NCLT clears insolvency action against personal guarantor where continuing guarantee was invoked within limitation

Background and parties involved

The Chennai Bench of the National Company Law Tribunal, in Aditya Birla Finance Pvt. Ltd. Vs G Thiyagarajan, has admitted a petition under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC) against an individual who had furnished a personal guarantee for credit facilities granted to a corporate debtor.

The application was instituted by Aditya Birla Finance Limited (financial creditor) seeking initiation of insolvency resolution process against the personal guarantor, G. Thiyagarajan, in respect of facilities sanctioned to the corporate debtor, Velohar Infra Private Limited. No name of a proposed resolution professional was furnished by the financial creditor.

The petition invoked Section 95 read with Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

The Tribunal, vide common order pronounced in open court, has:

  • Admitted the insolvency application against the personal guarantor
  • Appointed Mr. Ravindra Beleyur as the Resolution Professional (RP)
  • Taken on record and accepted the report submitted under Section 99 of the IBC
  • Declared moratorium under Section 101 of the IBC

Sanction of facilities and security structure

Loan arrangements

The record placed before the Tribunal showed that:

  • Credit facilities of ₹3.50 crore were sanctioned to the corporate debtor under a loan agreement dated 24.01.2014.
  • The facilities comprised:
    • Working Capital Demand facility of ₹2,98,00,000
    • Overdraft facility of ₹52,00,000

The corporate debtor created mortgage over its immovable property, depositing original title deeds in favour of the financial creditor as security for the above facilities. The assessee–company’s statement of account, sanction letter, term loan agreement and mortgage deed were produced along with the petition.

Personal guarantees

Repayment of the loan was additionally secured through personal guarantees:

  • G. Thiyagarajan and Mrs. Vijayalakshmi Subburaj executed a Deed of Guarantee on 24.01.2014, guaranteeing the entire loan amount along with interest and related dues.
  • A Declaration-cum-Undertaking was executed by the personal guarantor on the same date.

The Deed of Guarantee clearly described the guarantee as a continuing guarantee, with liability coextensive with that of the principal borrower.

Default and enforcement steps

Classification as NPA and SARFAESI notice

The corporate debtor failed to adhere to the repayment terms. Consequently:

  • The loan account of the corporate debtor was classified as Non-Performing Asset (NPA) on 01.11.2017.
  • A notice under Section 13(2) of the SARFAESI Act was issued on 03.11.2017 to the corporate debtor and one of the personal guarantors, Mrs. Vijayalakshmi Subburaj, calling upon them to clear the outstanding dues.

Notably, no Section 13(2) SARFAESI notice was issued to G. Thiyagarajan at that point in time.

Subsequent proceedings against corporate debtor

Insolvency proceedings were later initiated against the corporate debtor in CP/114/IB/2018. These proceedings were commenced within the three-year limitation period prescribed under Article 137 of the Limitation Act, 1963. The process culminated in liquidation of the corporate debtor.

During liquidation:

  • Assets of the corporate debtor were realised, and
  • A sum of ₹1,03,66,200 was paid to the financial creditor pursuant to a settlement among creditors, as recorded by the Hon’ble NCLAT in Company Appeal (AT) (Ins) No. 232/2022.

Petition under Section 95 against personal guarantor

Filing of insolvency application

The present application under Section 95 was filed on 09.06.2023 against G. Thiyagarajan in his capacity as personal guarantor. As per Part-III of the petition:

  • Total debt and default amount was stated at ₹3,65,28,644
  • Date of default was indicated as 01.11.2017

On 08.03.2024, the Tribunal appointed Shri. Ravindra Beleyur as Interim Resolution Professional to examine the petition and submit a report under Section 99 of the IBC. The IRP submitted his report vide IA(IBC)/799(CHE)/2024 on 03.04.2024, recommending initiation of insolvency proceedings against the personal guarantor.

The Tribunal considered the IRP’s report and proceeded to hear the contesting parties.

Defence of the personal guarantor

Limitation objection

The personal guarantor, upon receipt of notice and the IRP’s report, filed a detailed counter. The primary thrust of the defence was that the insolvency petition was barred by limitation:

  • Default date: 01.11.2017
  • Petition date: 09.06.2023

The guarantor contended:

  1. Insolvency proceedings must be based on a legally enforceable and recoverable debt.
  2. Once a debt becomes time-barred, it loses its character as a “debt” capable of enforcement.
  3. The right to sue arises when default occurs, and therefore limitation begins on that date.

It was also argued that:

  • Demand is a condition precedent for fastening liability on a guarantor where the guarantee is payable “on demand”.
  • Such demand must be in respect of a claim that is still legally recoverable from the principal debtor.
  • If the claim is already time-barred against the principal debtor, a valid demand cannot be made for the first time on the guarantor.