Laxmi Pat Surana vs Union Bank of India & Anr.

s. 7 - Application under – For initiation of corporate insolvency resolution process by financial creditor-Bank against corporate debtor concerning guarantee offered by it in respect of a loan account of the principal borrower, who committed default – Application filed after three years from the date of declaration of the loan account as Non-performing Asset, being the date of default, if barred by limitation – Held: 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 – s. 18 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 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 u/s. 7 of the Code – On facts, NCLT as well as NCLAT adverted to the acknowledgments by the principal borrower as well as the corporate guarantor-debtor after declaration of NPA time and again after 30.01.2010 and lastly on 08.12.2018 – View taken by the NCLT and NCLAT that 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, is affirmed – Thus, the application u/s. 7 of the Code filed on 13.02.2019 is within limitation – Limitation Act, 1963 - s.

18. s. 3(8) – Expression ‘corporate debtor’ – Meaning of. s. 5(5A) – Expression ‘corporate guarantor – Meaning of. s. 5(7) – Expression ‘financial creditor’ – Meaning of. Disposing of the appeal, the Court

HELD: 1.1 Section 7 of the Insolvency and Bankruptcy Code is an enabling provision, which permits the financial creditor to initiate Corporate Insolvency Resolution Process-CIRP against a corporate debtor. The corporate debtor can be the principal borrower. It can also be a corporate person assuming the status of corporate debtor having offered guarantee, if and when the principal borrower/debtor (be it a corporate person or otherwise) commits default in payment of its debt. [Para 17][942-F]

1.2 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 co-extensive 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 installment 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. A priori, in the context of the provisions of the Code, if the guarantor is a corporate person (as defined in Section 3(7) of the Code), it would come within the purview of expression “corporate debtor”, within the meaning of Section 3(8) of the Code. [Paras 19 and 20][943-D-H]

1.3 The generic provision contained in Section 3(37) postulates that the words and expressions used and not defined in the Code, but defined in enactments referred to therein, shall have the meanings respectively assigned to them in those Acts. Drawing support from s. 3 (37), it must follow that the lender would be a financial creditor within the meaning of the Code. The principal borrower may or may not be a corporate person, but if a corporate person extends guarantee for the loan transaction concerning a principal borrower not being a corporate person, it would still be covered within the meaning of expression “corporate debtor” in Section 3(8) of the Code. [Para 21] [944-A-C]

1.4 It is not possible to countenance the submission of the appellant that as the principal borrower is not a corporate person, the financial creditor could not have invoked remedy under Section 7 of the Code against the corporate person who had merely offered guarantee for such loan account. That action can still proceed against the guarantor being a corporate debtor, consequent to the default committed by the principal borrower. There is no reason to limit the width of Section 7 of the Code despite law permitting initiation of CIRP against the corporate debtor, if and when default is committed by the principal borrower. For, the liability and obligation of the guarantor to pay the outstanding dues would get triggered co-extensively. [Para 22][944-C-E]

1.5 Section 5(5A) of the Code defines the expression “corporate guarantor” to mean a corporate person, who is the surety in a contract of guarantee to a Corporate debtor. This definition has been inserted by way of an amendment, which has come into force on 6.6.2018. This provision is essentially in the context of a corporate debtor against whom CIRP is to be initiated in terms of the amended Section 60 of the Code, which amendment is introduced by the same Amendment Act of 2018. This change was to empower NCLT to deal with the insolvency resolution or liquidation processes of the corporate debtor and its 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. [Para 23][944-E-H]

1.6 Accepting the submission 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 given by it, within the meaning of Section 5(8) of the Code. [Para 24][945-A-C]

1.7 The expression “corporate guarantee” is not defined in the Code, whereas, expression “corporate guarantor” is defined in Section 5(5A) of the Code. If the legislature intended to exclude a corporate person offering guarantee in respect of a loan secured by a person not being a corporate person, from the expression “corporate debtor” occurring in Section 7, it would have so provided in the Code (at least when Section 5(5A) came to be inserted defining expression “corporate guarantor”). It was also open to the legislature to amend Section 7 of the Code and replace the expression “corporate debtor” by a suitable expression. It could have even amended Section 3(8) to exclude liability arising from a guarantee given for the loan account of an entity not being a corporate person. Similarly, it could have also amended expression “financial debt” in Section 5(8), “claim” in Section 3(6), “debt” in Section 3(11) and “default” in Section 3(12). There is no indication to that effect in the contemporaneous legislative changes brought about. [Para 25][945-C-F]

1.8 The expression “corporate debtor” is defined in Section 3(8) which applies to the Code as a whole. Whereas, expression “corporate guarantor” in Section 5(5A), applies only to Part II of the Code. Upon harmonious and purposive construction of the governing provisions, it is not possible to extricate the corporate person from the liability (of being a corporate debtor) arising on account of the guarantee given by it in respect of loan given to a person other than corporate person. The liability of the guarantor is co-extensive with that of the principal borrower. The remedy under Section 7 is not for recovery of the amount, but is for reorganisation and insolvency resolution of the corporate debtor who is not in a position to pay its debt and commits default in that regard. It is open to the corporate debtor to pay off the debt, which had become due and payable and is not paid by the principal borrower, to avoid the rigours of Chapter II of the Code in general and Section 7 in particular. [Para 26][945-F-H; 946-A]

1.9 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. [Para 27][946-B]

1.10 A priori, it cannot be said 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). [Para 28][946-C-D]

2.1 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. [Para 36][952-H; 953-A-C]

2.2 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 non-payment of “debt” when whole or any part or installment 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 non-payment 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 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 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 creditor can initiate action under Section 7 of the Code. [Para 37][954-A-F]

2.3 The NCLT as well as the NCLAT have adverted to the acknowledgments by the principal borrower as well as the corporate guarantor - 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 co-extensive 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 f rom the guarantee deed and memorandum of mortgage, unless it expressly provides to the contrary. [Para 38][954-G-H; 955-A]

2.4 Besides the clear assertion made in the application about the last acknowledgment on 08.12.2018 resulting in fresh period of limitation, the tribunal adverted to the correspondence exchanged between the principal borrower, corporate guarantor (corporate debtor) and the financial creditor (Bank) during the relevant period after 30.01.2010 until filing of application under Section 7 of the Code on 13.02.2019, wherein it is clearly stated that the corporate debtor duly secured the credit facilities from time to time. The last such acknowledgement by the (corporate) guarantor/corporate debtor taken note of by the NCLT as also the NCLAT. Indeed, this communication has been sent without prejudice by the corporate guarantor - corporate debtor. Nevertheless, it does acknowledge the liability of the principal borrower; and of corporate guarantee having been offered by the corporate debtor in that behalf. The liability of the corporate guarantor - corporate debtor is co-extensive 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 - corporate guarantor also triggers when the principal borrower acknowledges its liability in writing within the expiration of prescribed period of limitation, to pay such outstanding dues and fails to pay the acknowledged debt. Correspondingly, right to initiate action within three years from such acknowledgment of debt accrues to the financial creditor. That however, needs to be exercised within three years when the right to sue/apply accrues, as per Article

137 of the Limitation Act. This is the effect of Section 18 of the Limitation Act. In that, a fresh period of limitation is required to be computed from the time when the acknowledgment was so signed by the principal borrower or the corporate guarantor corporate debtor, as the case may be, provided the acknowledgment is before expiration of the prescribed period of limitation. Thus, the conclusion reached by the NCLT and affirmed by the NCLAT on the basis of the asservation in the application under Section 7 of the Code is a possible view. [Para 40][957-G-H; 961-D-H; 962-A]

2.5 It is the appellant’s submission 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 co-extensive 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. [Para 41][962-C-E]

2.6 The view taken by the NCLT and which commended to the NCLAT-that 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, is affirmed. Thus, the application under Section 7 of the Code filed on 13.02.2019 is within limitation. [Para 42][962-F]

Gaurav Hargovindbhai Dave vs. Asset Reconstruction Company (India) Limited & Anr. (2019) 10 SCC 572 : [2019] 13 SCR 224 - distinguished

Shanti Conductors Private Limited v. Assam State Electricity Board & Ors. (2020) 2 SCC 677 : [2019] 16 SCR 252; Babulal Vardharji Gurjar vs. Veer Gurjar Aluminium Industries Private Limited & Anr. (I) (2019)

15 SCC 209; B.K. Educational Services Private Limited vs. Parag Gupta and Associates (2019) 11 SCC 633: [2018] 12 SCR 794; Vashdeo R. Bhojwani vs.

Abhyudaya Co-operative Bank Limited & Anr. (2019) 9SCC 158 : [2019] 12 SCR 75; Sagar Sharma & Anr. vs. Phoenix Arc Private Limited & Anr. (2019) 10 SCC 353; Bank of Bihar Ltd. vs. Dr. Damodar Prasad & Anr. [1969] 1 SCR 620; Jignesh Shah and Anr. vs. Union of India and Anr. (2019) 10 SCC 750 : [2019]

12 SCR 678; Babulal Vardharji Gurjar vs. Veer Gurjar Aluminium Industries Private Limited & Anr. (II) (2020)

15 SCC 1 - referred to.