Introduction
In a recent ruling in the case of Bank of Maharashtra v. Mr. Anand Ghadigaonkar and Mr. Ketan Karkhanis[i], the National Company Law Tribunal, Mumbai Bench (‘NCLT’) addressed the issue of the personal guarantor’s (PG) liability under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The NCLT adjudicated on two consolidated petitions filed by the Bank of Maharashtra (‘BoM’) against Mr. Anand Ghadigaonkar and Mr. Ketan Karkhanis, PGs of the M/s Time Polyurethane Pvt. Ltd., the corporate debtor (‘CD’). This decision by the NCLT was based on the critical aspect of limitation, providing an interpretation of the law in reference to the invocation of personal guarantees and the commencement of limitation periods.
Brief Facts
The BoM had sanctioned various credit facilities to the CD in 2013, aggregating to Rs. 6,75,80,000. The CD defaulted, and its accounts were declared non-performing assets (NPA) on 12.05.2014.
The BoM issued a demand notice under s. 13(2) of the Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI’) on 04.11.2014, followed by the invocation of the personal guarantees on 31.10.2014.
An original application (OA No. 380/2015) was filed by the BoM before the Debt Recovery Tribunal (DRT), Pune, and was disposed of in favour of the applicant on 31.12.2015. The last payment from the CD was received on 12.12.2017 towards the one-time settlement payment.
Demand notices in Form B were sent to the PGs on 15.11.2022 for initiating proceedings under s. 95 of the IBC. The petitions under s. 95 of the IBC were filed on 26.07.2023, seeking initiation of the corporate insolvency resolution process (‘CIRP’) against the PGs.
The BoM, in the petitions inter-alia, submitted that in reference to clause 6 of the deed of guarantee (‘Deed’), the personal guarantee, in this case, persists even in scenarios where the BoM’s claim against the borrowers becomes time-barred and unenforceable through legal means against the borrowers.
Held
The NCLT dismissed the petitions filed under s. 95 of the IBC on the grounds that they were barred by limitation.
The NCLT observed that the limitation period for filing applications under s. 95 of the IBC is three years. It noted that a notice under s. 13(2) of the SARFAESI had been issued to the respondent PGs, and the personal guarantee was invoked on 31.10.2014. It further observed that even with the extension of the limitation period due to the part payment made by the principal borrower on 12.12.2017, the petitions, filed on 26.07.2023, were beyond the three-year limitation period and were, therefore, time-barred.
The NCLT rejected the argument that clause 6 of the Deed, which provided for the continuation of liability until the dues were paid in full, extended beyond the invocation of the personal guarantee. It clarified that once the personal guarantee is invoked, the PG’s liability becomes fixed, and the limitation period begins to run.
Conclusion
Under SARFAESI, the notice issued under s. 13 is crucial as it triggers the PG’s liability and sets the timeline for repaying the outstanding debt. Further, under r. 7(1) of the Insolvency and Bankruptcy Rules, 2019, financial creditors (‘FCs’) must issue a demand notice to the PG to initiate the CIRP. The Limitation Act, 1963, as applied through s. 238A of the IBC stipulates a three-year limitation period for filing any application, which begins from the date of default.
In view of the aforementioned provisions, the NCLT correctly noted that the limitation period for initiating proceedings under the IBC against a PG starts from the date the personal guarantee is invoked, typically through the issuance of a demand notice. The ruling reaffirmed the principle that the limitation period is not tied to the borrower’s default date but to the date when the PG is called upon to fulfil its obligations under the personal guarantee.
The NCLT’s decision, in this case, highlighted the importance of adhering to statutory timelines in initiating insolvency proceedings. The interpretation of the limitation period done by the NCLT in this case, particularly concerning the invocation of personal guarantees and subsequent payments, provides valuable guidance for FCs. By clarifying that the limitation period begins from the date of invocation or last payment, the ruling focuses on the need for timely action to preserve the right to recover dues.
The NCLT’s analysis of clause 6 of the Deed should be given importance, as the clause suggested an enduring liability. However, the tribunal restricted its applicability, asserting that the personal guarantee’s enforceability is subject to timely invocation and adherence to the limitation period.
This ruling has far-reaching implications for financial institutions and PGs. It reminded FCs to exercise due diligence and enforce their rights in a timely manner. For PGs, it reinforces the importance of being aware of their obligations and the potential consequences of personal guarantees’ invocation. Furthermore, the decision contributes to the evolving jurisprudence on PG liability under the IBC, setting a precedent for future cases involving similar issues.
End Note
[i] C.P. (IB) No. 740/MB/2023 and C.P. (IB) No. 943/MB/2023.
Authored by Jitin Bharadwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.