Corporate guarantor default under guarantee terms, not borrower default, governs limitation in Section 7 insolvency proceedings.

In a Section 7 insolvency proceeding against a corporate guarantor, limitation runs from the guarantor's own default under the guarantee terms, not automatically from the principal borrower's earlier default. Where the guarantee requires a demand before enforcement, the cause of action against the guarantor arises on that demand. Applying this principle, the demand notice issued to the guarantor was treated as the operative trigger, and the Section 7 application filed within three years was held not barred by limitation. The admission of the insolvency petition was therefore sustained, and the challenge based on limitation and admission failed.

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Issues: (i) Whether the default in payment by the corporate guarantor is necessarily the same as the default by the principal borrower for computing limitation under Section 7 of the Insolvency and Bankruptcy Code, 2016. (ii) Whether the Section 7 application filed against the corporate guarantor on 17.03.2020 was barred by limitation and whether the admission order was unsustainable.

Issue (i): Whether the default in payment by the corporate guarantor is necessarily the same as the default by the principal borrower for computing limitation under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Analysis: The limitation period under Article 137 of the Limitation Act, 1963 runs from the date when the right to apply accrues, and in a Section 7 proceeding that depends on when default occurs. The liability of a surety is co-extensive with that of the principal debtor under the Indian Contract Act, 1872, but the date of default for the guarantor depends on the terms of the guarantee. A continuing guarantee and a guarantee payable on demand are distinct. On the guarantee deed in question, the Bank was required to issue a demand and the guarantor's liability was to be enforced after such demand. The notice issued on 03.04.2017 calling upon the guarantor to discharge the liability within 60 days was treated as the operative demand for the guarantor.

Conclusion: The default of the corporate guarantor was not held to be identical to the earlier default of the principal borrower, and limitation against the guarantor was held to run from the demand made upon it.

Issue (ii): Whether the Section 7 application filed against the corporate guarantor on 17.03.2020 was barred by limitation and whether the admission order was unsustainable.

Analysis: The Bank's application was filed within three years of the demand notice issued to the guarantor and within the limitation framework applied to the guarantor's liability. The Court also noted the effect of the guarantee deed, the notice demanding payment, and the absence of a reply to the Section 7 application. The plea based on Vidarbha Industries was found inapplicable on the facts. The order admitting the Section 7 application was therefore upheld.

Conclusion: The application was not barred by limitation and the admission order was sustained.

Final Conclusion: The appeal failed on both limitation and merits of admission, and the insolvency proceedings against the corporate guarantor were allowed to continue, subject to the limited time granted for settlement efforts.

Ratio Decidendi: In a Section 7 proceeding against a corporate guarantor, limitation depends on when the guarantor commits default under the guarantee terms, and where the guarantee requires a demand, the cause of action against the guarantor arises on such demand rather than automatically on the principal borrower's default.

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