TaxTMI 
TaxTMI 
2023 (4) TMI 1081
X X X X Extracts X X X X
X X X X Extracts X X X X
...., Court IV by which application under Section 7 filed by Indian Bank has been admitted. Brief facts of the case necessary to be noted for deciding this Appeal are: i. Principal Borrower - 'M/s Poonam Resorts Ltd.', a sister concern of the Corporate Guarantor (N Kumar Housing and Infrastructure Pvt. Ltd.) obtained financial facility from the Indian Bank (erstwhile Allahabad Bank). A Term Loan Agreement dated 23.03.2011 entered between the Principal Borrower and the Bank. The Term Loan was secured by the Corporate Guarantee dated 23.03.2011 issued by the Corporate Guarantor in favour of the Indian Bank (erstwhile Allahabad Bank) (hereinafter referred to as 'Bank'). The Principal Borrower also executed an escrow agreement dated 23.03.2011 with the Bank. ii. The Principal Borrower wrote to the Bank on 07.03.2012 that the project is being delayed due to reasons beyond its control and the Principal Borrower would be unable to meet the original COD (April 2012). iii. Till April 2012, the Bank has only disbursed a principal sum of Rs.25 Crores out of the total loan amount of Rs.62 Crores to the Principal Borrower. iv. On 31.03.2017, the Bank declared the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7 application under Article 137 of the Limitation Act is three years from date of default. The application filed by the Bank in February, 2020 is beyond three years, hence, ought to have been dismissed on the ground of limitation. It is submitted that entire Term Loan was never disbursed to the Principal Borrower and only an amount of Rs.25 Crores was disbursed and rest of the amount was disbursed/released in the Escrow Account only to be transferred in loan account to be used as repayment. It is submitted that default on the part of Corporate Guarantor shall be on the same date on which Principal Borrower committed default i.e. 31.12.2016. Limitation for filing Section 7 application against the Corporate Guarantor commence w.e.f. date of default i.e. 31.12.2016 came to an end on 31.12.2019, the application filed in 17.03.2020 was clearly barred by time. It is submitted that the Adjudicating Authority committed error in coming to the conclusion that right to file Section 7 application will commence from post 60 days of the recall notice dated 03.04.2017. The liability of Corporate Guarantor is coextensive with that of the Principal Borrower. It is submitted that present is a fit ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as is committed by the Principal Borrower and the period of limitation for both the Principal Borrower and the Corporate Guarantor shall be same for the purposes of filing Section 7 application for the Bank? II. Whether in the facts of the present case, the application filed by the Bank on 17.03.2020 was barred by limitation against the Corporate Guarantor? III. Whether the order of the Adjudicating Authority admitting Section 7 application is unsustainable? Issue No. I 8. We, in the present case, are concerned with filing of Section 7 application of the I&B Code. We need to first notice the statutory scheme under I&B Code regarding limitation when application under Section 7 is filed against a Corporate Person. Article 137 of the Limitation Act, 1963 is applicable in an application under Section 7, which provides as follows: "PART II Other applications 137. Any other application for which no period of limitation is provided elsewhere in this Division. Three years When the right to apply accrues. 9. As per Article 137, time from which period begins to run is "when the right to apply accrues". Section 7 of the Code Sub-Sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ritten. Section: 128. Surety's liability. The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract. Section: 129. "Continuing guarantee". A guarantee which extends to a series of transactions, is called a "continuing guarantee"." 13. As per Section 128, the liability of the Surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. Law, thus, contemplates liability of the Surety i.e. Guarantor co-extensive with that of the Principal Debtor. 14. The question of start of period of limitation against the Guarantor when the default committed by the Guarantor in non-fulfilment of its obligation as contained in the guarantee deed has come for consideration before the Hon'ble Supreme Court in several cases. Learned counsel for the both the parties have relied on judgments of Hon'ble Supreme Court in the above context, which we need to notice before proceeding any further. The judgment which has been relied by learned counsel for the Respondent Bank is "Margaret Lalita Samuel vs. Indo Commercial Bank Ltd, (1979) 2 SCC 396". In the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d by the Judicial Committee of the Privy Council in Wright and Anr. v. New Zealand Farmers Cooperative Association of Canterbury Ltd. The second clause of the guarantee bond in that case was in the following terms: "This guarantee shall be a continuing guarantee and shall apply to the balance that is now or may at any time hereafter be owing to you by the William Nosworthy and Robert Nosworthy on their current account with you for goods supplied and advances made by you as aforesaid and interest and other charges as aforesaid." A contention was raised in that case that the liability of the guarantor was barred in respect of each advance made to the Nosworthys on the expiration of six years from the date of advance. The Judicial Committee of the Privy Council expressed the opinion that the matter had to be determined by the true construction of the guarantee. Proceeding to do so, the Judicial Committee observed (at p. 449): "It is no doubt a guarantee that the Association will be repaid by the Nosworthys advanced made and to be made to them by the Association together with interest and charges; but it specifies in col. 2 how that guarantee will operate-nam....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nly on a demand by the creditor, and a guarantee which does not contain such a condition. Further, depending on the terms of guarantee, the liability of a guarantor may be limited to a particular sum, instead of the liability being to the same extent as that of the principal debtor. The liability to pay may arise, on the principal debtor and guarantor, at the same time or at different points of time. A claim may be even time-barred against the principal debtor, but still enforceable against the guarantor. The parties may agree that the liability of a guarantor shall arise at a later point of time than that of the principal debtor. We have referred to these aspects only to underline the fact that the extent of liability under a guarantee as also the question as to when the liability of a guarantor will arise, would depend purely on the terms of the contract. 10. Samuel (supra), no doubt, dealt with a continuing guarantee. But the continuing guarantee considered by it, did not provide that the guarantor shall make payment on demand by the Bank. The continuing guarantee considered by it merely recited that the surety guaranteed to the Bank, the repayment of all money which sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Court had occasion to consider the provisions of I&B Code and the question of limitation for filing application under Section 7 of the Code. The two questions which arose of consideration has been noticed in Para 1 of the judgment, which is to the following effect: "1. Two central issues arise for our determination in this appeal, as follows: 1.1 (i) Whether an action under Section 7 of the Insolvency and Bankruptcy Code 2016 (for short "the Code") 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? 1.2 (ii) 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 (for short "NPA"), being the date of default, is not barred by limitation?" 21. In the above case, the Bank has extended credit facility to the Principal Borrower - M/s Surana Metals Ltd., for which the Appellant has offered Guarantee. Loan accounts were declared NPA on 30.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1. 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. 32. 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." 22. The observations made by the Hon'ble Supreme Court in the above paragraphs were in re....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 creditor can initiate action under Section 7 of the Code" 24. It is submitted that the Hon'ble Supreme Court in the above para has held that in cases where the corporate person had given 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. We may notice that the above observations are founded by next stipulation i.e. 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. The Hon'ble Supreme Court in the above case had considered the acknowledgement given by the Principal Borrower when it und....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Borrower and the Guarantor on the same date or date of default for both may be different depending on the terms of contract of guarantee. It is well settled that the loan agreement with the Principal Borrower and the Bank as well as Deed of Guarantee between the Bank and the Guarantor are two different transactions and the Guarantor's liability has to be read from the Deed of Guarantee. 27. Now we need to look into the Deed of Guarantee which was executed by the Corporate Guarantor in favour of the Bank to find out as to when the default on the part of the Guarantor shall be treated to be committed in particular as per the Deed of Guarantee. Para 2 of Deed of Guarantee states that the guarantee restricted to the sum of Rs.62 Crores, which was a continuing guarantee to the Bank. Para 2 of the Deed of Guarantee is as follows: "2. I/We declare that my/our liability under this guarantee shall be limited and restricted to the sum of Rs. 62,00,00,000/- (Rupees. Sixty Two Crore Only) with Interest at the rate aforesaid but subject to such limit shall nevertheless be a continuing guarantee to the Bank as hereinafter specified for all sums whatsoever which may at any time be or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ched me/us in course of post." 31. When we look into the above clauses of Deed of Guarantee, it is clear that although the Guarantor immediately become liable on any default committed by the Principal Borrower but for initiating any action against the Guarantor, a demand is to be made. Without there being any demand to the Guarantor, it cannot be accepted that period of limitation against the Guarantor shall commence. In the present case, Section 7 application filed by the Bank has been brought on the record as Annexure A-49. When we look into the Part IV of the application, the date of NPA i.e. 31.03.2017 has been mentioned in Part IV and total amount in default as on 31.12.2019 has been computed. The Application under Section 7 thus proceeds on date of NPA. The notice dated 03.04.2017 is also on the record as Annexure A-21, which notice was issued by the Bank to the Guarantors - M/s N. Kumar Housing and Infrastructure Pvt. Ltd. and its Directors. Para 3 mentions about the Guarantee Deed dated 23.03.2011 executed by the Corporate Guarantor and in Para 7, the Corporate Guarantor was called upon to discharge the entire liabilities. Para 3 and 7 of the notice dated 03.04.2017 are ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....It is also relevant to notice that the Corporate Debtor did not file any reply in Section 7 application despite giving opportunity by the Adjudicating Authority and right to reply was also forfeited. The Corporate Debtor, however, had filed an I.A. questioning the maintainability of the application. The application under Section 7 filed against the Principal Borrower was also noted to be pending before the Adjudicating Authority. In the facts of the present case, where the Corporate Debtor did not file any reply and also did not file application for recall of order dated 23.11.2021 forfeiting right to file reply, the Adjudicating Authority did not commit any error in admitting Section 7 application. The Adjudicating Authority also noted in the order that the disbursement of Rs.25 Crores was not even disputed. 33. In view of our discussion on Issue No. I, Issue Nos. II & III are answered as follows: Issue No. II : In the facts of the present case, application filed by the Bank on 17.03.2020 was not barred by limitation. Issue No. III : The order of the Adjudicating Authority admitting Section 7 application is sustainable. 34. The submission made by learned co....