2026 (4) TMI 229 - AT - IBC

Limitation for personal guarantor insolvency starts from the disclosed default date; a single term loan is not a continuing guarantee.

Limitation for a Section 95 insolvency application runs from the disclosed date of default, which is a definite event under the Insolvency and Bankruptcy ... Application under Section 95 of the Insolvency and Bankruptcy Code, 2016 - barred by limitation under Section 238A of the Insolvency and Bankruptcy Code, 2016 read with Article 137 of the Limitation Act, 1963 - Limitation for insolvency proceedings against personal guarantor - Effect of demand notice and the loan documentation - Continuing guarantee under Section 129 of the Indian Contract Act, 1872 so as to extend Or shift the date of default. Article 137 limitation - Definite date of default - HELD THAT:- Admittedly, there had been an Arbitration proceeding which had already been drawn before the Arbitral Tribunal, which had resulted into rendering of an award and as of now, after exhaustion of the proceedings, under Section 34 of the Act of 1996, the same is at the stage of its execution which has to be done as a decree. If we see the pleadings, as well as the conclusion that has been arrived at, it was on the basis that, the Claimants have filed their statement of claim for the recovery of a sum of Rs. 25,02, 61,350/-, wherein the amount shown therein was shown to have fallen due to be paid, as on 15.10.2012, that means even on the basis of the Arbitration proceedings, there had been a definite determination of default at the hands of the creditor for the purposes of initiating the proceedings of Arbitration, and when it has come to the conclusion about the liability, which could be fastened upon the borrower to be paid and due to be paid was determined to be as on 15.10.2012. The provisions contained under Article 137 of Limitation Act, is once again definite in its expression as, for the purposes of construing to determine, the period of limitation, which is given therein to be three years, the provision uses the word “when a right to apply accrues” hereto, it's a definite expression, which has been used under law for triggering of the proceedings, and that would be when there is a definite conclusion arrived at by the creditor, about an occurrence of default and consequential cause of action for the purposes of initiation of the proceeding under Section 95 of the Code. Even Article 137 of Limitation Act do not provide that the aspect of determination of limitation could be made, or even permissible to be made under law on the basis of so-called concept of Continuing Guarantee, which is not even thought of under the provisions contained under Article 137 of the Limitation Act. The Appellate Tribunal held that for initiation of proceedings under Section 95, the existence of debt and default must be established as definite preconditions. The expression 'default' under the Code denotes a specific event of non-payment when the debt becomes due and payable, and cannot be converted into a continuing or variable default merely by relying on the concept of continuing guarantee under Section 129 of the Contract Act. On the terms of the Facility Agreement and Schedule II, the loan was a term loan and nothing in the contractual arrangement showed a series of transactions or a stipulation making default a continuing feature. The creditor having itself stated in the statutory demand notice that the date of default was 01.08.2012, it could not shift or enlarge that date by referring to the date of issuance of the notice or by invoking execution proceedings arising out of the arbitral award. The pendency of arbitration or execution proceedings did not extend or suspend limitation under the Code. Even if the arbitral award were taken as the starting point, the notice issued in 2020 remained beyond the three-year period under Article 137 as applied through Section 238A. The plea of continuing guarantee was therefore rejected, and the application was held to be barred by limitation. [Paras 64, 65, 67, 68, 69] The Section 95 proceedings were held to be barred by limitation, the theory of continuing guarantee was rejected, and the admission order against the appellant as personal guarantor was quashed. Final Conclusion: The appeal was allowed. The Appellate Tribunal held that the creditor's own disclosure of default as 01.08.2012 governed limitation, the plea of continuing guarantee was untenable, and the Section 95 admission order was therefore unsustainable as time-barred. Issues: (i) whether the application under Section 95 of the Insolvency and Bankruptcy Code, 2016 was barred by limitation under Section 238A of the Insolvency and Bankruptcy Code, 2016 read with Article 137 of the Limitation Act, 1963; (ii) whether the demand notice and the loan documentation could be treated as creating a continuing guarantee under Section 129 of the Indian Contract Act, 1872 so as to extend or shift the date of default.Issue (i): whether the application under Section 95 of the Insolvency and Bankruptcy Code, 2016 was barred by limitation under Section 238A of the Insolvency and Bankruptcy Code, 2016 read with Article 137 of the Limitation Act, 1963Analysis: The notice under Section 95(4)(b) of the Insolvency and Bankruptcy Code, 2016 itself stated the date of default as 01.08.2012. The Court treated default under Section 3(12) of the Insolvency and Bankruptcy Code, 2016 as a definite event, and held that limitation must run from the disclosed date of default or, at the latest, from the date on which liability had already been crystallised in the arbitral proceedings. The Court also held that Section 238A of the Insolvency and Bankruptcy Code, 2016 applies retrospectively and that pendency of arbitration or execution proceedings does not suspend limitation for an application under Section 95 of the Insolvency and Bankruptcy Code, 2016.Conclusion: The proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016 were barred by limitation.Issue (ii): whether the demand notice and the loan documentation could be treated as creating a continuing guarantee under Section 129 of the Indian Contract Act, 1872 so as to extend or shift the date of defaultAnalysis: The Court held that Section 129 of the Indian Contract Act, 1872 applies only where the guarantee extends to a series of transactions. On the record, the facility was a single term loan transaction, the repayment structure did not contemplate recurring defaults or phased recovery, and no contractual term established a continuing guarantee or continuing default. The Court therefore rejected the attempt to recast the disclosed default as a continuing one in order to avoid limitation.Conclusion: The plea of continuing guarantee was rejected.Final Conclusion: The impugned order admitting the personal guarantor into the insolvency resolution process was set aside, and the company appeal succeeded on the ground of limitation.Ratio Decidendi: For proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016, default is a definite event that triggers limitation under Article 137 of the Limitation Act, 1963, and the period cannot be extended by characterising a single loan default as a continuing guarantee unless the contract expressly shows a guarantee extending to a series of transactions.