OTS Proposal Can Constitute Acknowledgment Of Debt For Limitation Under IBC: NCLT Indore

The Indore Bench of the National Company Law Tribunal (NCLT) on 13 April held that a One-Time Settlement (OTS) proposal can amount to an acknowledgment of debt for limitation under Section 95 of the Insolvency and Bankruptcy Code, 2016. Further, objections on limitation, stamping, and pending Debts Recovery Tribunal proceedings do not bar admission of insolvency proceedings against a personal guarantor at the threshold stage.

A Bench comprising Judicial Member Brajendra Mani Tripathi and Technical Member Man Mohan Gupta admitted an application filed by Punjab National Bank (PNB) against Akhilesh Argal, personal guarantor of Vindhya Cereals Pvt. Ltd. It observed:

“The stipulation contained in the OTS proposal does not, prima facie, take away the effect of acknowledgment of liability for the purposes of proceedings under Section 95 of the Code and cannot be disregarded while considering the issue of limitation”

PNB had extended credit facilities to Vindhya Cereals, which defaulted in repayment. Argal executed multiple guarantee deeds between 2012 and 2014 securing these facilities. The account was classified as a Non-Performing Asset on 29 December 2016, and the bank invoked the personal guarantee in 2017.

PNB filed the Section 95 application in September 2023, claiming an outstanding of Rs 89.68 crore as of June 2023. The Tribunal appointed Ms. Teena Saraswat Pandey as Resolution Professional, who submitted a report under Section 99 recommending admission of the application.

Argal objected to the proceedings on multiple grounds. He contended that the application was barred by limitation, as the default occurred in 2016 and the guarantee was invoked in 2017. He further relied on the OTS proposal clause stating that it could not be treated as an acknowledgment of debt. He also challenged the validity of the guarantee deeds on the ground of insufficient stamping, alleged improper service of demand notice in Form B, and argued that pending proceedings before the Debts Recovery Tribunal barred parallel action under the Insolvency Code.

PNB submitted that the guarantee was a continuing guarantee under Section 128 of the Contract Act, making liability co-extensive with the principal borrower. It further argued that the OTS proposal dated 15 February 2021 constituted a valid acknowledgment of debt, extending the limitation. It was also contended that Section 238 of the IBC gave an overriding effect to the Code over DRT proceedings.

The Tribunal recorded the chronology of events, including the default in 2016, invocation in 2017, OTS proposal in 2021, and the exclusion of limitation period during the COVID-19 period (15 March 2020 to 28 February 2022). It held that the OTS proposal amounted to an acknowledgment of liability and that the limitation objection was not sustainable.

Relying on Bank of India v. Multi ARC Coating and ITC Ltd. v. Blue Coast Hotels, the Tribunal rejected the limitation plea. It further observed:

“It is well settled that the liability of the guarantor is coextensive with that of the principal borrower. On perusal of the guarantee deed placed on record, it is observed that the said guarantee has been described as a continuing guarantee. The said aspect along with the OTS proposal dated 15.02.2021 forms part of the record and is required to be taken into consideration while examining limitation.”

The Tribunal held that objections regarding insufficiency of stamp duty were procedural in nature and not fatal at the admission stage. It also found that the application was filed in the prescribed form with requisite documents and fee, and that alleged defects in service did not vitiate the proceedings.

On the issue of parallel proceedings, the Tribunal ruled that pendency before the Debts Recovery Tribunal did not bar proceedings under the Insolvency Code in view of its overriding effect under Section 238.

Accordingly, the NCLT admitted the application and initiated insolvency proceedings against the personal guarantor.

For Appellants: Advocate Madhav Lahoti

For Respondents: Advocate Pratik Thakkar