Section 95 Application under IBC After Expiry of Three Years Is Barred by Limitation
Table of Contents
Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC) allows a creditor to initiate insolvency proceedings against a personal guarantor. A key legal issue in such cases is whether the application is time-barred if filed three years after the date of the corporate debtor’s default. Courts have consistently held that such applications are governed by such a limitation, making delayed filings impossible. This rule applies even if a recovery certificate has been issued by a Debt Recovery Tribunal (DRT). However, a fresh cause of action can extend the limitation period, such as a valid, written acknowledgement of the debt by the guarantor before the original period expires.
Understanding Section 95 of the IBC
Section 95 of the IBC enables a creditor, either individually or jointly with other creditors, to initiate an insolvency resolution process against a personal guarantor by filing an application before the Adjudicating Authority, which includes details of the debt, default, and supporting evidence. The primary objective is to ensure the recovery of dues from the personal guarantor when the corporate debtor defaults on a loan, thereby strengthening creditor rights and promoting accountability. The insolvency proceedings against a personal guarantor are linked to the corporate debtor’s insolvency proceedings are active or concluded, ensuring a coordinated approach to debt recovery.
Read more : IBBI Guidelines for Insolvency Professional Education
Limitation Act and Its Applicability to IBC
By section 238A of the IBC, the provisions of the Limitation Act, 1963 apply to all proceedings under the IBC, which the Supreme Court has clarified applies retrospectively to prevent the revival of time-barred debts. For an application under section 95 of the IBC against a personal guarantor, the limitation period is three years from the date of default, as specified under Article 137 of the Limitation Act, which governs any application for which no legal disputes are settled within a reasonable timeframe and protecting against the unfairness of litigating stale claims, where evidence might be lost and memories faded. Therefore, the application of limitation is not intended to extinguish rights but to ensure diligence and protect defendants from indefinite litigation.
Judicial Precedents on Limitation under Section 95
The NCLT and NCLAT have consistently held that the three year limitation period for initiating insolvency proceedings begins from the date of default, not from the date the corporate debtor is declared insolvent. These courts emphasize that a personal guarantor’s liability arises simultaneously with the corporate debtor’s default, and an application filed after the three year limitation period will be dismissed as time-barred. The Supreme Court in Laxmi Pat Surana v. Union of India, the court held that a creditor can proceed against a corporate guarantor without first suing the principal borrower. Hence, it clarified that the liability of a personal guarantor is co-extensive with that of the principal borrower. While the limitation period is strictly enforced, the Supreme Court, in Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal, confirmed that a written acknowledgement of debt can extend the limitation period under section 18 of the Limitation Act. The court specifically held that an entry in the corporate debtor’s balance sheet can constitute a valid acknowledgement of debt, provided it is made before the original limitation period expires. This acknowledgement creates a fresh three-year limitation period.
When Can Limitation Be Extended?
Under the Limitation Act, a fresh period of limitation can be extended under section 18 by written acknowledgement of debt or under section 19 by part payment before the original period expires. However, mere pendency of CIRP or liquidation proceedings against the corporate debtor does not automatically extend the limitation period for filing an application under section 95 of the IBBI . A creditor must still demonstrate a valid extension under the Limitation Act for their claim against a personal guarantor.
Practical Implications for Creditors
- For creditors, closely monitoring the limitation period is crucial to avoid having their section 95 application dismissed as time-barred.
- Lenders and financial institutions need to maintain documented acknowledgments of debt to preserve their right to file.
- It is important to take timely legal action to prevent the dismissal of their application on technical grounds related to an expired limitation period.
Conclusion
Recent NCLAT rulings confirm that applications under section 95 of the IBC field more than 3 years after the date of default are time-barred, in line with Article 137 of the Limitation Act. This three year period can only be extended by a valid written acknowledgment of the debt debt the personal guarantor before the original limitation expires. The clarification, which holds that a 12 year limitation for executing a decree is inapplicable for initiating IBC proceedings, reinforces the principal liability and prevents the revival of stale claims. Ultimately, the onus is on the creditors to creditors to act within statutory timeframes and on personal guarantors to be vigilant about their legal liabilities under the IBC.
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