor was prosecuted under SARFAESI Act.”

Holding that the NCLT had failed to consider the effect of acknowledgment of debt while computing limitation, the NCLAT set aside the impugned order and held that the insolvency proceedings against the personal guarantors were not barred by limitation.