The Kolkata Special Bench of the National Company Law Tribunal (NCLT) has clarified that where the guarantee is payable on demand, limitation against the personal guarantor begins to run when demand is made and the guarantor commits breach by not complying with the demand within the stipulated period; and where, before expiry of such limitation period, the Principal Borrower acknowledges the debt in writing, including through OTS proposals and audited balance sheets, a fresh period of limitation is computed under Section 18 of the Limitation Act, 1963, which also enures for proceedings against the Personal Guarantor because the guarantor’s liability is co-extensive with that of the Principal Borrower.
The NCLT held that service of notice at the last known address is valid and effective service in law, and that a Financial Creditor may directly maintain proceedings under Section 95 of the IBC against the Personal Guarantor without first initiating or simultaneously pursuing CIRP against the Principal Borrower.
The Division Bench comprising Bidisha Banerjee (Judicial Member) and Rekha Kantilal Shah (Technical Member) observed that the liability of the guarantor is co-extensive with that of the Principal Borrower, and that an acknowledgment of liability by the Principal Borrower extends the limitation period for initiating proceedings against the Personal Guarantor as well. It further held that, under the terms of the Deed of Guarantee, the demand notice dated May 04, 2016 issued under Section 13(2) of the SARFAESI Act served as invocation of the guarantee, and since the notice granted 60 days’ time, limitation commenced from July 04, 2016 upon expiry of that period without repayment.
The Tribunal noted that the OTS letter dated May 21, 2019 was within three years from July 04, 2016 and therefore attracted Section 18 of the Limitation Act, 1963; the subsequent OTS letters and audited balance sheets were also issued before expiry of the prescribed period. The objection that no acknowledgment existed in the books of account was rejected, and the Tribunal observed that even though the Financial Creditor’s name was not disclosed in the financial statements placed on record, the debt stood sufficiently acknowledged.
The Tribunal also rejected the challenge to the demand notice on the ground of lack of authority for want of supporting material, held that service at the last known address constituted valid service in law, and held that maintainability of a Section 95 application is not conditioned upon prior or parallel CIRP against the Principal Borrower.
Briefly, the Financial Creditor, Indian Bank, had sanctioned working capital facilities to M/s Burgundy Life Style Pvt Ltd. in 2010, and to secure such facilities, a Deed of Guarantee dated March 27, 2010 was executed by, inter alia, Santosh Jhawar as personal guarantor. The Principal Borrower’s account was classified as NPA on March 31, 2016, following which the Financial Creditor issued a demand notice under Section 13(2) of the SARFAESI Act, 2002 on May 04, 2016 to the Principal Borrower and its guarantors, thereby invoking the personal guarantees.
The Principal Borrower thereafter acknowledged the debt through OTS letters dated May 21, 2019, July 20, 2019, August 16, 2019, October 22, 2019, January 07, 2020 and March 06, 2020, and also in its audited balance sheets for FY 2019-20 and FY 2021-22. After issuance of demand notice in Form B dated January 16, 2024 under Rule 7(1) of the Personal Guarantors Rules, and upon failure of the Respondent to pay within 14 days, the Financial Creditor filed the Section 95 application on June 10, 2024.
The Resolution Professional was appointed under Section 97 on June 20, 2024 and submitted his report under Section 99 recommending initiation of insolvency resolution process against the Personal Guarantor. The Respondent opposed the petition on grounds of limitation, absence of acknowledgment, invalidity of the Form B notice, non-service, and non-initiation of CIRP against the Principal Borrower.
