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2025 (11) TMI 1450
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.... by limitation, since the balance sheets relied upon as acknowledgment of debt were not signed by the guarantor himself. The Appellant, being aggrieved by the impugned order, has therefore approached this Tribunal under Section 61 of the Code. Brief facts of the Case 2. The brief facts of the case are as given below: i. M/s GEI Industrial Systems Ltd., (Corporate Debtor) was incorporated with the Registrar of Companies, Gwalior, on 28.12.1993. ii. The Corporate Debtor approached State Bank of India and other consortium banks with an application seeking sanction of various credit facilities. The Appellant, along with six other consortium banks, sanctioned the loan facilities, and on 24.03.2009 a loan agreement was executed between the Corporate Debtor and the Appellant. On the very same date, the Respondent, Shri Bernard John, who was at that time the Whole-time Director of the Corporate Debtor, along with the Managing Director, Mr. C.E. Fernandes, executed a deed of guarantee in favour of the Appellant, thereby undertaking personal liability for repayment of the sanctioned facilities. iii. Subsequently, the consortium extended further credit facilit....
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....filed its claim amounting to INR 43,83,49,733.24/- with the Resolution Professional of the Corporate Debtor. xi. The balance sheets of the Corporate Debtor for the financial years 2016- 17, 2017-18, 2018-19, and 2019-20, prepared by M/s Shikha Tiwari & Associates, reflected and acknowledged the outstanding dues owed to the Appellant and other consortium lenders. xii. As the default continued, the Appellant issued a demand notice dated 21.01.2021 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, demanding an amount of INR 78,94,45,334.12/- from the Respondent in his capacity as personal guarantor. The Respondent did not reply to the aforesaid demand notice. xiii. The Appellant thereafter, filed a petition under Section 95 of the Code against the Respondent for initiation of personal insolvency resolution process, which was registered as C.P. (IB) No. 53(MP)/2021. xiv. By an order dated 25.11.2021, the Adjudicating Authority appointed Mr. Rahul Anand as the Resolution Professional (RP). The Resolution Professional issue....
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....Adjudicating Authority further held that the balance sheets relied upon were not signed by the Respondent, the same were signed by CE Fernandes another Director on behalf of the Board of Directors. xix. Aggrieved by the impugned order, the Appellant has preferred the present appeal before this Appellate Tribunal seeking to set aside the impugned order and to revive the petition filed under Section 95 of the Code. Submission of the appellant 3. Ld. counsel for the Appellant submits that a new case has been set-up before this appellate tribunal, for the first time. The Respondent/Personal Guarantor has raised a new plea that the personal guarantee was never invoked by the Appellant and that the acknowledgments of debt contained in the Balance Sheets signed during the Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor are invalid and cannot bind the Respondent. 4. He contended that this argument constitutes a completely new case sought to be introduced at the appellate stage, which was neither raised nor argued before the Learned Adjudicating Authority. Further, the impugned order also does not record any adjudication on such issue. Therefore, the....
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....7-18, 2018-19, and 2019-20, which were duly signed by the then directors (whose powers stood suspended under the IBC). This continuous reflection of liability in successive financial statements unequivocally establishes acknowledgment of debt at each interval. 10. The Counsel submitted that as per settled judicial law, acknowledgment of liability in duly signed Balance Sheets constitutes a valid acknowledgment under Section 18 of the Limitation Act, thereby extending the period of limitation with each such acknowledgment. He stated that as per records, the limitation chronology is as follows: • February 2016 - Default by the Corporate Debtor • 28.05.2016 - NPA Date • 30.09.2016 - Guarantee Invoked/Demand Raised • 07.10.2016 - Date of Default for Guarantor • 23.02.2017 - Signed Balance Sheet (FY 2015-16) uploaded on MCA • 02.08.2017 - Corporate Debtor admitted into CIRP • 27.10.2017 - Balance Sheet (FY 2016-17) signed acknowledging dues of SBI. Followed by Balance Sheets of FY 2017-18, 2018-19, 2019-20 signed acknowledging dues of SBI • 15.03.2020-28.02.2022 - Limitation period....
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....nsel submitted that the suspension of directors under Section 17(1)(b) of the IBC does not nullify the legal effect of Balance Sheets duly signed and filed on behalf of the company. These constitute valid acknowledgments of liability under Section 18 of the Limitation Act. 16. Ld. Counsel further submitted that Section 130(1) of the Companies Act, 2013 stipulates that if financial statements are alleged to be fraudulent or unreliable, the aggrieved person may seek reopening of accounts before the NCLT. However, no such application was ever filed by the Respondent challenging the authenticity or correctness of the Balance Sheets. 17. The Counsel stated that the Respondent himself continued to be a director of the Corporate Debtor till 25.02.2019, during which period several financial statements acknowledging dues to the Appellant were signed, and no objection was ever raised by him. 18. Ld. Counsel submitted that as per Clauses 12 and 19 of the Guarantee Agreement dated 31.03.2015, any acknowledgment made by the Corporate Debtor is binding on the guarantor. Therefore, the Balance Sheets signed by the directors, even with suspended powers, constitute valid acknowledgments of....
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.... had taken place at that point. The guarantee invocation is a distinct legal act that must explicitly communicate the invocation of the guarantee obligation; such invocation never occurred in the present case. Hence, the personal guarantee of the Respondent was never invoked in accordance with law. 24. The counsel for the Respondent submits that the account of the Corporate Debtor was classified as NPA on 28.05.2016. Subsequently, the loan was recalled on 30.09.2016, directing both the Corporate Debtor and the guarantors to clear the outstanding within seven days from receipt of the notice. Therefore, in terms of Section 3(12) of the Insolvency and Bankruptcy Code, the "default" occurred on 07.10.2016. 25. It is the submission of the Respondent that the Appellant's application under Section 95 was filed on 06.10.2021, that is, almost five years after the date of default. Thus, the application is hopelessly barred by limitation. No fresh cause of action arose in the interim, nor was any valid acknowledgment of debt made within the prescribed limitation period. Hence, the Adjudicating Authority rightly rejected the Section 95 application as being time-barred. 26. The counsel....
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.... Accountant, who was never appointed as the company's statutory auditor. h. There exists no provision under the Companies Act allowing one or two suspended directors to sign balance sheets "for and on behalf of the Board of Directors" without valid approval of the Board. Hence, the statement that these documents were signed "for and on behalf of the Board" is false and misleading. i. The execution of such balance sheets after the commencement of CIRP is directly in conflict with Section 17(1)(b) read with Section 238 of the Code, which has overriding effect. It is further submitted that the IBC is a complete Code in itself and operates independently; it cannot be subordinated to the Companies Act, 2013. j. None of these alleged balance sheets are filed or available with any statutory authority or public record such as MCA. k. Finally, the Code nowhere permits suspended directors to sign or approve balance sheets, not even with the permission of the Adjudicating Authority. Therefore, these fabricated balance sheets cannot, in any circumstance, constitute acknowledgment of debt under Section 18 of the Limitation Act, 1963. 27. He therefore submi....
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....n account of the Corporate Debtor- M/s GEI Industrial Systems Ltd.-was declared Non-Performing Asset (NPA) on 28.05.2016, and the demand-cum-recall notice dated 30.09.2016 was duly issued to both the Corporate Debtor and its personal guarantors, including the present Respondent. This notice demanded payment of the outstanding dues within seven days and simultaneously invoked the deeds of guarantee. The default accordingly crystallized on 07.10.2016, upon non-payment by the borrower and guarantors. 34. The appellant has further submitted that the balance sheets of the Corporate Debtor for the financial years 2016-17, 2017-18, 2018-19, and 2019-20, signed by the Directors of the CD and auditors, consistently recorded the outstanding liability owed to SBI and other consortium lenders. These acknowledgments, it was contended, operated to extend limitation under Section 18 of the Limitation Act, 1963, not only for the borrower, but also for the guarantor, given the co-extensive liability under Section 128 of the Indian Contract Act, 1872. 35. He placed reliance on Clauses 12 and 19 of the Deed of Guarantee dated 31.03.2015, which expressly provide that any admission, acknowledgmen....
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....ent further argued that since he had not signed or authorized any acknowledgment, no acknowledgment could operate against him personally. 41. The starting point of limitation in this case is undisputed - the account of the Corporate Debtor was declared NPA on 28.05.2016, and the demand- cum-recall notice dated 30.09.2016 was duly issued to both the Corporate Debtor and its guarantors, invoking the guarantees and demanding repayment. 42. We now have a look at the demand-cum-recall notice dated 30.09.2016. Same has been extracted below: 43. We note that the Demand-cum-Recall Notice dated 30.09.2016 addressed both the Corporate Debtor and the Personal Guarantor. This unequivocal demand clearly invoked the Deed of Guarantee and upon expiry of the seven-day notice period on 07.10.2016, the default stood crystallized. The limitation period of three years under Article 137 of the Limitation Act would, in the ordinary course, expire on 07.10.2019 unless extended by acknowledgment under Section 18 of the Limitation Act. 44. The record clearly demonstrates that the Corporate Debtor, through its duly prepared and signed balance sheets for FY 2015-16 (signed on 23.02.2017) and for ....
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....r forms as may be provided for different class or classes of companies in Schedule III: Provided that the items contained in such financial statements shall be in accordance with the accounting standards: Provided further that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company: Provided also that the financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose-- (a) in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999; (b) in the case of a banking company, any matters which are not required to be disclosed by the Banking Regulation Act, 1949; (c) in the case of a company engaged in the generation or supply of electricity, any matters which are not re....
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....tion. (7) If a company contravenes the provisions of this section, the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person charged by the Board with the duty of complying with the requirements of this section and in the absence of any of the officers mentioned above, all the directors shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both. Explanation.-For the purposes of this section, except where the context otherwise requires, any reference to the financial statement shall include any notes annexed to or forming part of such financial statement, giving information required to be given and allowed to be given in the form of such notes under this Act. Section 134. Financial statement, Board's report, etc. 1. The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by the chairperson of the company where he is authorised by the Board or by....
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.... as may be prescribed; (n) a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company; (o) the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year; (p) in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal annual evaluation of the performance of the Board, its Committees and of individual directors has been made; (q) such other matters as may be prescribed. Provided that where disclosures referred to in this subsection have been included in the financial statements, such disclosures shall be referred to instead of being repeated in the Board's report: Provided further that where the policy referred to in clause (e) or clause (o) is made available on company's website, if any, it shall be sufficient compliance of the requirements under such clauses if the s....
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....rm "internal financial controls" means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company's policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information; (f) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively. (6) The Board's report and any annexures thereto under sub-section (3) shall be signed by its chairperson of the company if he is authorised by the Board and where he is not so authorised, shall be signed by at least two directors, one of whom shall be a managing director, or by the director where there is one director. (7) A signed copy of every financial statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a copy each of- (a) any notes annexed to or forming part of such financial statement; (b) the auditor's report....
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....s in compliance of the Companies Act, 2013." 48. It is clear from the aforesaid Judgment of this Tribunal that the mere fact of a company going in insolvency does not take away the responsibility of the Suspended Directors to perform their statutory duties including the duty to sign financial statements under Sections 129 and 134 of the Companies Act, 2013. This ruling affirms that balance sheets signed by suspended directors remain valid and constitute binding acknowledgments of liability, supporting the Appellant's case that limitation stood duly extended. 49. We note that in the present case also all the balance sheets up to 2019- 20 are duly signed by the Directors of the company and we find no reason to question the authenticity of the same. 50. We now have a look at the Guarantee Agreement dated 31.03.2015. The Clause 8 of the Agreement is extracted below: "Clause 8 The Guarantee herein contained is a continuing one for all amounts advanced by the Bank to the Borrower in respect of or under the aforesaid credit facilities as also for all Interest costs and other monies which may from time to time become dus and remain unpaid to the Bank thereunder a....
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....ntor's liability co-extensive with that of the principal debtor, unequivocally extends the effect of acknowledgment to the guarantor as well. 54. The Adjudicating Authority in the impugned order took the view that since the balance sheets containing the acknowledgment were not signed by the Personal Guarantor, they could not be treated as his acknowledgment under Section 18 of the Limitation Act. This interpretation effectively treated the guarantor's liability as separate and distinct for limitation purposes, which is contrary to the scheme of Sec 128 of the Contract Act and the clauses of the Guarantee Agreement. 55. Even without considering subsequent acknowledgments, the limitation that began on 07.10.2016 was extended successively until at least 2020. The period from 15.03.2020 to 28.02.2022 stood excluded due to the Supreme Court's Suo Motu Extension Orders in 'Re: Cognizance for Extension of Limitation, Suo Motu W.P. (C) No. 3 of 2020'. When this exclusion is applied, the effective limitation end date moves well beyond October 2021. The Section 95 petition, filed in October 2021, was thus clearly within the limitation period. 56. Even if we consider Balance she....
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....s finding that the petition was time-barred suffers from a clear error of law and based upon incorrect appreciation of facts. The application under Section 95 filed by the Appellant was well within the limitation period. 62. Regarding the respondent's liability for repayment based on the acknowledgment in balance sheet, the Appellant highlighted the Clauses 12 and 19 of the Deed of Guarantee dated 31.03.2015, executed by the Respondent in favour of the Bank, which specifically stipulate that any acknowledgment, admission, or statement made by the principal borrower in respect of the debt "shall be binding on the guarantor and shall be deemed to have been made on his behalf." Therefore, acknowledgment of liability made by the Corporate Debtor in its financial statements has the effect of acknowledgment by the guarantor himself for purposes of limitation. 63. The Appellant further submitted that the guarantor's liability arises simultaneously with that of the principal borrower, and the creditor is not required to exhaust remedies against the borrower before proceeding against the guarantor. Reliance in this regard was placed on the judgments of the Hon'ble Supreme Court in Sta....
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....he surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract." This co-extensiveness implies that both the borrower and the guarantor are liable for the same debt, at the same time, and to the same extent, unless expressly limited by contract. 69. The Deed of Guarantee dated 31.03.2015 executed by the Respondent contains Clauses 12 and 19, reinforce this legal position. Clause 12 provides that any admission, acknowledgment, or statement made by the borrower regarding the amount due or the nature of the liability shall be binding upon the guarantor and shall be deemed to have been made on his behalf. Clause 19 further clarifies that acknowledgment or payment by the borrower shall be deemed acknowledgment or payment by the guarantor for purposes of limitation or otherwise. These clauses leave no scope for ambiguity-the parties expressly contracted that acknowledgment by the borrower would have binding effect upon the guarantor. 70. The contention of the Respondent that acknowledgment must be personally signed by him overlooks the fundamental principle that under a contract of guarantee, the guarantor's obligations are derivative i....
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....ng obligation and a co-extensive guarantee, necessarily renews the limitation against the other. 75. Applying the ratio of the aforesaid Judgments Syndicate Bank (supra) and State Bank of India (supra) to the present case, we hold that acknowledgment of liability made by the Corporate Debtor in its balance sheets for FY 2016-17 to 2019-20 constitutes valid acknowledgment not only for the borrower but also for the guarantor. This is for three reasons: a) Section 128 of the Contract Act makes the guarantor's liability co- extensive, meaning that the same acknowledgment of the same debt that renews limitation for the borrower equally applies to the guarantor, since their liabilities are inseparable. b) Clauses 12 and 19 of the Deed of Guarantee expressly deem acknowledgment by the borrower to be acknowledgment by the guarantor. The guarantor, having agreed to this term at the time of executing the guarantee, is estopped from denying its effect. c) The ratio in Syndicate Bank v. Channaveerappa Beleri (supra) and State Bank of India v. Indexport Registered (supra) highlights the concept that acknowledgment in balance sheet made by the principal debtor exten....
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....their invocation in future. 79. The above submission of the respondent is factually incorrect, as the endorsement portion of letter dated 30.09.2016 which has been addressed to the Personal Guarantors is the one extracted in paragraph 77 above, which clearly states that if the payment of bank dues is not made within the stipulated period i.e. within 07 days then bank will not have any option but to take appropriate action against them (the guarantors/corporate guarantors) also. 80. This makes it absolutely clear that the guarantee has been invoked vide this letter and in case payment was not received within 07 days i.e. 07.10.2016, then guarantors become liable for appropriate legal action by the bank, which would inter alia mean filing of petition under Section 95 of the Code in this case. 81. The plea that there was no invocation of the guarantee is, therefore, factually incorrect. Moreover, under the Deed of Guarantee dated 31.03.2015, particularly Clauses 12 and 19, any acknowledgment or admission of liability by the borrower is made binding upon the guarantor, and any acknowledgment by the borrower is treated as acknowledgment by the guarantor for purposes of limitati....