NCLAT Confirms CIRP Admission Despite OTS with Guarantors, Says Corporate Debtor Still Liable [Read Order]

Corporate Debtor Liable: NCLAT Confirms CIRP Admission The National Company Law AppellateTribunal (NCLAT), in a recent ruling, upheld the initiation of the CorporateInsolvency Resolution Process (CIRP) against M/s Ace Engineering (India) Pvt. Ltd., rejecting claims that a One-Time Settlement (OTS) with personal guarantors extinguished the company’s debt. The appeal was dismissed on July 3, 2025.

The appellant, Puneet Resutra, director and shareholder of Ace Engineering, challenged the March 6, 2023, order of the National Company Law Tribunal (NCLT), Chandigarh Bench, which admitted a Section 7 application filed by Jammu & Kashmir Bank Ltd. The application sought CIRP initiation on the grounds of default in repayment of sanctioned credit facilities.

Ace Engineering availed of two credit facilities: Rs. 9 crore in Cash Credit and Rs. 4 crore as Secured Overdraft. These were backed by personal guarantees and mortgaged properties belonging to directors. The accounts turned non-performing on March 31, 2016. A year later, the bank approved an OTS proposal with the guarantors for Rs. 10 crore. The amount was paid, and the guarantors were formally discharged.

The appellant argued that this payment settled the corporate debt in full. He emphasised that the bank released the mortgaged properties of the guarantors and made no further demand from the company until it filed a Section 7 application in 2019. He further contended that the internal agreement between the company and its guarantors, transferring company land to the latter in exchange for the debt discharge, indicated a comprehensive settlement.

The Tribunal pointed out that the settlement was strictly between the bank and the guarantors. There was no formal release of the company from its liability. The bank had made it explicitly clear in its correspondence that while the guarantors were discharged, the borrower was still liable for the remaining dues.

The company also argued that it had transferred land to the guarantors in exchange for them taking over the liability, and that this private arrangement showed that the debt was resolved. However, the Tribunal dismissed this, saying that any internal agreement between the company and its directors had no bearing on the creditors’ rights. The bank was not a party to that arrangement and couldn’t be bound by it.

The company further claimed that the insolvency application filed in January 2019 was time-barred, as the default occurred in March 2016. However, the NCLAT ruled that the application was well within the three-year limitation period. It also noted that the company had acknowledged the debt in its 2017–18 audited financials, which legally extended the limitation timeline.

Another argument raised was that the company was currently executing key government projects worth over ₹38 crore, including military infrastructure in Ladakh and Kargil, and that insolvency would derail critical public work.

The tribunal comprising, Justice Rakesh Kumar Jain (Judicial Member), Naresh Salecha (Technical Member) and Indevar Pandey (Technical Member), upheld that simply being operational or having ongoing contracts is not enough to block CIRP unless there’s compelling evidence of receivables or solvency, which, in this case, was lacking.

Citing legal precedents like Laxmi Pat Surana v. Union Bank of India, the Tribunal asserted that releasing guarantors doesn’t automatically release the borrower unless the lender explicitly agrees. And in this case, it hadn’t. The NCLAT found no merit in the appeal and upheld the NCLT’s decision to admit the Section 7 application and initiate CIRP.

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