Suspended Directors' Duty To Sign Balance Sheets Continues During CIRP, Any Acknowledgment Extends Limitation Against Personal Guarantor: NCLAT

The National Company Law Appellate Tribunal (NCLAT) New Delhi held that since the liability of the guarantor is co-extensive with that of the borrower, any acknowledgment of liability by the corporate debtor extends the limitation period against the guarantor also. The Tribunal also held that signing balance sheets is a statutory duty of the directors of a company from which they are not relieved even during the Corporate Insolvency Resolution Process (CIRP). Therefore, any acknowledgment made by them during CIRP is valid and effective. A bench comprising Justice Yogesh Khanna (Judicial Member) and Mr. Indevar Pandey (Technical Member) held 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 ”. Background: The case arose out of a loan obtained by GEI Industrial Systems Ltd. from SBI. The company's whole time directors provided personal guarantees in favor of the consortium. The corporate debtor's account was classified as Non-Performing Asset (NPA) on 28.05.2016. Subsequently, the bank issued a demand-cum-recall notice invoking the guarantees and seeking repayment of ₹35.13 crore. After default, ICICI Bank, the lead bank initiated recovery proceedings before the DRT and parallel insolvency proceedings under section 9 of the IBC. SBI later filed claims for ₹43.83 crore before the Resolution Professional which were admitted by the NCLT Ahmedabad. Thereafter, SBI issued a demand notice under Rule 7(1) Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 demanding ₹78.94 crore from the respondent and filed an application under section 95 of the IBC. The application was dismissed holding that it was barred by limitation and that the balance sheets relied upon by the SBI were not signed by the guarantor, therefore it could not extend the limitation. The Appellant submitted that balance sheets signed by directors and filed with MCA constituted a valid acknowledgment under section 18 of the Limitation Act. It was further submitted that clauses in the guarantee deed provided that any acknowledgment of debt by the borrower shall be binding on the guarantor and shall be deemed to have been made on his behalf. Per contra, the Respondent submitted that the guarantee was never validly invoked and a notice was merely a loan recall notice, not an invocation of the guarantee. It was further submitted that the balance sheets signed by suspended directors were signed subsequent to initiation of the CIRP and therefore were authorised and invalid under section 17 of the IBC. It was further contended that No balance sheet was approved by the shareholders or filed with the Registrar of Companies. Since the guarantor did not personally sign or authorised any acknowledgment, section 18 of the Limitation Act could not apply. Findings: Rejecting the respondent's objections, the Tribunal held that the petition was filed within limitation. It further rejected the plea that since the balance sheets were signed during CIRP, they will not constitute valid acknowledgments holding that the balance sheets up to FY 2019–20 signed by directors constituted a valid acknowledgment under section 18 of the Limitation Act. “The mere fact of a company entering insolvency does not relieve the suspended directors from their statutory duty to sign annual financial statements under Sections 129 and 134 of the Companies Act, 2013. Such acknowledgments, even during CIRP, are binding and valid,” the Bench observed. Relying on clause 12 and 19 of the Deed, the Tribunal held that “Any acknowledgment or admission made by the borrower shall be deemed to have been made by or on behalf of the guarantor and shall be binding upon each of them. The guarantor, having executed such a clause, cannot now deny its effect.” The Tribunal referred to section 128 of the Contract Act to hold that the liability of the guarantor is co-extensive with that of the borrower. Therefore, any acknowledgment by the corporate debtor validly extends the limitation period against the guarantor also. Relying on Syndicate Bank, the Tribunal observed that “acknowledgment of liability by the principal debtor renews limitation against both the debtor and the surety.” The Tribunal further held that the recall notice expressly required payment within 7 days and warned that a strict legal action would be taken against the guarantor. Therefore, it was a valid invocation of the...

Suspended Directors' Duty To Sign Balance Sheets Continues During CIRP, Any Acknowledgment Extends Limitation Against Personal Guarantor: NCLAT

Mohd Malik Chauhan

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