NCLAT: Suspended Directors’ Duty To Sign Balance Sheets Continues During CIRP; Acknowledgment Extends Limitation Against Guarantor
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Yogesh Khanna (Judicial Member) and Mr. Indevar Pandey (Technical Member), has held that the statutory duty of directors to sign balance sheets continues even during the Corporate Insolvency Resolution Process (CIRP), and such acknowledgments are valid and effective for the purpose of extending limitation. The Tribunal further held that since the liability of a guarantor is co-extensive with that of the borrower under Section 128 of the Indian Contract Act, 1872, any acknowledgment of debt by the corporate debtor also extends the limitation period against the guarantor.
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Background
The case arose from a loan availed by GEI Industrial Systems Ltd. from a consortium led by the State Bank of India (SBI). The company’s whole-time directors executed personal guarantees in favor of the lenders. The corporate debtor’s account was declared Non-Performing Asset (NPA) on May 28, 2016, and the consortium issued a demand-cum-recall notice seeking repayment of approximately ₹35.13 crore. Subsequently, ICICI Bank, the lead lender, initiated proceedings before the Debt Recovery Tribunal (DRT) and parallel insolvency proceedings under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). SBI later filed a claim of ₹43.83 crore before the Resolution Professional, which was admitted by the NCLT Ahmedabad Bench.
Following this, SBI served a demand notice under Rule 7(1) of the 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 guarantor and filed an application under Section 95 of the IBC for initiating insolvency proceedings against him. The Adjudicating Authority (NCLT Ahmedabad) dismissed the application as barred by limitation, holding that the balance sheets relied upon by SBI were not signed by the guarantor and hence could not extend limitation.
Appellant’s Contentions
SBI, through its counsel, argued that the balance sheets signed by the company’s directors and filed with the Ministry of Corporate Affairs (MCA) constituted valid acknowledgments of debt under Section 18 of the Limitation Act, 1963. It was further submitted that the personal guarantee deed contained clauses stipulating that any acknowledgment of debt made by the borrower would be binding upon the guarantor and deemed to have been made on his behalf. Therefore, limitation stood validly extended. The appellant contended that the NCLT had erred in ignoring the binding clauses of the guarantee deed and the settled position of law that acknowledgment by the principal debtor extends limitation against the surety.
Respondent’s Submissions
The respondent guarantor argued that the guarantee was never validly invoked, as the recall notice only demanded repayment and did not specifically invoke the guarantee. It was further contended that the balance sheets relied upon were signed after commencement of CIRP, when the powers of the board of directors stood suspended under Section 17 of the IBC, rendering such acknowledgments invalid. The respondent also submitted that no balance sheets were approved by shareholders or filed with the Registrar of Companies, and since the guarantor neither personally signed nor authorized any acknowledgment, Section 18 of the Limitation Act was inapplicable.
Findings Of The Tribunal
Rejecting the respondent’s contentions, the NCLAT held that the application filed by SBI was within limitation. The Bench clarified that the CIRP does not absolve suspended directors of their statutory duties, including signing annual financial statements under Sections 129 and 134 of the Companies Act, 2013. The Tribunal observed:“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.”
It noted that the balance sheets for FY 2019–20 signed by the directors constituted valid acknowledgments of liability under Section 18 of the Limitation Act. Addressing the issue of limitation against the guarantor, the Bench relied on Sections 128 of the Indian Contract Act and clauses 12 and 19 of the Deed of Guarantee, which explicitly provided that any acknowledgment or admission of debt by the borrower would be deemed to have been made on behalf of the guarantor. Quoting the relevant clause, the Tribunal stated: “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 Bench further relied on the Supreme Court’s ruling in Syndicate Bank v. Channaveerappa Beleri & Ors. (2006) to hold that acknowledgment of liability by the principal debtor extends limitation both against the debtor and the surety. On the issue of invocation, the NCLAT found that the recall notice expressly demanded payment within seven days and warned of legal action against the guarantors, thereby constituting a valid invocation of the guarantee. The Tribunal distinguished the case of SBI v. Deepak Kumar Singhania, cited by the respondent, noting that in that case, no demand or recall notice was issued before filing an application under Section 95 of the IBC, unlike the present case where proper invocation was established.
The NCLAT allowed the appeal, setting aside the order of the NCLT Ahmedabad, and held that:
The petition was within limitation;
Balance sheets signed by suspended directors during CIRP are valid acknowledgments under Section 18 of the Limitation Act; and
Acknowledgment of debt by the corporate debtor extends limitation against the guarantor, whose liability is co-extensive under Section 128 of the Contract Act.
The Tribunal, therefore, allowed SBI’s application under Section 95 of the IBC, holding the respondent liable as a personal guarantor and remanding the matter for further proceedings in accordance with law.
Appearance
For Appellant: Mr. Harshit Khare, Mr. Praful Saini, Mr. Ajay Agrawal, Advocates.
For Respondents: Mr. Vijayesh Atre, Ms. Aarya Chhangani, Advocates.
Cause Title: State Bank of India Versus Shri Bernard John
Case No: Company Appeal (AT) (Ins.) No. 1742 of 2024
Coram: Justice Yogesh Khanna (Judicial Member), Mr. Indevar Pandey (Technical Member)
