TaxTMI 
TaxTMI 
2023 (5) TMI 17
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....e necessary to be noted for deciding this Appeal are: i. M/s Spanco Nagpur Discom Ltd (SND Ltd.), the borrower entered into a Memorandum of Agreement for a term loan for sums not exceeding Rs.80 Crores on 25.02.2013. The Corporate Guarantor (Respondent No.2) and one Essel Utilities Distribution Company Ltd. executed a combined Corporate Guarantee dated 25.02.2013 to secure the Term Loan. Another Memorandum of Agreement was executed between SND Ltd. and the State Bank of India for a working capital credit facility for amounts not exceeding Rs.78,75,00,000/-. ii. Combined Corporate Guarantee was executed on 01.03.2013 by Respondent No.2 and Essel Utilities Distribution Company Ltd. A Supplemental working capital consortium agreement was executed. iii. Another combined corporate guarantee was executed by Respondent No.2 and Essel Utilities Distribution Company Ltd. for loans sanctioned to SND Ltd. on 17.07.2018 for an amount not exceeding Rs.185,27,00,000/-. iv. On 17.05.2019, fresh Corporate Guarantee was executed by the Respondent No.2 and Essel Utilities Distribution Company Ltd with respect to facilities extended to the SND Ltd. v. On 0....
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....ction 10A, the application was clearly barred and the application was not maintainable for a default which took place between the period 25.03.2020 to 25.03.2021. The Adjudicating Authority committed error in holding that for Corporate Guarantor date of default shall be 05.09.2019. It is submitted that the Adjudicating Authority not looked into the relevant clauses of the corporate guarantee which clearly contemplated notice of demand by the Bank. On demand guarantee is a different nature of guarantee under which limitation of Guarantor shall come to play only when a demand notice is issued. 4. Learned counsel for the Respondent Bank, Shri Krishnendu Datta refuting the submissions of learned counsel for the Appellant contends that the default committed by the Principal Borrower and the Corporate Guarantor has to be same. The account was declared NPA on 05.12.2019, hence, the default has to be treated as to have taken place three months prior i.e. on 05.09.2019 as per the RBI Circular. When the Principal Borrower committed default on 05.09.2019, the liability of the Corporate Guarantor being coextensive with that of the Principal Borrower, there shall be default on the part of th....
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....the Corporate Guarantor. The 'Corporate Guarantor' is defined under Section (5A) in following manner: "(5A) "corporate guarantor" means a corporate person who is the surety in a contract of guarantee to a corporate debtor;" 8. Section 3 of the Code is a definition clause. Section 3(11) defines 'debt' in following words: "3(11) "debt" means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;" 9. Section 3(12) defines 'default': "3(12) "default" means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be;" 10. When we look into the definition of 'debt' and 'default' under Section 3(11) and 3(12), it is clear that debt is a liability or obligation in respect of a claim which is due from any person and default is committed when debt which has become due and payable and is not paid by the debtor. Section 3(12) uses two additional words i.e (i) "payable"; and (ii) "is not paid by the debtor". The expression 'debtor' as used in Section 3(12), in the pres....
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....ce was raised of the limitation. The Hon'ble Supreme Court in the above judgment while considering the question of limitation made following observations in Para 10: "10. The guarantee is seen to be a continuing guarantee and the undertaking by the defendant is to pay any amount that may be due by the company at the foot of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach, under Article 115 of the schedule to the Limitation Act, 1908. When the Bombay High Court considered the matter in the first instance and held that the suit was not barred by limitation, J. C. Shah, J., speaking for the Court said: "On the plain words of the letters of guarantee it is clear that the defendant undertook to pay any amount which may be due by the Company at the foot of the general balance of its account or any other account whatever .....
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....time to time, during the continuance of the guarantee, by the excess of the total debits over the total credits. If that be true construction of this document, as their Lordships think it is, the number of years which have expired since any individual debit was incurred is immaterial. The question of limitation could only arise in regard to the time which had elapsed since the balance guaranteed and used for had been constituted". Later it was again observed (at p. 450): "That document, in their opinion, clearly guarantees the repayment of each debit balance as constituted from time to time, during the continuance of the guarantee, by the surplus of the total debits over the total credits, and accordingly at the date of the counterclaim the Association's claim against the plaintiff for payment of the unpaid balance due from the Nosworthys, with interest, was not statute-barred." 14. The Hon'ble Supreme Court in the above case has observed that cause of action arises when the contract of continuing guarantee is broken i.e. breach is committed by the Guarantor to the guarantee given. 15. The next judgment on which reliance has been placed is judgment of Ho....
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....t settled and there is no refusal on the part of the guarantor to carry out the obligation, the period of limitation could not be said to have commenced running. 11. But in the case on hand, the guarantee deeds specifically state that the guarantors agree to pay and satisfy the bank on demand and interest will be payable by the guarantors only from the date of demand. In a case where the guarantee is payable on demand, as held in the case of Bradford (supra) and Hartland (supra), the limitation begins to run when the demand is made and the guarantor commits breach by not complying with the demand." 16. It is to be noted that in Para 10 of the above judgment, the Hon'ble Supreme Court had referred to earlier case of 'Margaret Lalita Samuel' and the issue of 'Margaret Lalita Samuel' was noticed in following words: "...this Court held that so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, the period of limitation could not be said to have commenced running." 17. In Para 15, the Hon'ble Supreme Court further laid down following: "15. The responde....
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....9 against the Corporate Debtor - M/s Surana Metals Ltd., which was resisted on several grounds including that the Principal Borrower is not a corporate person; and further it is barred by limitation, as the date of default was 30.01.2010 and application has been filed on 13.02.2019 i.e. beyond the period of three years, which submissions were negatived by the Adjudicating Authority. The order of the Adjudicating Authority was also affirmed in appeal. Thereafter, the Corporate Debtor i.e. Guarantor filed an appeal in the Hon'ble Supreme Court. In the above context, the Hon'ble Supreme Court has occasion to consider the scheme of IBC. The Hon'ble Supreme Court in the above context has held that the liability of the Guarantor is co-extensive with that of the Principal Borrower and the Guarantor is also a Corporate Person and the Guarantor metamorphoses into a Corporate Debtor the moment the Principal Borrower makes default in payment of debt. In Para 30, 31 and 32 following was laid down while answering question no. (i), as noted above: "30. The expression "corporate debtor" is defined in Section 3(8) which applies to the Code as a whole. Whereas, expression "corporate guaran....
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....urt has occasion to examine the expression 'default' as used in Section 7. Para 43 of the judgment is as follows: "43. Ordinarily, upon declaration of the loan account/debt as NPA that date can be reckoned as the date of default to enable the financial creditor to initiate action under Section 7 of the Code. However, Section 7 comes into play when the corporate debtor commits "default". Section 7, consciously uses the expression "default" - not the date of notifying the loan account of the corporate person as NPA. Further, the expression "default" has been defined in Section 3(12) to mean nonpayment of "debt" when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be. In cases where the corporate person had offered 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. Thus, when the principal borrower and/or the (corporate) guarantor admit and acknowledge their liabilit....
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....rantor 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. Para 44 of the judgment is as follows: "44. 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." 24. The scheme of I&B Code clearly indicate that both the Principal Borrower and the Guarantor be....
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....er which the Bank may incur by reason of any default on the part of the Borrower. 13. The Guarantors shall forthwith on demand made by the Bank deposit with the Bank such sum or security or further sum or security as the Bank may from time to time specify as security for the due fulfillment of their obligations under this Guarantee and any security of deposited with the Bank may be sold by the Bank after giving to the Guarantors a reasonable notice of sales and the said sum or the proceeds of sale of the securities may be appropriated by the Bank in or towards satisfaction of the said obligations and any liability arising out of nonfulfillment thereof by the Guarantors. 14. The Guarantors hereby agree that notwithstanding any variation made in the terms of the said Agreement of loan and / or any of the said security documents including reallocation/ interchange of the individual limits within the principal sum variation in the rate of interest, extension of the date for payment of the instalments, if any, or any composition made between the Bank and Borrower to give time to or not to sue the Borrower, or the Bank parting with any of the securities given by the Bor....
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....tor was that amount shall be payable to the Bank on serving the Guarantor with notice requiring payment of the amount. 27. In view of the clear stipulation in the Deed of Guarantee, default on the part of the Guarantor cannot be treated to be on 05.09.2019, when it is alleged that the Principal Borrower committed default, nor the default on the part of the Guarantor can be on date of NPA i.e. 05.12.2019 for the purpose of present case. In the present case, admittedly, the Bank has issued notice dated 01.10.2020 to the Principal Borrower as well as to the Guarantor - Essel Infraprojects Ltd. Notice dated 01.10.2020 which has been brought on the record indicate that notice is addressed to the Principal Borrower and to Guarantors. In Para 8 of the notice following has been stated: "8. Our Clients states that, You Nos.2 to 4, executed Deed of Guarantee on respective dates inter alia agreeing to pay on demand and without demur to our clients alongwith interest, cost, charges, expenses and/or other money due thereon from time to time in terms of the Agreement of Loan for overall limits, Agreement of Hypothecation of Goods and Assets and Supplemental Agreements." 28. In Par....
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....ation towards the loan availed by you No.1 herein, failing which our clients will be constrained to initiate necessary action against You no.1 to 4 at your costs, risks and consequences including but not limited toi) initiating recovery proceedings against you before the Debts Recovery Tribunal or any other forum under Recovery of Debts and Bankruptcy Act, 1993 or any other law, ii) initiating insolvency proceedings against you under the Insolvency and Bankruptcy Code, 2016 ("IBC") or any other law, iii) initiating criminal proceedings against directors of the Borrower, iv) initiating proceedings under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; v) informing default/breach under the Working Capital, Cash Credit, Seasonal Limit, Term Loan and Standby Letter of Credit/Bank Guarantee Facility to TransUnion CIBIL, Reserve Bank of India, information utility under IBC or any other reporting authority/body; vi) reporting you and/or Borrower's directors as non-cooperative borrowers or wilful defaulters; vii) initiating civil and criminal proceedings against the Personal Guara....
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....e Financial Creditor has invoked the corporate guarantee, the default of corporate guarantor has to be subsequent to 01.10.2020. 32. In view of the foregoing discussion, we arrive at following conclusions: (i) The Corporate Guarantee Deed dated 17.05.2019 is on demand guarantee deed and the default shall arise on the part of the Guarantor only when demand notice is issued as contemplated in the Deed of Guarantee. When the State Bank of India invoked the guarantee vide notice dated 01.10.2020, demand on the part of the Corporate Guarantee shall arise only subsequent to the notice dated 01.10.2020 i.e. non-payment of the amount within seven days i.e. default arise on 08.10.2020. (ii) Default on the part of the Guarantor having arisen on 08.10.2020 i.e. within the period which is covered as prohibited period under Section 10A, application under Section 7 was clearly barred by Section 10A. Issues No. II, III and IV are answered accordingly. (iii) The Adjudicating Authority in the impugned order has not adverted to the relevant clauses of the Deed of Guarantee as noted above. The date of default on part of the Guarantor being subsequent to 01.10.2020 when g....