Resolving the Conundrum: The Need for a Clear Framework on Limitation Periods for Guarantors in India

Tanay S. Naidu & Sujeeth Madasu*

Introduction

The recent ruling by the Hyderabad bench of the NCLT in Jammu & Kashmir Bank Ltd v. Kanumuru Raghu Ram Krishama Raju [“J&K Bank Case”]  provides a pivotal perspective on the law governing the limitation period for guarantors. The bench held that the limitation period for filing an application against a Personal Guarantor [“PG”] in respect of the debt owed by a Principal Borrower [“PB”] must be consistently applied to both parties as the liability of a Principal Borrower and a Personal Guarantor is co-extensive in nature, therefore the limitation period for the PG and the PB commences from the date of default. As the Personal Guarantor had not acknowledged the debt post-default, the Tribunal barred any fresh limitation period which differs from the date of default. Consequently, the Demand Notice issued was deemed time-barred.   

The commencement of the limitation period with respect to the PB begins from the date of default, with the limitation being 3 years from the date of default under Article 137 of the Limitation Act, 1963. This has been clearly elucidated in the case of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited & Another for an application filed under Section 7 of the Insolvency and Bankruptcy Code 2016 [“IBC, 2016”]. Therefore, owing to the precedent established in the J&K Bank Case, the limitation period for filing an application under Section 7 of the IBC, 2016 against a Personal Guarantor would begin from the date of default, with the limitation period being 3 years.  

The problem, however, arises due to a multitude of cases with varied dictums with regard to the trigger moment for commencement of the limitation period against personal guarantors. The Supreme Court in the case of Syndicate Bank vs. Channaveerappa Beleri Ors. held that the period of limitation begins for a guarantor when a demand is made by the bank to the guarantor. It is important to note that the dispute in this case does not pertain to any proceedings under the IBC, 2016. Nonetheless, it examined the contractual nature of a guarantee deed and further the applicable limitation period for guarantees under the Limitation Act, 1963, laying down the principles pertinent to insolvency proceedings under the IBC concerning guarantees. This case therefore differentiated the limitation period for the PG from that of the PB which begins from the date of default. This holding however comes with a caveat, as the Court clarified, that the limitation period for enforcing a guarantor's liability is contingent on the bank making a demand whilst the debt is still live against the PB. For instance, if the debt against the PB becomes due on December 4, 2024, the limitation period for filing the application for recovery of dues from the Principal Borrower would extend until December 4, 2027. To preserve its claim against the Guarantor, the bank must demand payment within this period i.e., on or before December 04, 2027. Once such a guarantee is invoked within this timeframe, the limitation period for enforcing the Guarantor’s liability begins from the date of the invocation and extends for three years thereafter. Consequently, the latest permissible date for the Bank to initiate a demand against the Guarantor is December 04, 2027, which would trigger a separate and distinct limitation period for the Guarantor.  A similar approach has been taken in the cases of C.P. Sreelal vs. District Collector and Ors. by the High Court of Kerala, followed by  Pooja Ramesh Singh vs. SBI decision by NCLAT, Delhi ensuring that IBC proceedings against guarantors can only commence post-invocation, resultantly preventing premature CIRP filings.  However, there is no set precedent or uniform procedure followed in relation to the issue.

Bridging the Gaps: Clarifying the Limitation Period for Personal Guarantors

Owing to divergent approaches by the judiciary, the ambiguity regarding the commencement of the limitation period against guarantors is yet to be resolved. Regardless of what the Supreme Court or NCLT have held, the United Kingdom (“UK”) seems to follow a far more efficient system to ease this confusion. In the UK, the limitation period for enforcing a guarantor’s liability depends on the type and terms of the guarantee, with the limitation period depending on when the “cause of action” arises.  Section 5 of the Limitation Act, 1980 of the UK, provides that time starts to run from the cause of action, but the trigger point varies depending on the type of guarantee.  As elucidated in Section 5, for simple guarantees, the limitation period begins on the date the Principal Borrower defaults on their obligations and commencement of the limitation period against guarantors is dependent on such a default.

On the other hand, the limitation period for guarantees on demand begins when the creditor issues a demand notice to the guarantor. In such situations, the liability of the guarantor is triggered immediately upon the issuance of a valid demand, regardless of whether the principal borrower has defaulted or not. With respect to such demand notices, strict compliance is not a primary cause of concern in the UK. In a 2018 case involving Barclays Bank, the High Court of England and Wales held that despite an error in the demand notice exceeding the liability cap, the notice was clear enough to bind the guarantor. The court applied the principles from Mannai Investment v. Eagle Star Life Assurance Co Ltd, wherein it was held that the demand left no reasonable doubt about the guarantor’s liability.  Regardless, ensuring precision in a demand notice is generally advisable to avoid potential disputes. Although demand guarantees typically require the demand to be in writing and served as per the terms of the agreement, practical considerations may sometimes allow for flexibility, particularly where the guarantor is also the Principal Borrower. In such cases, a formal demand may not always be necessary.

On the contrary in India the Delhi High Court in the case of  M/S Garg Builders Through Shri Mohinder Pal Garg v. Hindustan Prefab Ltd. and Anr., emphasized that demand guarantees must be clear and unambiguous. Once a valid demand is made per the guarantee’s terms, the guarantor is legally bound to honor its commitment without interference. The Court held that if the invocation strictly complies with the guarantee’s terms, courts cannot restrain payment by referring to the underlying contract between the principal and the beneficiary, as doing so would compel the guarantor to breach its independent obligation.  

From the point of view of guarantors, identifying procedural flaws in demand notices can offer strategic leverage during negotiations, potentially leading to more favorable terms. However, this does not absolve the guarantor of liability, as creditors retain their ability to rectify defects.

Another issue identified in the J&K Bank Case is the effect of Section 18 of the Limitation Act, 1963, which provides for the acknowledgment of debt and its impact on the limitation period. Here, there exists a confusion as to whether the guarantor is required to acknowledge the debt separately or whether the acknowledgement of the debt by the Principal Borrower also extends the liability to the Guarantor.

The NCLT in the case of  J&K Bank  has disregarded the ratio laid down by the Hon’ble Supreme Court in Laxmi Pat Surana v. Union Bank of India. In the J&K Bank case, the court held that to extend the limitation period, the PG must independently acknowledge the debt, separate from any acknowledgement by the PB, thereby ruling against the extension of the limitation period for the PG based on an acknowledgement of debt made by the PB. However in Laxmi Pat Surana v. Union Bank of India, the Hon’ble Court has held that, inter alia, an acknowledgment of liability made by the Principal Borrower shall be equally binding on the Corporate/Personal Guarantor with respect to the extension of the period of limitation under the provisions of the Limitation Act, 1963. The Supreme Court held that the necessity of a separate acknowledgment of debt by the guarantor would be inconsistent with the very nature of a guarantee, which, by definition, ensures the performance of an obligation by the principal borrower.  Therefore, the acknowledgment of debt by the principal borrower reaffirms the guarantor’s liability as well. This interpretation further aligns with the broader principles of fairness and practicality in commercial transactions. Imposing a requirement for separate acknowledgment by the guarantor would unnecessarily burden creditors and create potential loopholes for guarantors to evade liability, thereby undermining the utility of guarantees as a security mechanism.

The Way Forward

The very purpose behind a guarantee is to provide an additional layer of security beyond the obligations of the borrower. The principle of co-extensive liability essentially asserts that the liability of the guarantor is equivalent to that of a Principal Borrower.  However, this principle when applied rigidly, leads to practical problems which nullifies the very purpose of a guarantee. If the enforceability of a guarantee against a PG is constrained by the limitation period of a PB a creditor loses their right to seek a redressal inspite of having negotiated separate contractual rights  under the guarantee. This would effectively render the guarantee pointless in situations where the limitation period for the PB expires prior to the invocation of the guarantee. 

In the J&K Bank case for instance, where the contract specified different starting points for the limitation period of PB and PG. A strict application of the co-extensive liability to limitation periods would result in enforcing identical limitation criteria for both PBs and PGs, negating the specific agreed upon contractual provisions.

This problem points to the importance of respecting the specific terms agreed upon in contracts, affirming the autonomy of parties to define their relationships.

Moreover, while the IBC is designed to address highly time-sensitive proceedings, it recognizes the necessity of enforcing financial obligations that emerge from contracts. Aligning insolvency processes with the contractual intentions of the parties can substantially enhance the efficiency of these proceedings. By respecting established contractual terms, the insolvency process not only adheres to party autonomy but also reduces potential disputes or appeals, thereby maintaining efficiency and fidelity to the contractual foundations of financial obligations. The United Kingdom takes a balanced and pragmatic approach to guarantees, ensuring that the right to enforcement depends on the specific nature and terms of the guarantee in question. This approach prevents the application of a rigid, one size fits all rule by stipulating that the limitation period begins only when the cause of action arises as per the contractual framework. The same was upheld in Bank of Maharashtra v. Anand Ghadigaonkar, where the court held that the limitation period is triggered not by the borrower’s default but by the formal invocation of the guarantee. This decision reinforced the principle that the guarantor’s obligation to fulfill the guarantee arises only upon invocation, rather than being tied to the borrower’s failure to repay. Moreover, the importance of adhering to statutory timelines when initiating insolvency proceedings was emphasized, thereby highlighting that timely action is crucial to preserving the right to recover outstanding debts.

Such an approach would not only enhance legal certainty but also align judicial interpretation with practical realities, addressing the current ambiguity in applying limitation laws to guarantees and related insolvency proceedings by ensuring that both guarantors and creditors have a precise understanding of their rights and obligations from the outset. Accordingly, standardizing the commencement of the limitation period as per the terms of guarantee would create a more predictable legal environment that enhances fairness and efficiency in financial transactions, bringing its practices in line with global standards.

Conclusion

The lack of a uniform approach regarding the trigger moment for the limitation period of guarantees in India gives rise to uncertainty for creditors and guarantors as well, resulting in disputes which could be avoided by adopting an unambiguous framework. Therefore, the recent ruling by the NCLT in the J&K Bank case reflects a legal ambiguity which continues to leave parties in doubt with regards to the trigger moment of a limitation period. Adopting an approach similar to that of the UK and in the cases of Bank of Maharashtra v. Anand Ghadigaonkar and Syndicate Bank vs. Channaveerappa Beleri Ors would ease this confusion and provide clarity, ensuring that creditors are safeguarded, and guarantors are treated equitably.

*The authors are Fourth Year students at National Academy of Legal Studies and Research (NALSAR).