2026 (3) TMI 1436 - AT - IBC

Personal guarantee invocation and debt acknowledgement can extend limitation in insolvency proceedings against guarantors.

A demand notice under Section 13(2) of the SARFAESI Act may amount to invocation of a personal guarantee where it is addressed to the guarantors and ... Demand notice issued under Section 13(2) of the SARFAESI Act to the borrower and guarantors, in the language used in the notice - invocation of the personal guarantee and fixed the starting point of limitation for proceedings against the personal guarantor - Extension of Limitation - Acknowledgment of debt in principal borrower's books - Concurrent remedies under SARFAESI and IBC - Whether mere issuance of notice under Section 13(2) can be considered as an invocation of guarantee and limitation to be calculated from that date of invocation for proceedings under IBC. Limitation for insolvency proceedings against personal guarantor - Acknowledgment of debt in principal borrower's books - Extension of limitation - HELD THAT:- The Appellate Tribunal held that, even proceeding on the basis that default under the guarantee arose after expiry of 60 days from the notice dated 12.04.2018, the Adjudicating Authority erred in ignoring the acknowledgment of debt contained in the Independent Auditor's Report filed with Form AOC-4 for Financial Year 2019-20. Relying on the principle that acknowledgment in the balance sheet extends limitation, and further holding that acknowledgment by the principal borrower is as good as acknowledgment by the guarantor, the Tribunal concluded that a fresh period of limitation commenced from 31.12.2020. After applying the exclusion granted during the COVID-19 period, the fresh limitation ran from 01.03.2022 and had not expired when the petitions were filed on 13.10.2023. [Paras 67, 68, 69, 70, 71] The petitions were not barred by limitation, and the dismissal on that ground was unsustainable. Concurrent remedies under SARFAESI and IBC - Overriding effect of the IBC - Personal guarantor proceedings - HELD THAT: - The Appellate Tribunal held that proceedings under SARFAESI and under the Code are independent and may continue concurrently. It further observed that, in view of the overriding effect of the Code, the creditor's resort to Rule 7(1) of the Personal Guarantor Rules could not be defeated by the Respondents' contention that the guarantee had already been invoked or that other recovery proceedings had been initiated. The pendency of arbitration proceedings or proceedings before the DRT, therefore, did not preclude initiation of insolvency proceedings against the personal guarantors. [Paras 52, 57, 64, 72] The objections founded on prior SARFAESI, arbitration, and DRT proceedings were rejected. Final Conclusion: The Appellate Tribunal held that the Section 95 petitions against both personal guarantors were within limitation because the Corporate Debtor's acknowledgment of debt in its auditor's report extended limitation for the guarantors as well. The impugned dismissal was therefore reversed and both petitions were allowed. Issues: (i) Whether a demand notice issued under Section 13(2) of the SARFAESI Act to the borrower and guarantors, in the language used in the notice, amounted to invocation of the personal guarantee and fixed the starting point of limitation for proceedings against the personal guarantor. (ii) Whether the acknowledgement of liability in the corporate debtor's financial statements and auditor's report extended limitation for initiating insolvency proceedings against the personal guarantor.Issue (i): Whether a demand notice issued under Section 13(2) of the SARFAESI Act to the borrower and guarantors, in the language used in the notice, amounted to invocation of the personal guarantee and fixed the starting point of limitation for proceedings against the personal guarantor.Analysis: The notice dated 12.04.2018 was addressed not only to the borrower but also to the guarantors, and it specifically called upon them to discharge their liability in full within 60 days. The language of the notice made a direct demand against the guarantors in relation to the credit facility and therefore disclosed invocation of the guarantee. The period of default under the guarantee commenced on expiry of the 60-day period, and the date of invocation could not be ignored while examining limitation.Conclusion: The notice under Section 13(2) of the SARFAESI Act did amount to invocation of the personal guarantee and the default under the guarantee arose on expiry of the notice period.Issue (ii): Whether the acknowledgement of liability in the corporate debtor's financial statements and auditor's report extended limitation for initiating insolvency proceedings against the personal guarantor.Analysis: The corporate debtor's independent auditor's report for the financial year 2019-20 recorded that it would deal with the financial creditor for the debt and make future payments in relation to the debt. Such a recorded acknowledgement was treated as an acknowledgement of debt within the meaning of Section 18 of the Limitation Act, 1963. Since an acknowledgement by the principal borrower extends limitation and is attributable to the guarantor as well, a fresh period of limitation ran from the date of acknowledgement, read with the COVID-related exclusion period.Conclusion: The acknowledgement in the corporate debtor's audited financial statements extended limitation, and the insolvency petitions were within time.Final Conclusion: The dismissal order of the Adjudicating Authority was set aside, the limitation objection failed, and the insolvency petitions against both personal guarantors were allowed.Ratio Decidendi: For personal guarantor insolvency, a Section 13(2) notice will amount to invocation of guarantee if its wording makes a direct demand on the guarantor to discharge liability, and a corporate debtor's written acknowledgement of the debt in its financial statements extends limitation against the guarantor as well.