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LAXMI PAT SURANA VS. UNION OF INDIA (2021) 8 SCC 481

LAXMI PAT SURANA VS. UNION OF INDIA (2021) 8 SCC 481   

 

FACTS

  • Respondent No. 1 bank extended a credit facility to M/s. Mahaveer Construction, a proprietary firm of the appellant, through two loan agreements in the years 2007 and 2008 for a term loan of Rs. 9,60,00,000/- and an additional amount of Rs. 2,45,00,000/- respectively.
  • The loan amount was disbursed to the Principal Borrower. M/s. Surana Metals Limited had offered a guarantee to the two loan accounts of the Principal Borrower. The stated loan accounts were declared NPA on 30.1.2010.
  • The Financial Creditor then filed an application under Section 19 of the RDDBFI Act, 1993 against the Principal Borrower. During the pendency of the said application, the respondent filed Section 7 for initiation of CIRP proceedings against the Corporate Guarantor.

 

ISSUE

  • Whether an action under Section 7 of the IBC, 2016 can be initiated by the financial creditor (Bank) against a corporate person (being a corporate debtor) concerning a 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?
  • Whether an application under Section 7 of the Code filed after three years from the date of declaration of the loan account as Non-performing Asset, being the date of default, is not barred by limitation?

 

APPELLANT CONTENTIONS

  • It was not maintainable because the Principal Borrower was not a “corporate person.”
  • 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.

 

RESPONDENT CONTENTIONS

  • 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.
  • “Corporate debtor” in Section 3(8), “debt” in Section 3(11), “financial creditor” in Section 5(7), and “financial debt” in Section 5(8) of the Code. It is urged that upon a conjoint reading of these provisions, it is crystal clear that a “financial debt” includes the amount of any liability in respect of any guarantee or indemnity for any money borrowed against interest.

 

SUPREME COURT

  • ISSUE 1
    • It is not possible to countenance the argument of the appellant that as the principal borrower is not a corporate person, the financial creditor could not have invoked remedy under Section 7 of the Code against the corporate person who had merely offered guarantee for such loan account. That action can still proceed against the guarantor being a corporate debtor, consequent to the default committed by the principal borrower. There is no reason to limit the width of Section 7 of the Code despite law permitting initiation of CIRP against the corporate debtor, if and when default is committed by the principal borrower. For, the liability and obligation of the guarantor to pay the outstanding dues would get triggered coextensively.
    • The expression “corporate debtor” is defined in Section 3(8) which applies to the Code as a whole. Whereas, expression “corporate guarantor” in Section 5(5A), applies only to Part II of the Code. Upon harmonious and purposive construction of the governing provisions, it is not possible to extricate the corporate person from the liability (of being a corporate debtor) arising on account of the guarantee given by it in respect of loan given to a person other than corporate person. The liability of the guarantor is coextensive with that of the principal borrower. The remedy under Section 7 is not for recovery of the amount, but is for reorganization and insolvency resolution of the corporate debtor who is not in a position to pay its debt and commits default in that regard. It is open to the corporate debtor to pay off the debt, which had become due and payable and is not paid by the principal borrower, to avoid the rigours of Chapter II of the Code in general and Section 7 in particular.
    • 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 Code 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.
  • ISSUE 2
    • 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 the declaration of NPA from time to time and lastly on 08.12.2018 before the expiration of three years therefrom including the fresh period of limitation due to (successive) acknowledgments, it is not possible to extricate them from the renewed limitation accruing due to the effect of S. 18 of the Limitation Act
  • 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, it triggers the moment the 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.