2021 (3) TMI 1179 - SC - Indian Laws

Supreme Court: Creditor Can Start Insolvency against Guarantor; Acknowledgment Extends Limitation

LAXMI PAT SURANA Versus UNION BANK OF INDIA & ANR.

The Supreme Court held that a financial creditor can initiate Corporate Insolvency Resolution Process (CIRP) against a corporate guarantor under Section 7 ... Maintainability of application - initiation of CIRP - Action against corporate person (being a corporate debtor) concerning guarantee offered by it in respect of a loan account of the principal borrower (a proprietorship firm), who had committed default - 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 - time barred or not. Action against 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 - HELD THAT:- 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 - there are no substance in the argument that since the loan was offered to a proprietary firm (not a corporate person), action under Section 7 of the Code 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) - first question stands answered against the appellant. 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? - HELD THAT:- 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 08.12.2018. 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, 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. The fact that the principal borrower had availed of credit/loan and committed default and that the (corporate) guarantor/corporate debtor had offered guarantee in respect of the loan account is not disputed. What is urged by the appellant is that the acknowledgment of liability to pay the amount in question was by the principal borrower and that acknowledgment 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 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 acknowledgment of liability and failure of both to discharge that liability. 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 08.12.2018. Thus, the application under Section 7 of the Code filed on 13.02.2019 is within limitation. Appeal disposed off. Issues Involved:1. Whether an action under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the Code) can be initiated by the financial creditor against a corporate person concerning a guarantee offered by it for a loan account of the principal borrower, who is not a corporate person within the meaning of the Code.2. Whether an application under Section 7 of the Code filed after three years from the date of declaration of the loan account as Nonperforming Asset (NPA) is barred by limitation.Issue-wise Analysis:Issue (i):Section 7 of the Code allows a financial creditor to initiate Corporate Insolvency Resolution Process (CIRP) against a corporate debtor. The term 'financial creditor' is defined in Section 5(7) of the Code, and 'financial debt' includes liabilities in respect of guarantees (Section 5(8)). The Code's definition of 'corporate debtor' (Section 3(8)) includes a corporate person who owes a debt, which can arise from a guarantee given for a loan to a non-corporate person. The liability of a guarantor is coextensive with that of the principal borrower under Section 128 of the Indian Contract Act, 1872. Thus, a corporate guarantor becomes a corporate debtor upon the principal borrower's default. The definition of 'corporate guarantor' in Section 5(5A) of the Code, introduced by an amendment, does not exclude the applicability of Section 7 against a corporate person guaranteeing a loan to a non-corporate person. The legislative intent and provisions of the Code do not support the exclusion of such corporate guarantors from the scope of Section 7. Therefore, the financial creditor can initiate CIRP against the corporate guarantor even if the principal borrower is not a corporate person.Issue (ii):The limitation for filing an application under Section 7 of the Code is governed by Article 137 of the Limitation Act, 1963, which prescribes a three-year period from the date when the right to apply accrues. Section 18 of the Limitation Act, which provides for a fresh period of limitation upon acknowledgment of debt, is applicable to proceedings under the Code. The acknowledgment must be in writing and signed by the party against whom the right is claimed. In this case, the principal borrower and the corporate guarantor acknowledged the debt multiple times, including on 08.12.2018. This acknowledgment extends the limitation period, making the application filed on 13.02.2019 within the limitation period. The NCLT and NCLAT correctly concluded that the acknowledgment of debt by the principal borrower and the corporate guarantor resulted in a fresh period of limitation, and the application under Section 7 was not barred by limitation.Conclusion:The Supreme Court affirmed that the financial creditor can initiate CIRP against a corporate guarantor under Section 7 of the Code, even if the principal borrower is not a corporate person. The acknowledgment of debt by the principal borrower and the corporate guarantor extended the limitation period, making the application filed within the permissible time frame. The appeal was disposed of, leaving other grounds and contentions to be decided by the NCLT.