NCLAT Sets Aside Insolvency Against Palavi Synthetics Guarantors After NCLT Miscalculated Limitation

The National Company Law Appellate Tribunal (NCLAT) at Delhi has set aside the admission of insolvency proceedings against personal guarantors of Palavi Synthetics Pvt. Ltd., holding that while a recovery decree gives rise to a fresh cause of action and a fresh limitation period, the NCLT had wrongly computed that limitation.

A bench of Judicial Member Justice Mohd. Faiz Alam Khan and Technical Member Naresh Salecha observed, “since the decree was passed by the JR on 15.09.2017 the limitation period according to this decree, which has provided a fresh cause of action would have extended the limitation period till 14.09.2020,” but found that this principle had been incorrectly applied.

The appellate tribunal was hearing appeals filed by Dineshbhai Premjibhai Lathidadia and Rashmiben Dineshbhai Lathidadia, who had stood as personal guarantors to financial facilities extended by Sarvodaya Sahakari Bank.

The appeals challenged orders of the Ahmedabad bench of the NCLT admitting applications to initiate insolvency proceedings against them.

The bank had extended financial facilities to Palavi Synthetics Pvt. Ltd., for which the appellants had furnished personal guarantees. The account was classified as a non-performing asset in July 2016.

The guarantees were invoked in August 2016. The bank then filed a summary suit before the Joint Registrar in Surat under the Gujarat Co-operative Societies Act, which was decreed in September 2017. The order directed repayment of Rs. 2,88,65,468.35 along with interest. No payment was made thereafter. In 2022, the bank issued a demand notice and initiated insolvency proceedings.

The NCLT admitted the applications as being within limitation, a finding the appellate tribunal later found erroneous.

The guarantors argued that the proceedings were time-barred. They said the right to initiate insolvency action arose when the guarantees were invoked in 2016. According to them, the decree could not revive limitation.

They also argued that a demand notice under the insolvency framework cannot be treated as invocation of a guarantee. They pointed out that any acknowledgment relied upon by the bank came after the limitation had expired.

The appellate tribunal rejected the argument that limitation could not restart after a decree. At the same time, it found clear errors in how limitation had been computed. It held that the adjudicating authority had wrongly treated the demand notice as an invocation of the guarantee.

Clarifying the legal position, it observed, “it appears to be a settled law that by issuance of notice under Form-B the guarantee may not be invoked.” It further quoted SBI vs. Deepak Kumar Singhania, (2025) which held, “a Personal Guarantor becomes a Debtor only when guarantee is invoked, making him liable to make the payment to the Lender.”

The tribunal also found that the exclusion of time during the COVID period had been incorrectly calculated. On these grounds, it set aside the orders and remanded the matter for fresh consideration on limitation.