“Suspended” But Not Silent: NCLAT Rules Balance Sheets Signed by Suspended Directors Extend Limitation for Personal Guarantors

The Hon’ble National Company Law Appellate Tribunal (NCLAT), in its judgment dated October 17, 2025, addressed the critical issue of whether the limitation period for initiating insolvency proceedings against a Personal Guarantor (under Section 95 of the Insolvency and Bankruptcy Code(IBC)) is extended by entries in the Corporate Debtor’s balance sheets when such sheets are signed by directors whose powers are suspended under Section 17 of the IBC.

The Appellant, State Bank of India (SBI), had extended credit facilities to GEI Industrial Systems Ltd. (Corporate Debtor), secured by the personal guarantee of the Respondent. The account was classified as NPA on May 28, 2016, and SBI invoked the guarantee on September 30, 2016. Subsequently, the Corporate Debtor was admitted into CIRP in July 2017.

SBI filed a Section 95 application against the Respondent in October 2021. The National Company Law Tribunal (NCLT) dismissed the application as time-barred, reasoning that the limitation expired three years from the date of default (2016) and holding that balance sheets signed by suspended directors during CIRP were invalid and could not constitute an acknowledgment of debt.

Allowing the appeal and setting aside the NCLT’s order, the Hon’ble NCLAT laid down the following key principles:

1. Suspended Directors Must Sign Financial Statements: The NCLAT rejected the argument that balance sheets signed by suspended directors are invalid. It held that the commencement of CIRP suspends the directors’ management powers but does not absolve them of their statutory duties under Sections 129 and 134 of the Companies Act, 2013, to sign financial statements. Consequently, such balance sheets constitute valid acknowledgments of liability under Section 18 of the Limitation Act, 1963.

2. Acknowledgment by Borrower Binds the Guarantor: The Court observed that under Section 128 of the Contract Act, the liability of the surety is co-extensive with that of the principal debtor. The NCLAT also relied on specific clauses in the Deed of Guarantee which stated that any acknowledgment by the borrower “shall be binding on the guarantor”. Citing the Supreme Court’s decision in Syndicate Bank v. Channaveerappa Beleri, the NCLAT held that an acknowledgment of debt by the principal borrower renews the limitation period against the guarantor as well.

3. Validity of Invocation: The Respondent argued that the guarantee was never invoked. The NCLAT found that the demand-cum-recall notice issued in 2016 specifically warned the guarantors of action upon failure to pay, which constituted a valid invocation.

4. Application within Limitation: The NCLAT calculated that the balance sheets from FY 2016-17 to 2019-20 continuously extended the limitation. When combined with the Supreme Court’s Suo Motu exclusion of the Covid-19 period (March 2020 to February 2022), the application filed in October 2021 was well within the limitation period.

This judgment clarifies that the “suspension” of directors under the IBC does not render them legally impotent regarding statutory compliances like signing balance sheets. It reinforces the principle that creditors can rely on the Corporate Debtor’s financial statements to maintain the life of a claim against Personal Guarantors, preventing guarantors from escaping liability on technical limitation grounds when the debt is acknowledged by the principal borrower.