Borrower's Debt Acknowledgment Extends Limitation Against Guarantors Too: NCLAT Reaffirms

The National Company Law Appellate Tribunal at Delhi has reiterated that acknowledgment of debt by a principal borrower extends the limitation period for initiating insolvency proceedings against its corporate guarantors.

Quoting apex court's ruling in Laxmi Pat Surana vs. Union Bank of India, (2021), the tribunal observed,

"There is no quarrel with the proposition that the acknowledgement made by the principal borrower will tantamount to be an acknowledgment made by the guarantor and any acknowledgement made in writing within the limitation period already existing would further extend the period of limitation under Section 18 of the Indian Limitation Act, 1963,” the appellate tribunal observed.

A bench comprising Judicial Member Justice Mohd. Faiz Alam Khan and Technical Member Arun Baroka set aside orders of the National Company Law Tribunal, Kolkata Bench, which had dismissed UCO Bank's Section 7 insolvency applications against two corporate guarantors of Ankit Metal & Power Ltd.

For context, UCO Bank had advanced working capital facilities of Rs 65 crore to Ankit Metal & Power Ltd. The company defaulted, and its account was classified as a non-performing asset.  A Master Restructuring Agreement was executed in 2014, followed by a letter of revival acknowledging the outstanding dues. The borrower thereafter made intermittent payments and continued to reflect the liability in its audited balance sheets.

UCO Bank's insolvency application against Ankit Metal & Power Ltd. was admitted, and the corporate insolvency resolution process commenced. Thereafter, the Bank filed separate Section 7-CIRP applications under the Insolvency and Bankruptcy Code against the company's two corporate guarantors.

These applications were dismissed by the National Company Law Tribunal, Kolkata Bench, on the ground that the guarantees had been invoked in 2019 and were therefore barred by limitation.

Before the Appellate Tribunal, UCO Bank argued that the liability of a corporate guarantor is co-extensive with that of the principal borrower and therefore acknowledgments of debt made by the borrower also extend the limitation period against the guarantors.

The tribunal accepted the submission. It noted that the borrower had repeatedly acknowledged its liability, including in its audited financial statements.

Referring to Section 18 of the Limitation Act, the tribunal reiterated that an acknowledgment of liability made before the expiry of the limitation period gives rise to a fresh period of limitation.

Allowing both appeals, the NCLAT held that since the debt continued to be reflected in the financial statements of the corporate debtor up to the financial years 2019-20, 2020-21 and 2021-22, the limitation period stood extended.

It observed, “The acknowledgment made by the principal borrower is as good as the acknowledgment made by the guarantor… the limitation to file an application under Section 7 of the IBC was available to the appellant till 2024.”

As the insolvency applications were filed in 2023, the appellate tribunal set aside the NCLT's orders dismissing the claims against the corporate guarantors.

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