IBC S.121(2) Timeline For Personal Guarantor Bankruptcy Applications Directory, Not Mandatory: NCLAT

The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) on 30 June held that the three month period prescribed under Section 121(2) of the Insolvency and Bankruptcy Code, 2016 (IBC) for filing a bankruptcy application against a personal guarantor is directory and not mandatory.

Judicial Member Justice N Seshasayee and Technical Member Arun Baroka set aside the order of the Cuttack Bench of the National Company Law Tribunal (NCLT), which had dismissed Cosmos Co Operative Bank Limited's bankruptcy petition against personal guarantor Anil Kumar Gilra on the ground of delay. The Bench observed:

“The three-month period under Section 121 is thus intended to be facilitative and not restrictive, ensuring that genuine attempts at settlement are not foreclosed. Any interpretation imposing a strict or inflexible limitation would defeat the very object sought to be achieved by the legislature and the Bankruptcy Law Reforms Committee (BLRC). Furthermore, if Section 121(2) were to be held to be mandatory, the object to encouraging banks to settle debts outside of the court process would be completely defeated, and banks would be encouraged to file for bankruptcy forthwith, even when the same could have been avoided.”

The matter arose from credit facilities extended by Cosmos Bank to the corporate debtor between 2013 and 2017, for which Gilra had executed personal guarantees. Following default by the corporate debtor, insolvency proceedings were initiated and the corporate debtor was admitted into the Corporate Insolvency Resolution Process (CIRP) in December 2019.

In October 2020, Cosmos Bank issued a demand notice to Gilra seeking payment of Rs. 87.25 crores. The Bank subsequently filed an application under Section 95 of the IBC (which provides for initiation of insolvency resolution against personal guarantors to corporate debtors) in 2021. The Resolution Professional (RP) recommended admission of the application, following which the NCLT in June 2022 admitted the application and commenced insolvency resolution proceedings against Gilra.

During the creditors' meetings, Gilra admitted his inability to repay the dues and failed to submit a repayment plan. Consequently, in December 2023, the NCLT permitted creditors to file a bankruptcy application.

Cosmos Bank filed the bankruptcy application only in June 2024, beyond the three month period prescribed under Section 121(2) of the IBC. The Cuttack Bench dismissed the application on limitation grounds, holding that the delay could not be condoned, leading to the appeal before the NCLAT.

The Bank contended that the delay occurred due to the lack of communication from the RP, unavailability of authorised signatories and the time required for collating documents. It also submitted that it was under a bona fide belief that Gilra would settle the dues.

Further, it submitted that Section 121(2) of the IBC was directory and not mandatory. It further relied on Section 238A of the Code, which makes the Limitation Act applicable to proceedings under the IBC, and contended that Section 5 of the Limitation Act, which permits condonation of delay, would apply.

Gilra opposed the appeal, arguing that the bankruptcy application was filed after a delay of 160 days beyond the statutory three month period and that the IBC did not provide any mechanism for condoning such delay. He also alleged suppression of facts by the Bank and contended that the delay had not been properly explained.

The NCLAT noted that although Section 121(2) uses the term “shall”, the provision does not prescribe any consequence for non compliance. Relying on the Supreme Court decisions in Consolidated Engineering Enterprises v Principal Secretary, Irrigation Department and J.J. Merchant v Shrinath Chaturvedi, the Bench observed that a time limit becomes an absolute bar only where the statute provides both an initial period and an outer limit beyond which delay cannot be condoned. It held:

“Thus, the filing of a Bankruptcy Application under Section 121 of the IBC is not subject to a rigid statutory bar and thus there is no bar in preferring an Application beyond a period of 3 months. Thus, in the absence of any express outer limit under Section 121, there exists no absolute prohibition against condonation of delay in filing an application under the said section.”

The Bench further held that procedural provisions containing the word “shall” can be interpreted as directory where a strict interpretation would defeat legislative intent. It observed that personal insolvency provisions under the IBC operate differently from the CIRP framework, as they involve issues relating to an individual's dignity and livelihood and are not intended to be governed by rigid timelines.

It noted that the BLRC had prescribed the three month period under Section 121(2) to encourage settlements between creditors and guarantors, without creating an absolute bar on delayed filings.

Further, the Bench held that Section 5 of the Limitation Act would apply to such applications through Section 238A of the IBC, where no outer limitation period is prescribed. It held that Section 121(2) is directory, the delay in filing the bankruptcy application was condonable and the NCLT had erred in dismissing Cosmos Bank's petition.

Accordingly, the NCLAT allowed the appeal and set aside the impugned order and restored the bankruptcy application for adjudication on merits.