Time-Barred Debts: The Critical Role of Limitation and Service under Section 94 of the IBC

Introduction

When a personal guarantor files for insolvency under the Insolvency and Bankruptcy Code (IBC), does the “date of default” align with the classification of the corporate debtor’s account as a Non-Performing Asset (NPA), or is it triggered by the formal invocation of the guarantee?. This critical distinction was the pivot point in dismissal of a company petition filed by Kiran Ratilal Sheth¹ in NCLT Mumbai, where the Tribunal clarified that for a personal guarantor, the right to apply for insolvency resolution is tethered strictly to the demand for payment and the subsequent failure to honor that demand within the statutory window. Consequently, the NCLT dismissed the petition, establishing that reliance on NPA dates cannot rescue a claim that has otherwise lapsed under the three-year limitation period prescribed by the Limitation Act, 1963.

The factual background involves Mr. Kiran Ratilal Sheth, who stood as a personal guarantor for credit facilities availed by M/s. Max Flex & Imaging Systems Limited² from a consortium of ten banks, including State Bank of India and Bank of Baroda. The company defaulted on its obligations, leading to a total outstanding debt of approximately ₹458.32 Crore. Following these defaults, the lenders classified the company’s accounts as NPAs between 2014 and 2015. On July 18, 2016, the consortium issued a notice under Section 13(2) of the SARFAESI Act, 2002, formally invoking the guarantee and demanding payment. Despite this, the Petitioner waited until May 13, 2023, to file a petition under Section 94(1) of the IBC seeking to initiate the Insolvency Resolution Process.

In its rationale, the Tribunal first addressed a significant procedural lapse: the Petitioner failed to serve the application “forthwith” to the corporate debtor, a mandatory requirement under Rule 6(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantor to Corporate Debtor) Rules, 2019. While proof of service to the financial creditors was provided, the absence of service to the company itself rendered the petition deficient.

More substantially, the Tribunal delved into the legal timeline of “default.” While the Petitioner argued that default occurred at the time of NPA classification, the NCLT held that a guarantor’s liability to pay is specifically triggered upon the invocation of the guarantee. Since the guarantee was invoked on July 18, 2016, with a 60-day window to pay, the actual default occurred in September 2016. Applying Section 238A of the IBC and Article 137 of the Limitation Act, which mandates a three-year period from the date the right to apply accrues, the Tribunal determined the limitation period expired on September 16, 2019. The NCLT fortified this stance by citing Suyog Jain v. Arvind Kumar (Resolution Professional) & Ors.³, where the NCLAT affirmed that the three-year limitation period under Article 137 applies strictly to applications filed under Section 94.

Conclusion

Ultimately, this ruling serves as a stern reminder of the “use it or lose it” nature of insolvency proceedings. By failing to comply with mandatory service rules and allowing nearly seven years to pass since the invocation of the guarantee, the Petitioner’s application was found both procedurally deficient and legally barred. The judgment reinforces that the IBC is not an open-ended remedy; it requires vigilant adherence to timelines, ensuring that the insolvency framework remains a tool for timely resolution rather than a refuge for stale claims.

1. Kiran Ratilal Sheth, Company Petition (IB) 410 of 2023 ↩︎
2. M/s. Max Flex & Imaging Systems Limited ↩︎
3. Suyog Jain v. Arvind Kumar (Resolution Professional) & Ors  (Company Appeal (AT) (Insolvency) No. 567 of 2019) ↩︎

Expositor(s): Adv. Jahnobi Paul