2025 (7) TMI 1718 - AT - IBC

Guarantor Liability Starts at NPA Classification; Limitation Counts from Debt Recovery Certificate Under IBC Section 5(7)

MR. VIRIGNENI ANJAIAH Versus M/s. PRIDHVI ASSET RECONSTRUCTION AND SECURITIZATION COMPANY LTD., MR. GOVADA VENKATA SUBBARAO, M/s. SRI PAVANA KEERTHI HOTELS INDIA PRIVATE LIMITED And SMT. KADIYALA SUNEETHA Versus M/s. PRIDHVI ASSET RECONSTRUCTION AND SECURITIZATION COMPANY LTD., MR. GOVADA VENKATA SUBBARAO, M/s. SRI PAVANA KEERTHI HOTELS INDIA PRIVATE LIMITED

The NCLAT held that the guarantor's liability arose upon classification of the loan as NPA on 31.10.2015, with limitation starting from the issuance of ... Admission of proceedings that were held u/s 95 of the I & B Code, 2016 - Corporate Debtor declared as NPA - time limitation - necessity of issuance of a fresh notice - HELD THAT:- It is only upon the classification of the loan account as NPA (Non-Performing Asset) on 31.10.2015, that the Guarantor's liability in pursuance to the demand raised by the creditors on the Guarantor got crystalized to be proceeded with and limitation will start from 09.07.2019, date of issue of Debt Recovery Certificate. The period of 3 years would have to be computed after excluding the period specified limitation by the judgment of the Hon’ble Apex Court, as rendered in Suo Moto Writ Petition No. 3/2020 [2022 (1) TMI 385 - SC ORDER], i.e., the period from 15.03.2020 to 28.02.2022. As the Application were filed on 05.07.2023, they stand well within the limitation period, as the limitation period would stand extended in the light of the judgment rendered by the Hon’ble Apex Court, a finding in relation to which has been recorded in Para 20 of the judgment. What could be conclusively determined from the records, is that, in principle, the Appellant has admitted the liability, as it was reflected in the demand notice issued under Rule 7 and more aptly in pursuance to the demand notice issued under Section 13(2) of the SARFAESI Act, 2002. Neither of the issues with respect to limitation is now an issue, which is res integra as the law has already been settled in the judgment rendered by Dena Bank Vs. C. Shivakumar Reddy and Another [2021 (8) TMI 315 - SUPREME COURT], wherein the Hon’ble Apex Court held that, the recovery certificate, gives rise to a fresh cause of action, and the recovery certificate holder is to be treated as to be the Financial Creditor under Section 5 (7) of the I & B Code, 2016. In that eventuality the Recovery Certificate of 09.07.2019, as issued by the DRT (Debt Recovery Tribunal) Hyderabad, would give a fresh cause of action holding the Respondent to be the Financial Creditor under Section 5 (7) of the I & B Code, 2016, for the purposes of initiation of the proceedings, in the matters of Dena Bank Vs. C. Shivakumar Reddy and Another has considered the aspect of limitation. The Recovery Certificate that was issued by the Debt Recovery Tribunal on 09.07.2019, and the Financial Creditor, having been determined as to be a certificate holder under the said certificate in the DRT proceedings, acquired the status of having a fresh cause of action and thus, proceedings having been initiated on 09.12.2021, after issuance of the demand notice by the DRT (Debt Recovery Tribunal), will not be barred by limitation. Even the subsequent company petition proceedings which stood initiated on 05.07.2023, will be well within the prescribed time limit, if limitation is computed from 29.07.2019 after accounting for the exclusion period mandated by Hon’ble Apex Court on account of the Covid-19 pandemic. The finding which has been recorded by the Ld. Tribunal on the question of limitation, and on the question of issuance of proper notice for initiation of the proceedings, do not suffer from any apparent error, because the notice of 29.12.2021, will be treated to be in continuity to the proceedings, having been served on 18.04.2023, which itself bring the proceedings to be well within the prescribed limitation - Appeal dismissed. ISSUES: Whether the initiation of insolvency resolution proceedings against personal guarantors under Section 95 of the Insolvency and Bankruptcy Code (IBC), 2016, was validly preceded by the mandatory service of a demand notice as required under Rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2019.Whether the proceedings were barred by limitation considering the dates of demand notice issuance, Debt Recovery Certificate, and subsequent applications.Whether a fresh demand notice was required after the dismissal of the initial application due to non-service of the demand notice.Whether the service of the original demand notice on a later date satisfies the statutory requirement for initiating proceedings under Section 95 of the IBC.Whether the Debt Recovery Certificate issued by the Debt Recovery Tribunal (DRT) constitutes a fresh cause of action for limitation purposes under the IBC. RULINGS / HOLDINGS: The Court held that the initiation of proceedings under Section 95 IBC requires mandatory service of a demand notice in Form-B as per Rule 7, and the absence of proof of such service renders the proceedings invalid; however, service of the original demand notice dated 29.12.2021 on 18.04.2023, which was acknowledged by the personal guarantors, satisfies the statutory requirement.The Court ruled that the proceedings were not barred by limitation as the demand notice of 29.12.2021 was issued within the prescribed time and the application filed on 05.07.2023 remains within the three-year limitation period under Article 137 of the Limitation Act, considering the exclusion period mandated by the Supreme Court due to the COVID-19 pandemic.The Court found that the order dated 25.05.2023 dismissing the initial application for non-service of notice did not mandate issuance of a fresh demand notice; rather, it required rectification by ensuring service of the existing notice, which was subsequently done and acknowledged.The Court concluded that the service of the demand notice dated 29.12.2021 on 18.04.2023 fulfills the 'basic ingredient and the purpose of the service of notice as intended by the law' and thus the proceedings initiated thereafter comply with statutory requirements.The Court affirmed that the Debt Recovery Certificate issued on 09.07.2019 by the DRT constitutes a fresh cause of action, thereby resetting the limitation period for initiating insolvency proceedings against the personal guarantors under the IBC. RATIONALE: The Court applied the provisions of Section 95 of the Insolvency and Bankruptcy Code, 2016, read with Rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process against Personal Guarantors to Corporate Debtors) Rules, 2019, which mandate the issuance and service of a demand notice in Form-B to the personal guarantor before initiating insolvency proceedings.The Court relied on the principle that non-service of the mandatory demand notice invalidates the initiation of proceedings, but subsequent valid service cures this procedural defect, as reflected in the order dated 25.05.2023 which allowed refiling after proper notice.The limitation analysis was guided by Article 137 of the Limitation Act, 1963, and the Supreme Court's suo moto extension of limitation during the COVID-19 pandemic period (15.03.2020 to 28.02.2022), thereby extending the limitation timeline for filing applications.The Court followed the precedent set by the Supreme Court in the judgment concerning Dena Bank v. C. Shivakumar Reddy, holding that a Recovery Certificate issued by a Debt Recovery Tribunal gives rise to a fresh cause of action for the purposes of limitation and establishes the Financial Creditor's status under Section 5(7) of the IBC.The Court emphasized that the acknowledgment of debt and acceptance of the demand notice by the personal guarantor negates any dispute on the existence of debt and amount of default, thereby supporting the initiation of insolvency proceedings.No dissent or doctrinal shift was indicated; the Court's reasoning is consistent with established statutory mandates and Supreme Court precedents.