TaxTMI 
TaxTMI 
2021 (3) TMI 1179
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....ault, is not barred by limitation? 2. Briefly stated, respondent No. 1 bank - for short, "the Financial Creditor" extended credit facility to M/s. Mahaveer Construction - for short, "the Principal Borrower", 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 - for short, the "Corporate Debtor", of which the appellant is also a Promoter/Director, had offered 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 issued a recall notice on 19.2.2010 to the Principal Borrower, as well as, the Corporate Debtor, demanding repayment of outstanding amount of Rs. 12,35,11,548/( Rupees twelve crore thirtyfive lakhs eleven thousand five hundred fortyeight only). 3. The Financial Creditor then filed an application under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 - fo....
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.... The NCLAT vide impugned judgment and order dated 19.3.2020, dismissed the appeal and affirmed the conclusion reached by the Adjudicating Authority on the two preliminary objections raised by the appellant. 8. The appellant, feeling aggrieved, has approached this Court by way of present appeal reiterating the two preliminary objections referred to above. This Court vide order dated 28.7.2020 issued notice in this appeal, recording the principal ground urged at that time. The order reads thus: " A question has been raised by learned counsel for the appellant that the proprietorship firm had taken the loan, the principal borrower has to be corporate entity, in order to maintain the proceedings under the Insolvency and Bankruptcy Code. Issue notice confined to the aforesaid aspect returnable in four weeks. Steps be taken within three days from today. If the steps are not taken within the stipulated time, the civil appeal shall stand dismissed without further reference to the Court. There shall be interim stay on the operation of impugned judgment till the next date of hearing. List in the last week of August, 2020." 9. According to th....
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....uarantee, a creditor is not entitled to recover more than what is due to it, an action against the surety cannot be prevented solely on the ground that the creditor has an alternative relief against the principal borrower. Further, as discussed above, the creditor is at liberty to proceed against either the debtor alone, or the surety alone, or jointly against both the debtor and the surety. Therefore, restricting a creditor from initiating CIRP against both the principal borrower and the surety would prejudice the right of the creditor provided under the contract of guarantee to proceed simultaneously against both of them." (emphasis supplied) It is urged that any other view would inevitably result in indirectly enforcing the Code even against entities, such as partnership firms and proprietorship firms and/or individuals, who are governed by Part III of the Code, without notifying the same. According to the appellant, a corporate guarantee is one which is extended in respect of a loan given to a "corporate person", coming within the purview of Part II of the Code. That is reinforced by the amendment Act 26 of 2018 on account of insertion of definition of "corporate gu....
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....f Section 238A of the Code, which has come into effect with effect from 6.6.2018, is only a clarificatory provision. It is urged that there is distinction between the proceedings for recovery and winding up under the Companies Act and the action under Section 7 of the Code. It is further urged that action under the Code cannot be invoked nor can be used as a fresh opportunity for creditors and claimants who had failed to invoke remedy in respect of claims which had become time barred under the existing laws. It is finally urged that even if Section 18 of the Limitation Act was to be applied to an action under Section 7 of the Code, the application including Form1 filed by the financial creditor before the adjudicating authority in no way makes out the case for granting benefit under Section 18 of the Limitation Act. The factual narration in the subject application is that the date of default was 30.1.2010 being the date of declaration of accounts as NPA, and no other fact which is relevant for giving benefit under Section 18 of the Limitation Act as expounded in Shanti Conductors Private Limited vs. Assam State Electricity Board & Ors. (2020) 2 SCC 677, has been stated therein. In ....
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....the Code enables the financial creditor to initiate CIRP against the principal borrower if it is a corporate person, including against the corporate person being a guarantor in respect of loans obtained by an entity not being a corporate person. The Financial Creditor besides placing reliance on Section 7, would also rely on definition of expressions "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 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. Resultantly, the money borrowed by sole proprietorship of the appellant against payment of interest for which the Corporate Debtor stood guarantee or indemnity, was also a "financial debt" of the Corporate Debtor and for that reason, the Financial Creditor respondent No. 1, could proceed under Section 7 of the Code. It is further urged that the definition of "corporate guarantor" introduced by way of amendment of 2018 is to define a corporate guarantor in relation to a co....
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....rrespondent No. 1 pressed for dismissal of the appeal. 14. We have heard Mr. Abhijit Sinha, learned counsel for the appellant and Mr. O.P. Gaggar, learned counsel for respondent No. 1. 15. It is no more res integra that the Code is a complete code - provisioning for actions and proceedings relating to, amongst others, reorganisation and insolvency resolution of corporate persons in a time bound manner for maximisation of value of assets of such persons, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto. ISSUE (i): 16. Section 7 of the Code propounds the manner in which corporate insolvency resolution process (CIRP) may be initiated by the "financial creditor" against a "corporate person being the corporate debtor". It predicates that a financial creditor either by itself or jointly with other financial creditors or any other person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating CIR....
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....o a right to payment in respect of specified matters. 19. Indubitably, a right or cause of action would enure to the lender (financial creditor) to proceed against the principal borrower, as well as the guarantor in equal measure in case they commit default in repayment of the amount of debt acting jointly and severally. It would still be a case of default committed by the guarantor itself, if and when the principal borrower fails to discharge his obligation in respect of amount of debt. For, the obligation of the guarantor is coextensive and coterminous with that of the principal borrower to defray the debt, as predicated in Section 128 of the Contract Act. As a consequence of such default, the status of the guarantor metamorphoses into a debtor or a corporate debtor if it happens to be a corporate person, within the meaning of Section 3(8) of the Code. For, as aforesaid, expression "default" has also been defined in Section 3(12) of the Code to mean non-payment of debt when whole or any part or instalment of the amount of debt has become due or payable and is not paid by the debtor or the corporate debtor, as the case may be. 20. A priori, in the context of the provisions o....
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....s corporate guarantor in the same Tribunal pertaining to same transaction, which has territorial jurisdiction over the place where the registered office of the corporate debtor is located. That does not mean that proceedings under Section 7 of the Code cannot be initiated against a corporate person in respect of guarantee to the loan amount secured by person not being a corporate person, in case of default in payment of such a debt. 24. Accepting the aforementioned argument of the appellant would result in diluting or constricting the expression "corporate debtor" occurring in Section 7 of the Code, which means a corporate person, who owes a debt to any person. The "debt" of a corporate person would mean a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. The expression "debt" in Section 3(11) is wide enough to include liability of a corporate person on account of guarantee given by it in relation to a loan account of any person including not being a corporate person in the event of default committed by the latter. It would still be a "financial debt" of the corporate person, arising from the guarantee ....
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....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. 28. A priori, we find no substance in the argument advanced before us 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). Hence, the first question stands answered against the appellant. ISSUE (ii): 29. As noted earlier, this Court while entertaining the present appeal in its order dated 28.07.2020 had adverted to only one contention which already stands answered against the appellant. However, the appellant would contend that the other plea taken by him and having been dealt with by the NCLT as well as the NCLAT, the appellant ....
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....owever, the principal borrower as well as the corporate debtor had acknowledged the debt time and again after 30.01.2010 and lastly on 08.12.2018, which was the basis of filing of subject application under Section 7 of the Code on 13.02.2019. 32. Even the NCLAT noted this ground urged by the appellant in paragraph 21 of the impugned judgment as follows: "21. In the instant case the Corporate Debtor (M/s Surana Metals Ltd.) had duly executed the Letter of Guarantor dated 2.2.2007, 17.2.2007 and 3.8.2008 for the Loan facilities Sanctioned by the Bank to M/s Mahaveer Construction also that the Corporate Debtor had acknowledged its debt on 16.9.2010, 3.3.2012, 27.5.2015, 24.10.2016, and executed by the Appellant (Vide Page. No.196, 197, 140, 198) and on 8.12.2018 executed by the (M/s Surana Metals Ltd.) page no.141 respectively against the execution of the Letters of Guarantee. Significantly, the Corporate Debtor in its Reply dated 8.12.2018 had tacitly admitted the execution of Guarantors Agreement dated 2.2.2007, 17.2.2007, 3.8.2008 in and by which the Corporate Debtor had agreed to pay Rs. 12,05,00,000/crore and interest on such sum." (emphasis supplied) Fina....
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....ed to put the corporate debtor back on its feet and is not a mere money recovery legislation; (b) that CIRP is not intended to be adversarial to the corporate debtor but is aimed at protecting the interests of the corporate debtor; (c) that intention of the Code is not to give a new lease of life to debts which are timebarred; (d) that the period of limitation for an application seeking initiation of CIRP under Section 7 of the Code is governed by Article 137 of the Limitation Act and is, therefore, three years from the date when right to apply accrues; (e) that the trigger for initiation of CIRP by a financial creditor is default on the part of the corporate debtor, that is to say, that the right to apply under the Code accrues on the date when default occurs; (f) that default referred to in the Code is that of actual nonpayment by the corporate debtor when a debt has become due and payable; and (g) that if default had occurred over three years prior to the date of filing of the application, the application would be timebarred save and except in those cases where, on facts, the delay in filing may be condoned; and ....
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.... requires being read with the definition of "debt" and "claim" in the Code. Further, debts in windingup proceedings cannot be timebarred Interactive Media and Communication Solution (P) Ltd. vs. GO Airlines Ltd., 2013 SCC OnLine Del 445, and there appears to be no rationale to exclude the extension of this principle of law to the Code. 28.2. Further, nonapplication of the law on limitation creates the following problems: first, it reopens the right of financial and operational creditors holding timebarred debts under the Limitation Act to file for CIRP, the trigger for which is default on a debt above INR one lakh. The purpose of the law of limitation is 'to prevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a party's own inaction, negligence or laches' Rajender Singh vs. Santa Singh, (1973) 2 SCC 705. Though the Code is not a debt recovery law, the trigger being "default in payment of debt" renders the exclusion of the law of limitation counterintuitive. Second, it reopens the right of claimants (pursuant to issuance of a public notice) to file timebarred claims with the IRP/RP, which....
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....ve the time barred debts under the Limitation Act. At the same time, accrual of fresh period of limitation in terms of Section 18 of the Limitation Act is on its own under that Act. It will not be a case of giving new lease to time barred debts under the existing law (Limitation Act) as such. 36. Notably, the provisions of Limitation Act have been made applicable to the proceedings under the Code, as far as may be applicable. For, Section 238A predicates that the provisions of Limitation Act shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the NCLAT, the DRT or the Debt Recovery Appellate Tribunal, as the case may be. After enactment of Section 238A of the Code on 06.06.2018, validity whereof has been upheld by this Court, it is not open to contend that the limitation for filing application under Section 7 of the Code would be limited to Article 137 of the Limitation Act and extension of prescribed period in certain cases could be only under Section 5 of the Limitation Act. There is no reason to exclude the effect of Section 18 of the Limitation Act to the proceedings initiated under the Code. Section 18 of the Limitation Act reads ....
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....principal borrower commits default due to nonpayment of debt. Thus, when the principal borrower and/or the (corporate) guarantor admit and acknowledge their liability after declaration of NPA but 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 Section 18 of the Limitation Act. Section 18 of the Limitation Act gets attracted the moment acknowledgment in writing signed by the party against whom such right to initiate resolution process under Section 7 of the Code enures. Section 18 of the Limitation Act would come into play every time when the principal borrower and/or the corporate guarantor (corporate debtor), as the case may be, acknowledge their liability to pay the debt. Such acknowledgment, however, must be before the expiration of the prescribed period of limitation including the fresh period of limitation due to acknowledgment of the debt, from time to time, for institution of the proceedings under Section 7 of the Code. Further, the acknowledgment must be of a liability in respect of which the financial cr....
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....No.17, Ultadanga Main Road, Kolkata with an intent to create equitable Mortgage in favour of the Financial Creditor. Creation of such Mortgage in respect of the immovable property as aforesaid duly extended by the Corporate Guarantor lastly on 25.08.2008. Creation of such charge filed with the Registrar of Companies, West Bengal by the Corporate Debtor in Form No.8 Under Section 125/127/137 of the Companies Act, 1956 dated 19.09.2008 and a copy of the Title Deed is annexed hereto and marked with Letter 'G' and 'G1'. Initially while sanctioning the Term Loan1 dated 19th January, 2007, the Financial Creditor also send a Letter on 19th January, 2007 to the said Pantaloons Retail (India) Limited being the SubLicensee whose monthly Rent of Rs. 21,45,000/payable to 37 the said Principal Borrower intimating its conformation sending therewith a copy of the General Power of Attorney executed by the Principal Borrower assigned its right of collecting and receiving Monthly rents from the said Pantaloons Retail (India) Limited in favour of the Financial Creditor. A copy of the said Letter of the Financial Creditor dated 19.01.2007 is annexed hereto and marked with Letter 'H'. Due to default in....
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....r Section 19 of the RDDB Act, 1993 before the Debts Recovery Tribunal3, Kolkata being O.A. No.130 of 2010 which is still pending for final adjudication and in that proceeding the said Principal Borrower as well as Corporate Debtor are appearing and several interim orders have been passed from time to time related to collection of rents from the subLicensee." (emphasis supplied in italics) Again, in Part V specifying about the particulars of financial debt in paragraphs 5 and 8, it is mentioned as follows: "PART V PARTICULARS OF FINANCIAL DEBT ..... 5. THE LATEST AND COMPLETE COPY OF THE FINANCIAL CONTRACT REFLECTING ALL AMENDMENTS AND WAIVERS TO DATE (ATTACH A COPY) Attached to this application. Sanction letters dated 19.01.2007 and 25.08.2008 and Letter dated 08.12.2018 written by the Corporate Debtor acknowledging their liability towards Financial CreditorUnion Bank of India. 8. LIST OF OTHER DOCUMENTS ATTACHED TO THIS APPLICATION IN ORDER TO PROVE THE EXISTENCE OF FINANCIAL DEBT, THE AMOUNT AND DATE OF DEFAULT. Letter dated 08.12.2018 written by the Corporate Debtor acknowledging their liability towards Financial CreditorUnion Bank of India." (em....
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....borrower and the guarantee for repayment has been provided to you by M/s Pantaloon Retail (India) Ltd. which was unconditionally accepted by you. We are not the borrowers and/or the corporate debtor as claimed by you in your aforesaid notice. 2. We have, at the request of M/s Mahaveer Construction, provided you a collateral security only in the form of a premises being No.17, Ultadanga Main Road, Kolkata by way of creation of a paripassu charge with Syndicate Bank, of which we are a Lessee only. It is a Debutter Trust Estate. Our corporate guarantee was issued in accordance with the provisions of The Companies Act, 1956 only. 3. You have initiated legal proceedings for recovery of your loan against Mahaveer Construction in the Learned Debt Recovery Tribunal III, at Kolkata treating them as defaulters and the said proceeding is awaiting adjudication. We have not committed any default as alleged by you and therefore cannot be termed as a defaulter, far less to speak of corporate defaulter, by any stretch of imagination. You are, therefore, not authorized legally to initiate further proceedings for the self same cause under the pretext of The Insolvency and Bankruptc....
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....unded/untenable in law. 9. This letter is issued reserving our rights to add further points of law and/or to act further as may be advised in the matter. Under the circumstances it is most humbly requested to refrain from taking any action against us for the reasons stated above as otherwise it will only be an abuse of the process of law and you would be doing so at your own peril and cost. Please acknowledge the receipt of this letter. Thanking you, Yours faithfully, For Surana Metals Limited. Sd/SURANA METALS LIMITED 12, BONFIELD LANE, KOLKATA700001" (emphasis supplied) Indeed, this communication has been sent without prejudice by the corporate guarantor (corporate debtor). Nevertheless, it does acknowledge the liability of M/s. Mahaveer Construction (principal borrower); and of corporate guarantee having been offered by the corporate debtor in that behalf. As aforesaid, the liability of the corporate guarantor (corporate debtor) is coextensive with that of the principal borrower and it gets triggered the moment the principal borrower commits default in paying the debt when it had become due and payable. The liability of the corporate debtor (corp....