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TMI Blog2021 (3) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 - there are no substance in the argument 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) - first question stands answered against the appellant. Whether an application under Section 7 of the Code filed after three years from the date of declaration of the loan account as NPA, being the date of default, is not barred by limitation? - HELD THAT:- 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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? (ii) Whether an application under Section 7 of the Code filed after three years from the date of declaration of the loan account as Nonperforming Asset - for short, "NPA", being the date of default, 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 ₹ 9,60,00,000/( Rupees nine crore sixty lakhs only) and an additional amount of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jection, the Adjudicating Authority found that the Principal Borrower, as also, the Corporate Debtor had admitted and acknowledged the debt time and again, lastly on 8.12.2018 and thus the application filed on 13.2.2019 was within limitation. 7. The appellant carried the matter before the National Company Law Appellate Tribunal - for short, "NCLAT", New Delhi by way of Company Appeal (AT) (Ins) No. 77 of 2020. 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 aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of accountancy or engages in services …". Notably, 'proprietorship firms' have also not been statutorily defined in many other jurisdictions." We may also usefully advert to Chapter 7 of the same report. It deals with the issue relating to Guarantors. Paragraph 7.3 thereof reads thus: " 7.3 The Committee noted that while, under a contract of guarantee, 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, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o application to the proceedings under the Code. It applies only to suits for recovery and in respect of property or right. The Insolvency and Bankruptcy Code is a selfcontained code. Section 7 thereof merely refers to the factum of default being the cause of action for maintaining the application. The amended provision in the form of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Creditor, the liability of the Principal Borrower and of the Guarantor is coextensive or coterminous, as predicated in Section 128 of the Indian Contract Act, 1872 - for short, "the Contract Act". This legal position is wellestablished by now (see -Bank of Bihar Ltd. vs. Dr. Damodar Prasad & Anr. (1969) 1 SCR 620 ). Section 7 of 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 guarante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion of fact and law as contended, but on the facts discerned from the communication and as stated in the subject application, it is obvious that the Corporate Debtor had admitted the liability vide communication dated 8.12.2018, for which reason the application filed on 13.2.2019 was within limitation. The Financial Creditorrespondent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "claim" has been defined in Section 3(6), which means a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured. It also means a right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to 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 afores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ode in general and Section 7 in particular. 27. 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. 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dave (supra) and distinguished the same on the ground that in that case the original borrower and the corporate debtor had not admitted or acknowledged the debt after the date of default, which had occurred three years before the filing of the application. In the present case, however, 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 De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0, Vashdeo R. Bhojwani supra at footnote 16, Gaurav Hargovindbhai Dave supra at footnote 15 and Sagar Sharma supra at footnote 17 respectively, the following basics undoubtedly come to the fore: (a) that the Code is a beneficial legislation intended 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is settled law that when a debt is barred by time, the right to a remedy is timebarred. Punjab National Bank vs. Surendra Prasad Sinha, 1993 Supp (1) SCC 499 This 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 lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of the Limitation Act on case to case basis. Indeed, the purport of amendment in the Code was not to reopen or revive 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther with Building and Structure standing thereon P.S. Maniktala being Municipal Premises 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 ₹ 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 Finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A the Financial Creditor thereafter the Financial Creditor on 14th July, 2010 filed an application Under 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 Corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch M/s Mahaveer Construction is a lawful 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (corporate guaranto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no substance even in the second ground urged by the appellant regarding the maintainability of the application filed by the respondentfinancial creditor under Section 7 of the Code on the ground of being barred by limitation. Instead, we affirm 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. Thus, the application under Section 7 of the Code filed on 13.02.2019 is within limitation. 43. As no other issue arises for our consideration - except the two grounds urged by the appellant regarding the maintainability of the application for initiating CIRP by the financial creditor (Bank) under Section 7 of the Code, we dispose of this appeal leaving all "other grounds" and contentions available to both the sides open to be decided in the pending proceedings before the NCLT. The same be decided uninfluenced by any observation(s) made in the impugned judgment or in the present judgment. 44. Accordingly, this appeal is disposed of i ..... 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