Why SBI lost its Rs 1,759-crore insolvency case against Patanjali Foods guarantor despite debt remaining…

Reports coming in for today mention that The National Firm Law Tribunal (NCLT), Mumbai, has rejected State Bank of India's (SBI) insolvency petition against Dinesh Shahra, personal guarantor for Patanjali Foods Ltd., formerly Ruchi Soya Industries Ltd., over a claimed outstanding amount of Rs 1,759.12 crore.

The case was not rejected because Shahra's guarantee liability had been extinguished. Instead, the tribunal found that SBI filed its insolvency petition after the applicable limitation period had ended.

The 13-page order, pronounced on Tuesday (September 22), noted by Moneycontrol, was passed by Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar in a firm petition filed under Section 95 of the Insolvency and Bankruptcy Code, 2016, read with Rule 7(2) of the 2019 Rules governing insolvency proceedings against personal guarantors.

How the debt and guarantee arose

SBI began extending credit facilities to Ruchi Soya in 2013. A sanction letter dated March 22, 2013 was followed by loan, hypothecation and guarantee documents. Further facilities and renewals were executed in 2014 and 2015, including guarantee deeds dated March 29, 2014 and April 30, 2015. The debt was subsequently acknowledged through revival letters dated September 30, 2015 and September 23, 2016.

Ruchi Soya entered corporate insolvency proceedings after petitions by Standard Chartered Bank and DBS Bank were admitted by the NCLT on December 15, 2017.

SBI invoked Shahra's guarantees through a March 7, 2018 letter, asking him to clear the dues within three days. He did not pay, and the tribunal recorded March 12, 2018, as the date of default.

What happened after Patanjali's resolution plan

The NCLT approved the resolution plan submitted by the Patanjali Group on July 24, 2019. SBI subsequently received Rs 854.04 crore on December 18, 2019 under the plan.

Shahra argued that implementation of the resolution plan had discharged the underlying debt and, consequently, his guarantee. He additionally relied on Section 134 of the Indian Contract Act, 1872, and argued that SBI could not recover the same debt after receiving money under the resolution plan. Section 134 essentially says that if a creditor legally releases the main borrower from a debt, the guarantor who had promised to repay that debt can additionally be discharged from the guarantee.

The NCLT did not accept this argument. Citing the Supreme Court's ruling in Lalit Kumar Jain v Union of India, the tribunal stated approval of a resolution plan does not automatically release a personal guarantor from obligations under an independent guarantee contract. The Rs 854.04 crore received by SBI would have to be adjusted while calculating the remaining liability, but the payment itself did not wipe out the guarantee.

The tribunal additionally stated that SBI's separate proceedings before the Debts Recovery Tribunal, Jabalpur, did not establish that the liability had been discharged because there was no final adjudication showing satisfaction or extinguishment of the debt.

Limitation offering that changed the case

SBI issued a demand notice to Shahra on May 26, 2022. The insolvency petition was eventually filed on March 21, 2023, claiming Rs 1,759,12,03,548.36 (over Rs 1,759 crore), along with further interest and charges.

The limitation calculation became decisive.

The tribunal excluded the period from March 15, 2020 to February 28, 2022 in accordance with the Supreme Court's COVID-19 limitation orders. After applying that exclusion, the NCLT calculated that the limitation period expired on February 26, 2023. SBI's petition as a result came 23 days after the deadline.

There was an earlier twist. NCLT had condoned SBI's delay through an October 18, 2023 order. Shahra challenged that decision before the NCLAT, but withdrew the appeal on August 17, 2026, with liberty to mobilize the limitation offering before the NCLT.

On reconsidering the offering, the NCLT stated its earlier condonation had resulted from an incorrect understanding of the Supreme Court's COVID relaxation. According to the tribunal, 362 days remained available from March 1, 2022, meaning the additional 90-day benefit was not applicable. It described the earlier condonation as being based on a “mistaken belief”.

Why SBI's petition was rejected

The tribunal considered Section 5 of the Limitation Act, which permits delay to be condoned where sufficient cause is shown. But it held that this provision could not be used for the present petition because its limitation was governed by the schedule to the Limitation Act.

The NCLT held: “Accordingly, the present petition filed on 21.03.2023 having been filed after the expiry of limitation on 26.02.2023 is not maintainable.” The tribunal rejected and disposed of SBI's Section 95 insolvency petition.