Liability of the corporate guarantor/ debtor is coextensive with that of the principal borrower: SC

In cases where the corporate person had offered a guarantee in respect of loan transaction, the right of the financial creditor to initiate action against such entity being a corporate debtor (corporate guarantor), would get triggered the moment the principal borrower commits default due to non­payment of debt. (Para 37).

LAXMI PAT SURANA V/S UNION BANK OF INDIA & ANR.

Civil Appeal No. 2734 of 2020

Decided on 26th March 2021

A Three-Judge Bench of the Hon’ble Supreme Court consisting of Justice A.M. Khanwilkar, Justice B.R. Gavai, and Justice Krishna Murari presided over the appeal where the question of delay in filing of an application under Section 7 of the Indian Bankruptcy Code has been raised.

The factual matrix of the present case is that respondent No. 1 bank extended credit facility to M/s. Mahaveer Construction, a proprietary firm of the appellant, through two loan agreements in years 2007 and 2008 for a term loan of Rs.9,60,00,000/­ (Rupees nine crore sixty lakhs only) and an additional amount of Rs.2,45,00,000/­ (Rupees two crore forty­five lakhs only), respectively. The loan amount was disbursed to the Principal Borrower. M/s. Surana Metals Limited, of which the appellant is also a Promoter/Director, had offered a guarantee to the two loan accounts of the Principal Borrower. The stated loan accounts were declared Non-Profiting Asset (NPA) on 30.1.2010. The Financial Creditor then filed an application under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 against the Principal Borrower before the Debt Recovery Tribunal at 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 30.1.2010, whereas, the application had been filed on 13.2.2019 i.e., beyond the period of three years.

Learned counsel for the Appellant submitted that: (i) That the date of default must be reckoned as 30.1.2010, on which date, the loan accounts were declared as NPA. That fact has been duly noted in the subject application filed on 13.2.2019. Hence, the application was ex facie barred by limitation in view of Article 137 of the Limitation Act, 1963. (ii) Letters relied upon do not mention the factum of acknowledgment of the debt by the Principal Borrower or the Corporate Debtor, as the case may be. The said communications were sent without prejudice and cannot be read as an acknowledgment of liability as such. All other relied upon communications have been sent by the Principal Borrower and not the Corporate Debtor, who is an independent legal entity. The so ­called acknowledgment by the Principal Borrower, therefore, cannot bind the Corporate Debtor. (iii) There was a delay in filing the application under Section 7 and despite that, it was not accompanied by an application for condonation of delay under Section 5 of the Limitation Act.

Learned counsel for the Respondents submitted that (i) According to the Financial Creditor, the liability of the Principal Borrower and of the Guarantor is coextensive or coterminous, as predicated in Section 128 of the Indian Contract Act, 1872. (ii) The Adjudicating Authority, as well as, the NCLAT had justly taken due cognizance of the said admission to conclude that a fresh period of limitation commenced because of acknowledgment of the debt by the Corporate Debtor.

Two central issues arise for our determination in this appeal, as follows: ­

(i) Whether an action under Section 7 of the Insolvency and Bankruptcy Code, 2016 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 Code?

(ii) Whether an application under Section 7 of the Code filed after three years from the date of declaration of the loan account as NPA, being the date of default, is not barred by limitation?

After hearing all the contention the Court viewed that “The appellant was at pains to persuade us that the intention behind the communication dated 08.12.2018 sent to the financial creditor by the corporate guarantor (corporate debtor) is a triable matter, as it was sent without prejudice. We are not impressed by this submission. The fact that the principal borrower had availed of credit/loan and committed default and that the (corporate) guarantor/corporate debtor had offered a guarantee in respect of the loan account is not disputed. What is urged by the appellant is that the acknowledgement of liability to pay the amount in question was by the principal borrower and that acknowledgement cannot be the basis to proceed against the corporate guarantor (corporate debtor). Section 18 of the Limitation Act, however, posits that a fresh period of limitation shall be computed from the time when the party against whom the right is claimed acknowledges its liability. The financial creditor has not only the right to recover the outstanding dues by filing a suit but also has a right to initiate a resolution process against the corporate person (being a corporate debtor) whose liability is coextensive with that of the principal borrower and more so when it activates from the written acknowledgement of liability and failure of both to discharge that liability’ (Para 41)

Suffice it to conclude that there is no substance even in the second ground urged by the appellant regarding the maintainability of the application filed by the respondent financial creditor under Section 7 of the Code on the ground of being barred by limitation. Instead, we affirm the view taken by the NCLT and which commended to the NCLAT - that a fresh period of limitation is required to be computed from the date of acknowledgement of the debt by the principal borrower from time to time and in particular the (corporate) guarantor/corporate debtor vide last communication dated 08.12.2018. Thus, the application under Section 7 of the Code filed on 13.02.2019 is within limitation. (Part 42)

The Court concluded that ”As no other issue arises for our consideration — except the two grounds urged by the appellant regarding the maintainability of the application for initiating CIRP by the financial creditor (Bank) under Section 7 of the Code, we dispose of this appeal leaving all “other grounds” and contentions available to both the sides open to be decided in the pending proceedings before the NCLT. The same be decided uninfluenced by any observation(s) made in the impugned judgment or in the present judgment.” (Para 44)

The appeal was dismissed.

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