NCLT Fails to Consider Balance Sheet Debt Acknowledgments and COVID Limitation Relief: NCLAT Restores UCO Bank’s Insolvency Proceedings [Read Order]

The National Company Law Appellate Tribunal(NCLAT) allowed the insolvency proceedings initiated by UCO Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016, as the NCLT was in error in rejecting the petitions on the ground of being time-barred without taking into account the balance sheet acknowledgments and COVID19 limitation relief.

The UCO Bank had availed credit facilities to the principal borrower, whose account was classified as an NPA in 2014. The borrower had signed revival letters as well as acknowledged liabilities in audited balance sheets for several financial years and made part payments thereafter.

Insolvency proceedings were initiated against the principal borrower and corporate guarantors. However, the NCLT Kolkata Bench rejected certain Section 7 applications against guarantors, as they were barred by limitation.

The UCO Bank argued that the acknowledgments of debt in balance sheets and revival letters squarely fell within the provisions of Section 18 of the Limitation Act thereby extending the limitation period. It was also submitted that the NCLT did not consider the exclusion of limitation during the COVID-19 pandemic as directed by the Supreme Court.

The Bank also relied upon the settled legal position that the liability of a corporate guarantor is co-extensive with that of the main borrower.The respondents further submitted that the limitation period against the guarantors was separate and that the applications were made after a period of three years from the date of NPA.

NCLAT allowed the appeals holding that the acknowledgment of debt by the principal borrower also applies equally to the corporate guarantors in light of their co-extensive liability under the Contract Act.

The Appellate Tribunal relied on the precedents of the Supreme Court of India in the cases of Laxmi Pat Surana and Asset Reconstruction Company v. Bishal Jaiswal, holding that balance sheet entries are valid acknowledgment of debt.

Further, the NCLT completely disregarded the suo motu directions of the Supreme Court of India to exclude the COVID period from the computation of limitation. After applying the said exclusions, the Section 7 petitions were clearly within time.

The Bench comprising Justice Mohd. Faiz Alam Khan[Judicial Member]and Arun Baroka[Technical Member] held that the impugned orders were seriously infirm in law and therefore set aside the orders and restored the insolvency applications of UCO Bank.

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