2025 (11) TMI 1713 - AT - IBC

Section 95 IBC plea timely; guarantor appeals fail on limitation, Covid exclusion, and Rule 7 invocation

Brij Kishore Gupta, Chandra Mohan Singhal, Bitthal Prasad Agarwal, Giriraj Kumar Singhal, Lokesh Kumar Sharma, Radha Agarwal, Shyam Sunder Sharma, Gayatri Devi Singhal, Ramavtar Sharma, Varun Gupta and Om Prakash Sharma Versus State Bank of India & Anr.

NCLAT (PB) dismissed appeals by personal guarantors challenging maintainability of a Section 95 IBC application on limitation and guarantee invocation ... Time Limitation for filing application u/s 95 of the Insolvency and Bankruptcy Code against the personal guarantors - acknowledgement on the part of the borrower qua the payment of dues on account of the proposal of the OTS by the Bank or not HELD THAT:- There are two dates given by the bank i.e. 27.06.2019, date on which the recovery certificate was issued and 23.09.2019 when the OTS proposal made by the Bank was accepted by the principal borrower - If the limitation is to be counted from 27.06.2019 then the period of three years would come to an end on 27.06.2022 whereas the application under Section 95 was filed on 10.08.2024. During the currency of period of limitation, because of the Covid-19 the Hon’ble Supreme Court passed the order on 10.01.2022 in Re : cognizance for extension of limitation [2022 (1) TMI 385 - SC ORDER], as per which the period from 15.03.2020 till 28.02.2022 was ordered to be excluded for counting the limitation, as may be prescribed under any general or special laws, in respect of all judicial or quasi judicial proceedings. From the reading of the aforesaid letter/communication between the bank and borrower, it is apparent that the consent was given by the borrower on 23.09.2019 on the basis of which it transpires that there was an acknowledgment of debt on that date only, therefore, if the limitation of three years is to be counted from 23.09.2019, the application having been filed on 10.08.2024, is within the period of limitation. Hence, the first contention raised by the Appellant in regard to limitation is hereby repelled. Whether there was an acknowledgement on the part of the borrower qua the payment of dues on account of the proposal of the OTS by the Bank? - HELD THAT:- From the perusal of the notice dated 29.11.2013, it is clear that the guarantees given by the Appellants were already invoked and the notice under Rule 7 was only a statutory notice - there are no force in the second contention of the Appellant as well that the notice was not given for invocation of the guarantee. All these appeals are found to be devoid of merit and thus, the same is hereby dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the application under Section 95 of the Insolvency and Bankruptcy Code against the personal guarantors was filed within the prescribed period of limitation under the Limitation Act, 1963, considering the date of recovery certificate, subsequent acknowledgment through OTS correspondence, and the exclusion/extension of limitation granted by the Supreme Court due to Covid-19. 1.2 Whether a valid invocation of the personal guarantees had taken place prior to filing the application under Section 95, and whether the statutory notice under Rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 could by itself constitute such invocation. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Limitation for application under Section 95 of the Code Legal framework (as discussed) 2.1 The Court proceeded on the basis that limitation for an application under Section 95 is governed by Article 137 of the Limitation Act, 1963, prescribing a period of three years. The Court referred to: (i) the date of the recovery certificate under the Recovery of Debts and Bankruptcy Act, 1993; (ii) Section 18 of the Limitation Act regarding acknowledgment of liability and fresh commencement of limitation; and (iii) orders passed by the Supreme Court in In Re: Cognizance for Extension of Limitation excluding the period from 15.03.2020 to 28.02.2022 for the purposes of limitation and granting a further 90 days from 01.03.2022 where limitation would have expired in that excluded period. Interpretation and reasoning 2.2 The Court noted two possible starting points for limitation relied upon by the creditor Bank: (a) 27.06.2019, being the date of issuance of the recovery certificate by the DRT; and (b) 23.09.2019, being the date on which the borrower conveyed its willingness to settle the dues under the SBI OTS 2019 and thereby acknowledged the debt. 2.3 Proceeding first on the basis of 27.06.2019, the Court observed that the normal three-year limitation would have expired on 27.06.2022. However, in view of the Supreme Court's order excluding the period from 15.03.2020 to 28.02.2022, the said excluded period could not be counted towards limitation. The Court recorded that between 27.06.2019 and 15.03.2020 the Bank had consumed 262 days, leaving a balance of 833 days (out of 1095 days) after the exclusion period, which would expire on 28.05.2022. 2.4 The Court noted the Bank's contention that, in addition to the balance limitation period, it was entitled to the benefit of Clause III of the Supreme Court's order dated 10.01.2022 granting a minimum of 90 days from 01.03.2022 where the limitation would otherwise have expired between 15.03.2020 and 28.02.2022. On that basis, the Bank argued that limitation would extend to around September 2024, making the application dated 10.08.2024 within time. This contention was noticed but did not form the ratio, as the Court proceeded to test limitation also from the acknowledgment date. 2.5 Independently of the above, the Court examined whether there was a valid acknowledgment of debt within the meaning of Section 18 of the Limitation Act that would start a fresh period of three years. The Bank relied on the borrower's letter dated 23.09.2019 responding to the Bank's OTS offer dated 27.08.2019. 2.6 The Court reproduced the relevant OTS offer dated 27.08.2019 and the borrower's reply dated 23.09.2019, wherein the borrower clearly expressed its 'willingness to settle the dues on the basis of and in accordance with the SBI OTS 2019 Scheme' and requested sanction of OTS to enable payment of the first installment. The Court held that this communication constituted an acknowledgment of debt as on 23.09.2019. 2.7 The objection raised that a subsequent letter dated 30.09.2019 from the Bank seeking consent negated acknowledgment was rejected. The Court held that the acknowledgment stood crystallised on 23.09.2019 when the borrower unequivocally expressed willingness to settle the outstanding dues, and later correspondence did not erase or invalidate that acknowledgment. 2.8 The Court accepted the Bank's submission, supported by previous precedent cited before it, that acknowledgment of debt by the principal borrower operates as acknowledgment by the guarantors as well, thereby extending limitation against the guarantors under Section 18. Conclusions 2.9 The Court concluded that there was a clear acknowledgment of debt on 23.09.2019 by the principal borrower, which, in law, enured to the detriment of the personal guarantors. A fresh three-year limitation period thus commenced from 23.09.2019. 2.10 Calculated from 23.09.2019, and bearing in mind the exclusion of the Covid-19 limitation period, the application under Section 95 filed on 10.08.2024 was held to be within limitation. The contention that the application was barred by limitation was expressly repelled. Issue 2 - Invocation of personal guarantee prior to application under Section 95 Legal framework (as discussed) 2.11 The Court noted that: (i) under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, service of a statutory notice in the prescribed form is a sine qua non before filing an application under Section 95; and (ii) the personal guarantees in question were 'on demand', necessitating a notice of demand invoking the guarantee. Interpretation and reasoning 2.12 The appellants argued that the only notice addressed to them prior to filing the Section 95 application was the statutory notice dated 07.06.2024 under Rule 7, and that such notice, being merely a procedural pre-condition for filing the application, could not amount to an invocation of the 'on demand' guarantees. On this basis, it was contended that the application under Section 95 was not maintainable for want of prior invocation of guarantees. 2.13 The Court examined this contention with reference to the Bank's claim that the guarantees had already been invoked through an earlier recall notice. The Court reproduced and scrutinised the detailed recall and demand notice dated 29.11.2013, issued on behalf of the Bank to the borrower and all guarantors. 2.14 From the contents of the notice dated 29.11.2013, the Court found that: (a) it recited the grant of loan facilities, creation of security, and furnishing of personal guarantees; (b) it recorded that the accounts had become irregular, were declared NPA, and quantified the total outstanding dues as on 27.11.2013; and (c) it called upon the borrower and guarantors to pay the entire outstanding amount with interest and expenses within seven days, failing which legal action, including recovery by sale of mortgaged properties under SARFAESI, would be initiated. 2.15 On this basis, the Court held that the said recall notice clearly demanded repayment from the guarantors and, consequently, amounted to invocation of the guarantees. The statutory notice dated 07.06.2024 under Rule 7 was held to be distinct in character, serving only as a mandatory pre-filing procedural notice for initiation of the insolvency process under Section 95 and not as the first or only invocation. Conclusions 2.16 The Court concluded that the personal guarantees were validly invoked by the recall/demand notice dated 29.11.2013 addressed to the borrower and all guarantors, and that the requirement of demand under the 'on demand' guarantees stood satisfied long prior to the filing of the Section 95 application. 2.17 The statutory notice dated 07.06.2024 was held to be merely a procedural statutory requirement under Rule 7 and not the foundational notice for invocation of guarantees. The contention that no prior invocation of guarantee existed, or that the Section 95 application was not maintainable for that reason, was rejected. 2.18 No other grounds having been pressed, the appeals were dismissed as devoid of merit and the order admitting the Section 95 applications and accepting the resolution professional's report under Section 99 was affirmed.