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Laxmi Pat Surana Vs. Union Bank of India and Ors. - (Supreme Court) (26 Mar 2021)

Action under Section 7 of the IBC could be invoked even against a (corporate) guarantor



Two central issues arise for determination in present appeal are (i) Whether an action under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) can be initiated by the financial creditor (Bank) against a corporate person (being a corporate debtor) concerning guarantee offered by it in respect of a loan account of the principal borrower, who had committed default and is not a "corporate person" within the meaning of the IBC? (ii) Whether an application under Section 7 of the IBC filed after three years from the date of declaration of the loan account as Non-performing Asset2, being the date of default, is not barred by limitation?

The Financial Creditor then proceeded to file an application Under Section 7 of the IBC on 13th February, 2019 for initiating Corporate Insolvency Resolution Proceeding against the Corporate Debtor, before the National Company Law Tribunal, Kolkata. This application came to be resisted on diverse counts and in particular, on the preliminary ground that it was not maintainable because the Principal Borrower was not a "corporate person"; and further, it was barred by limitation, as the date of default was 30th January, 2010, whereas, the application had been filed on 13th February, 2019 i.e., beyond the period of three years. These two preliminary objections came to be negatived by the Adjudicating Authority vide judgment.

The Adjudicating Authority held that, the action had been initiated against the Corporate Debtor, being coextensively liable to repay the debt of the Principal Borrower and having failed to do so despite the recall notice, became Corporate Debtor and thus liable to be proceeded with under Section 7 of the IBC. As regards the second objection, the Adjudicating Authority found that the Principal Borrower, as also, the Corporate Debtor had admitted and acknowledged the debt time and again, lastly on 8th December, 2018 and thus, the application filed on 13th February, 2019 was within limitation. The NCLAT vide impugned judgment dismissed the appeal and affirmed the conclusion reached by the Adjudicating Authority.

In law, the status of the guarantor, who is a corporate person, metamorphoses into corporate debtor, the moment principal borrower (regardless of not being a corporate person) commits default in payment of debt which had become due and payable. Thus, action under Section 7 of the IBC could be legitimately invoked even against a (corporate) guarantor being a corporate debtor. The definition of "corporate guarantor" in Section 5(5A) of the Code needs to be so understood.

Since the loan was offered to a proprietary firm (not a corporate person), action under Section 7 of the IBC cannot be initiated against the corporate person even though it had offered guarantee in respect of that transaction. Whereas, upon default committed by the principal borrower, the liability of the company (corporate person), being the guarantor, instantly triggers the right of the financial creditor to proceed against the corporate person (being a corporate debtor).

In the present case, the NCLT as well as the NCLAT have adverted to the acknowledgments by the principal borrower as well as the corporate guarantor-corporate debtor after declaration of NPA from time to time and lastly on 8th December, 2018. The fact that acknowledgment within the limitation period was only by the principal borrower and not the guarantor, would not absolve the guarantor of its liability flowing from the letter of guarantee and memorandum of mortgage. The liability of the guarantor being coextensive with the principal borrower under Section 128 of the Contract Act, 1872, it triggers the moment principal borrower commits default in paying the acknowledged debt. This is a legal fiction. Such liability of the guarantor would flow from the guarantee deed and memorandum of mortgage, unless it expressly provides to the contrary.

A fresh period of limitation is required to be computed from the date of acknowledgment of debt by the principal borrower from time to time and in particular the (corporate) guarantor/corporate debtor vide last communication dated 8th December, 2018. Thus, the application under Section 7 of the IBC filed on 13th February, 2019 is within limitation. Appeal disposed off.


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