2025 (7) TMI 355 - AT - IBC

Seeking initiation of insolvency resolution process - personal guarantor - application filed beyond the prescribed limitation period and without proper cause of action - OTS proposal not produced before the Adjudicating Authority and the same cannot be taken into consideration at the appeal stage - time limitation. OTS proposal not produced before the Adjudicating Authority and the same cannot be taken into consideration at the appeal stage - violation of principles of natural justice - HELD THAT - It is a settled principle that proceedings before this Appellate Tribunal in CIRP matters are proceedings in Rem. This principle has been reiterated by Hon ble Supreme Court in GLAS Trust Company LLC vs. BYJU Raveendran Ors. 2024 (10) TMI 1185 - SUPREME COURT (LB) . In this case the OTS proposal given by the Principal Borrower is very important document having material impact on the limitation issue. Also huge amount of public money more than Rs. 200 Cr is involved in this matter. Such document which has direct bearing on deliverance of substantive justice cannot be ignored as the proceedings in this Tribunal are proceeding in-rem a continuation of the proceedings of the Adjudicating Authority. The contention of Appellant that the letter dated 19.03.2018 was only a proposal by the Appellant and the Respondent along with consortium of bankers did not take any action on the aforesaid proposal. We are not able to accept this contention as the letter constitutes an acknowledgment of debt by the Principal Borrower and therefore has the effect of extending the limitation period. It cannot be ignored merely on the ground that there is no contract between the Appellant and Respondent due to such letter. The letter dated 19.03.2018 is by the appellant in his capacity of Director of the borrower is very important to the proceedings as it proposes a OTS; acknowledges the failure of Master Restructuring Agreement; and also acknowledges the proceedings initiated by lenders under SARFAESI Act. Time limitation - HELD THAT - It is seen from the submissions of the Respondent bank that they have relied on their Section 13 (2) notice issued on 13.06.2016 for computation of limitation. A 60 days period was given to the Principal Borrower and the Guarantor to make outstanding payments to the Respondent Bank. The 60 days period ended on 12.08.2016 accordingly the three-year period of limitation starts from 13.08.2016. The three years limitation period from last date of acknowledgment of debt i.e. 19.03.2018 ends on 18.03.2021 which is within the excluded period specified by Hon ble SC. The demand notice under Rule 7 (2) of the Insolvency and Bankruptcy (Application of Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules 2019 was served to the Appellant on 10.05.2022 this was well within the limitation period. The application was filed well within the limitation period. There is no merit in the appeal - appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(i) Whether the application filed under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiating insolvency proceedings against the personal guarantor is barred by limitation?

(ii) What is the correct date for computation of limitation period in the context of invocation of personal guarantee-whether it commences from the date of default/NPA classification, the date of issuance of Demand Notice under Section 13(2) of the SARFAESI Act, or the date of issuance of Demand Notice under Rule 7(1) of the Insolvency and Bankruptcy Board of India (IBBI) Rules, 2019?

(iii) Whether the One-Time Settlement (OTS) proposal dated 19.03.2018 submitted by the Principal Borrower constitutes an acknowledgment of debt that can extend the limitation period under the Limitation Act, 1963?

(iv) Whether the Resolution Professional (RP) conducted an independent and objective examination of the limitation objections raised by the Appellant and whether the Adjudicating Authority correctly accepted the RP's report?

(v) Whether the application filed by Indian Bank, which was not the Lead Bank in the lending consortium, is maintainable in light of the consortium agreement and whether parallel proceedings before the Debt Recovery Tribunal (DRT) amount to abuse of process?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i) and (ii): Limitation Period and Date of Invocation of Guarantee

Legal Framework and Precedents: The limitation period for filing an application under Section 95 of the IBC is three years as prescribed under Article 137 of the Limitation Act, 1963, which governs suits and applications for recovery of debts. The limitation period ordinarily begins from the date when the right to apply accrues, which is generally the date of default or when the guarantee is invoked. The Supreme Court's suo motu order dated 10.01.2022 excluded the period from 15.03.2020 to 31.05.2022 from the computation of limitation for all judicial and quasi-judicial proceedings.

Court's Interpretation and Reasoning: The Appellant contended that the limitation period started from the date of classification of the Principal Borrower's account as Non-Performing Asset (NPA) on 29.10.2012 or from the date of the first Demand Notice under Section 13(2) of the SARFAESI Act issued on 13.06.2016. The Appellant argued that the application filed on 19.07.2022 was thus time-barred. The Respondent Bank argued that the limitation period should be computed from the date of the latest acknowledgment of debt, i.e., the OTS proposal dated 19.03.2018, and that the subsequent Demand Notice under Rule 7(1) of the IBBI Rules on 10.05.2022 was within the extended limitation period due to the Supreme Court's exclusion.

The Tribunal examined the timeline of events and noted that the initial default and NPA classification occurred in 2012, but the Appellant, in his capacity as Director of the Principal Borrower, submitted the OTS proposal in 2018, which acknowledged the debt and the failure of the Corporate Debt Restructuring (CDR) scheme. The Tribunal referred to Clauses 12 and 19 of the Guarantee Deed, which deem any acknowledgment of debt or admission by the Borrower as binding on the Guarantor as well.

Further, the Supreme Court's suo motu order excluding the period from 15.03.2020 to 31.05.2022 from limitation calculations was held to be applicable, thereby extending the limitation period. The Tribunal concluded that the application filed on 19.07.2022 was within the extended limitation period.

Key Evidence and Findings: The OTS proposal dated 19.03.2018 was a critical document evidencing acknowledgment of debt. The Tribunal found that the Appellant could not deny the effect of this document in extending limitation. The Demand Notice dated 10.05.2022 was also issued within the extended limitation period.

Application of Law to Facts: The Tribunal applied the Limitation Act principles and the Supreme Court's extension of limitation period to hold that the application was not barred by limitation. The acknowledgment of debt through the OTS proposal was binding on the guarantor, thus resetting the limitation clock.

Treatment of Competing Arguments: The Appellant's argument that the limitation expired in 2015 or 2019 was rejected on the basis that the OTS proposal extended limitation. The contention that the Rule 7(1) Demand Notice in 2022 could not revive limitation was addressed by placing reliance on the acknowledgment of debt in 2018 and the Supreme Court's extension order.

Conclusions: The Tribunal held that the application under Section 95 was filed within the period of limitation and the Adjudicating Authority correctly admitted the application.

Issue (iii): Validity and Effect of the OTS Proposal

Legal Framework and Precedents: Under Sections 18 and 19 of the Limitation Act, an acknowledgment of debt in writing signed by the debtor can extend the limitation period. The question was whether the OTS proposal, which was not accepted by the Bank, could be treated as such acknowledgment.

Court's Interpretation and Reasoning: The Tribunal observed that the OTS proposal was submitted by the Appellant in his capacity as Director of the Principal Borrower and contained detailed acknowledgment of the financial difficulties, failure of the CDR, and ongoing recovery proceedings. Despite the Bank not accepting the OTS, the proposal itself constituted an acknowledgment of debt, which is sufficient to extend limitation. The Tribunal rejected the Appellant's contention that the OTS was merely a proposal without contractual effect.

Key Evidence and Findings: The OTS letter was addressed to the lead bank, acknowledged the failure of restructuring, and admitted the existence of debt and recovery actions. The Tribunal found this to be a material and substantive document for limitation purposes.

Application of Law to Facts: The Tribunal applied the Limitation Act provisions to hold that the OTS proposal extended the limitation period, notwithstanding the absence of acceptance or concluded contract.

Treatment of Competing Arguments: The Appellant's argument that the OTS was an afterthought and not placed before the Adjudicating Authority was considered but rejected due to the in-rem nature of insolvency proceedings and the importance of substantive justice.

Conclusions: The OTS proposal was held to be a valid acknowledgment of debt extending the limitation period.

Issue (iv): Conduct of Resolution Professional and Adjudicating Authority

Legal Framework and Precedents: Under Section 99 of the IBC, the Resolution Professional is required to submit a report on the application for insolvency resolution of personal guarantors, including examination of limitation objections.

Court's Interpretation and Reasoning: The Appellant contended that the RP merely repeated the Bank's assertions without independent analysis and that the Adjudicating Authority failed to consider the Appellant's objections properly. The Tribunal, however, found that the RP's report was reasoned and based on the acknowledgment of debt and limitation principles. The Adjudicating Authority's acceptance of the RP's report was justified.

Key Evidence and Findings: The RP issued notices, invited submissions, and considered the Appellant's replies. The Tribunal found no material irregularity or failure to apply mind.

Application of Law to Facts: The RP's report was in accordance with the statutory mandate and the Adjudicating Authority's order was supported by the report.

Treatment of Competing Arguments: The Tribunal rejected the Appellant's contention of procedural lapses and lack of independent review.

Conclusions: The RP and Adjudicating Authority acted within their jurisdiction and correctly admitted the application.

Issue (v): Maintainability of Application by Indian Bank and Abuse of Process

Legal Framework and Precedents: Consortium lending agreements often designate a Lead Bank empowered to take enforcement actions. The question was whether Indian Bank, a consortium member but not the Lead Bank, could file the Section 95 application.

Court's Interpretation and Reasoning: The Tribunal noted that the Indian Bank was a member of the consortium and had issued the Demand Notice under Section 13(2) of the SARFAESI Act. The Appellant's contention that only the Lead Bank could initiate proceedings was not accepted as the consortium members had rights to enforce guarantees. The pendency of recovery proceedings before the DRT was not held to bar initiation of insolvency proceedings, as parallel remedies are permissible under the Code.

Key Evidence and Findings: The Indian Bank's active role in the consortium and issuance of notices supported its locus to file the application. The Tribunal found no abuse of process or forum shopping.

Application of Law to Facts: The Tribunal applied the provisions of the IBC and relevant banking practices to uphold the maintainability of the application.

Treatment of Competing Arguments: The Appellant's arguments on procedural irregularity and abuse of process were rejected.

Conclusions: The application filed by Indian Bank was maintainable and not an abuse of process.

3. SIGNIFICANT HOLDINGS

"The letter dated 19.03.2018 is by the appellant in his capacity of Director of the borrower is very important to the proceedings as it proposes a OTS; acknowledges the failure of Master Restructuring Agreement; and also acknowledges the proceedings initiated by lenders under SARFAESI Act."

"In terms of Clauses 12 & 19 of the Guarantee Agreement, this acknowledgement by the Principal Borrower is deemed to have been made by the Guarantor also."

"The three years limitation period from last date of acknowledgment of debt i.e. 19.03.2018 ends on 18.03.2021 which is within the excluded period specified by Hon'ble SC. The demand notice under Rule 7 (2) of the Insolvency and Bankruptcy (Application of Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 was served to the Appellant on 10.05.2022 this was well within the limitation period."

"It is a settled principle that proceedings before this Appellate Tribunal in CIRP matters are proceedings in Rem. This principle has been reiterated by Hon'ble Supreme Court ... Such document, which has direct bearing on deliverance of substantive justice cannot be ignored as the proceedings in this Tribunal are proceeding in-rem, a continuation of the proceedings of the Adjudicating Authority."

"We therefore hold that the application was filed well within the limitation period."

The Tribunal established the core principles that in insolvency proceedings against personal guarantors, the limitation period is computed from the last acknowledgment of debt by the Principal Borrower, which is binding on the guarantor by virtue of the guarantee deed. The Supreme Court's exclusion of the COVID-19 period from limitation calculations is applicable. Further, documents evidencing acknowledgment of debt, even if not accepted as binding contracts, can extend limitation. The Tribunal also reaffirmed that insolvency proceedings are in-rem and that all material documents bearing on limitation and liability must be considered to ensure substantive justice.

On the key issues, the Tribunal concluded:

(i) The application under Section 95 was not barred by limitation.

(ii) The OTS proposal dated 19.03.2018 constituted a valid acknowledgment of debt extending the limitation period.

(iii) The RP and Adjudicating Authority correctly admitted the application after due consideration of objections.

(iv) The application filed by Indian Bank was maintainable and not an abuse of process despite pending recovery proceedings before the DRT.

Accordingly, the appeal was dismissed and the impugned order admitting the insolvency application was upheld.