2025 (6) TMI 196 - AT - IBC

NCLAT dismisses appeal on insolvency application rejection under Section 94(1) - continuing personal guarantee limitation period unaffected by property auction recovery

NCLAT dismissed an appeal challenging rejection of insolvency application under Section 94(1) of the Code. The case involved a continuing personal ... Dismissal of application under Section 94(1) of the Code by the Adjudicating Authority as not maintainable - whether the Respondent’s claims persisted post-auction or evaluating compliance with Code’s procedural mandates for personal guarantor insolvency? - HELD THAT:- The guarantee agreement dated 23.09.2013 is stated to be continuing and binding personal guarantee on the part of the Appellant in favour of the Respondent. The guarantee agreement, clause 2, further stated that the guarantee is an additional and without prejudice for any security for application which bank may have from the personal guarantor on the principal borrower and for which of rights and remedies in respect of are reserved. The Clause 3 of the guarantee deed categorically mentioned that the guarantee shall be continuing guarantee and shall not be considered as wholly or partially satisfied or exhausted by any payment from time to time made to the bank or any statement of any account or reason of account being created or any other at any time or from time to time. This clause 3 further states that guarantee shall continue in force notwithstanding the discharge of the principals by operation of law. It is noted that similar rights have been accrued in favour of the Respondent bank in clause 4, 5, 6 etc. From this, it becomes very clear that the Respondent has absolute right to invoke the guarantee agreement signed by the Appellant despite any operation of law and other factors. Explanation (b) of Section 19 of the Limitation Act,1963 states “debt” does not include money payable under a decree or order of a court. Thus, we note that the term “debt” in the context of Section 19 of the Limitation Act,1963 specifically excludes any money that is payable under a decree or order of a court. In other words, if a court has already passed a decree or order directing the payment of a certain amount, such an amount is not considered a “debt” for the purposes of Section 19 of the Limitation Act,1963 - the amount was recovered by the Respondent Bank due to auction of mortgaged property as a result of decree passed by Debt Recovery Tribunal-II, Ahmedabad. Thus, in terms of Explanation (b) of Section 19 of the Limitation Act,1963, this recovery would not considered as Debt and therefore does not impact/enhance limitation period as pleaded by the Appellant. In fact, this goes against the cause of the Appellant. Conclusion - The default by the Corporate Debtor and subsequently notice to Appellant invoking the bank guarantee are undisputed. We also note that the bank has issued guarantee which is in nature of continuing and unconditional guarantee which has been legally invoked by the Respondent Bank. It is further observed that the DRT proceedings are under the Recovery of Debts and Bankruptcy Act, 1993. It is reiterated that the action based on to decree passed by the DRT was in respect of the mortgaged property held by the Respondent. Hence, it cannot be case of the Appellant that such recovery shall extend the limitation for personal guarantee given by the Appellant. The argument therefore submitted by the Appellant are not tenable. There are no error in the Impugned Order. The Appeal devoid of any merit stand rejected. Issues Presented and ConsideredThe core legal questions considered in this appeal are:Whether the application filed under Section 94(1) of the Insolvency and Bankruptcy Code, 2016 ('Code') by the personal guarantor was maintainable despite being dismissed by the Adjudicating Authority on limitation grounds.Whether payments or recoveries made pursuant to a decree/order of the Debt Recovery Tribunal (DRT) and subsequent auction of mortgaged property can revive or extend the limitation period for filing insolvency proceedings against a personal guarantor under the Limitation Act, 1963.The applicability and interpretation of Section 19 of the Limitation Act, 1963, particularly the effect of payments on account of debt in extending limitation, vis-`a-vis money recoverable under a court decree.The applicability of Section 238A of the Code, which mandates the application of the Limitation Act to proceedings before the Adjudicating Authority and related tribunals.Whether the Adjudicating Authority's dismissal of the application as 'not maintainable' without detailed reasoning constituted a non-speaking order and was legally unsustainable.Issue-Wise Detailed Analysis1. Maintainability of the Application under Section 94(1) of the Code and Limitation PeriodLegal Framework and Precedents: Section 94(1) of the Code allows a personal guarantor to initiate insolvency proceedings. The Limitation Act, 1963 governs the time frame for filing such applications. Section 19 of the Limitation Act provides that part payments made by a debtor can reset the limitation period. The Supreme Court judgment in Dena Bank v. C. Shivakumar Reddy established that a decree/order of the DRT can constitute a fresh cause of action, potentially extending limitation.Court's Interpretation and Reasoning: The Appellant argued that the limitation period should be computed from the date of last payment or acknowledgment, which was the receipt of sale consideration by the Bank on 30.01.2024 following auction of mortgaged property pursuant to the DRT decree. The Appellant contended that this revived the limitation period under Section 19 of the Limitation Act, enabling the application filed on 06.08.2024 to be within time.The Adjudicating Authority dismissed the application as barred by limitation, holding that recoveries made under a court decree and auction of mortgaged property do not amount to repayments by the principal borrower or guarantor, and hence cannot extend the limitation period. The Adjudicating Authority further held that the petition was filed beyond the prescribed limitation and did not comply with Section 238A of the Code.The Tribunal examined the guarantee agreement, which was a continuing and unconditional personal guarantee. The invocation of the guarantee was undisputed and dated 06.08.2016. The limitation period for filing the application should have been computed from this date, expiring by 05.08.2019. The application filed in 2024 was thus beyond limitation.Key Evidence and Findings: The decree/order of the DRT dated 09.01.2017 and subsequent auction of mortgaged property in January 2024 were central. The Appellant relied on the Dena Bank judgment to argue for extension of limitation. However, the Tribunal noted that the amount recovered was pursuant to a court decree and auction, not a voluntary payment by the debtor or guarantor.Application of Law to Facts: Section 19 of the Limitation Act excludes money payable under a decree or order of a court from the definition of 'debt.' Hence, payments made pursuant to such decree do not reset the limitation period. The Tribunal distinguished the Dena Bank judgment, which pertained to entries in books of accounts and acknowledgments by the Corporate Debtor, not payments under a court decree.Treatment of Competing Arguments: The Appellant's argument that the auction sale proceeds should reset limitation was rejected on the ground that such recovery is not a payment by the debtor or guarantor but a realization under court decree. The Tribunal emphasized that no payment was made by the Corporate Debtor or the personal guarantor to invoke Section 19 benefit.Conclusion: The application was rightly dismissed as barred by limitation. The recoveries under the DRT decree and auction do not extend or revive the limitation period for insolvency proceedings against the personal guarantor.2. Applicability of Section 238A of the CodeLegal Framework: Section 238A of the Code provides that the Limitation Act, 1963 shall apply to proceedings before the Adjudicating Authority and related tribunals, as far as may be.Court's Interpretation: The Tribunal noted that the Adjudicating Authority correctly applied Section 238A in dismissing the petition on limitation grounds. The Code mandates adherence to the Limitation Act in insolvency proceedings, thereby reinforcing the limitation bar.Conclusion: The Adjudicating Authority's reliance on Section 238A was appropriate and legally sound.3. Nature and Effect of the Guarantee AgreementLegal Framework: The guarantee agreement executed by the Appellant was continuing, unconditional, and binding. Clauses in the agreement explicitly stated that the guarantee shall not be considered satisfied or exhausted by any payment or account statements, and shall continue notwithstanding discharge of the principal by operation of law.Court's Interpretation: The Tribunal emphasized that the guarantee was valid and enforceable. The Respondent had absolute right to invoke the guarantee despite any operation of law or other factors. The invocation by notice dated 06.08.2016 was valid and undisputed.Conclusion: The guarantee was legally invoked and enforceable; no challenge to its validity was sustained.4. Whether the Adjudicating Authority's Order was a Non-Speaking OrderArguments: The Appellant contended that the Impugned Order was a non-speaking order, passed without adequate consideration of facts and arguments, and thus legally unsustainable.Court's Reasoning: The Tribunal reviewed the Impugned Order and found that the Adjudicating Authority had considered the relevant facts, the guarantee agreement, the DRT decree, and the limitation provisions. The order clearly articulated the basis for dismissal, including the legal reasoning on limitation and non-applicability of Section 19 to recovery under a court decree.Conclusion: The Impugned Order was a speaking order with adequate legal reasoning and was not legally unsustainable.Significant Holdings'Such receipts of recoveries do not pertain to the repayment of the principal borrower or guarantor/s and is out of the mortgaged properties on which a recovery certificate has been issued, cannot extend the limitation period for the personal guarantor who is not complying with the provisions of Sec 36 of Limitation Act 1963.''The term 'debt' in the context of Section 19 of the Limitation Act, 1963 specifically excludes any money that is payable under a decree or order of a court. This means that if a payment is made towards satisfying a court decree or order, such payment will not result in the computation of a fresh limitation period under Section 19 of the Limitation Act, 1963.''The guarantee agreement dated 28.09.2013 is stated to be continuing and binding personal guarantee on the part of the Appellant in favour of the Respondent. The guarantee shall continue in force notwithstanding the discharge of the principals by operation of law.''The application under Section 94(1) of the Code filed on 06.08.2024 is beyond the prescribed period of limitation and does not comply with Section 238A of the Code. Hence, it is not maintainable.'Core Principles EstablishedPayments or recoveries made pursuant to a court decree or order, including auction proceeds under a recovery certificate, do not amount to payments by the debtor or guarantor for the purpose of extending the limitation period under Section 19 of the Limitation Act, 1963.The Limitation Act, 1963 applies to insolvency proceedings under the Code by virtue of Section 238A, and limitation periods must be strictly adhered to.A continuing and unconditional personal guarantee remains enforceable notwithstanding payments or discharge of the principal debtor by operation of law, unless expressly released.An order dismissing an application on limitation grounds is sustainable if it contains clear reasoning and addresses the relevant legal provisions and facts.Final Determinations on Each IssueThe Tribunal upheld the dismissal of the application under Section 94(1) of the Code as barred by limitation, rejecting the Appellant's contention that auction proceeds under the DRT decree revived the limitation period. The guarantee was validly invoked and enforceable. The Adjudicating Authority's order was legally sound and not a non-speaking order. The appeal was devoid of merit and was accordingly rejected without costs.