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TMI Blog2023 (5) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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? - HELD THAT:- 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 - 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. The Hon ble Supreme Court in Margaret Lalita Samuel vs. Indo Commercial Bank Ltd [ 1978 (9) TMI 180 - SUPREME COURT ] 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. The scheme of I B Code clearly indicate that both the Principal Borrower and the Guarantor become liable to pay the amount when the default is committed. When default is committed by the Principal Borrower the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only after notice dated 01.10.2020 i.e. during period of Section 10A. Whether the application filed by the Bank under Section 7 was barred by Section 10A? - HELD THAT:- The application filed by the Bank under Section 7 was barred by Section 10A. The application under Section 7 filed by the Bank being barred by Section 10A could not have been admitted - Appeal allowed. - Company Appeal (AT) (Insolvency) No. 329 of 2023 - - - Dated:- 28-4-2023 - [ Justice Ashok Bhushan ] Chairperson And [ Barun Mitra ] Member ( Technical ) For the Appellant : Mr. Gaurav Mitra , Ms. Smriti Churiwal , Mr. Jaiveer Kant and Ms. Lavanya Pathak , Advocates For the Respondents : Mr. Krishnendu Datta , Sr. Advocate with Mr. Manish Kr. Jha , Ms. Avni Sharma, Mr. Dhruv Nayyar , Ms. Varsha Himatsingka , Advocates for Respondent No.1. JUDGMENT ASHOK BHUSHAN , J. This Appeal by the Suspended Director of the Corporate Debtor (Corporate Guarantor) has been filed challenging the order dated 01.03.2023 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Court V admitting Section 7 application filed by State Bank of India. Brief facts of the case ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de. x. On 01.03.2023, the Adjudicating Authority admitted the Section 7 application. The Adjudicating Authority overruled the defence raised by the Corporate Debtor that application is barred by Section 10A. The Adjudicating Authority took view that the Account of Principal Borrower became NPA on 05.12.2019, hence, notice dated 01.10.2020 shall not change date of default which was 05.09.2019. Challenging the impugned order this Appeal has been filed. 2. We have heard Shri Gaurav Mitra, learned senior counsel for the Appellant and Shri Krishnendu Datta, learned senior counsel appearing for the Respondent Bank. 3. Learned counsel for the Appellant submits that the corporate guarantee issued by the Corporate Guarantor was on demand guarantee and the default on behalf of the Corporate Guarantor can take place only when amount is demanded from the Corporate Guarantor. It is admitted fact that notice was issued on 01.10.2020 to the Corporate Guarantor demanding the payment within 7 days, hence, default on the part of Corporate Guarantor shall take place only w.e.f. 08.10.2020. The date of default being covered by Section 10A, the application was clearly barred and the applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IV. Whether the application filed by the Bank under Section 7 was barred by Section 10A? Issue No. I 6. 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. 7. As per Article 137, time from which period begins to run is when the right to apply accrues . Section 7 of the Code Sub-Section (1) provides that the Financial Creditor may file an application for initiating CIRP against the Corporate Debtor when the default has occurred . In the present case, the Corporate Debtor being a Corporate Guarantor the question is to be considered is as to when the default is occurred on the part of the Corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. 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. 12. 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 above case, a continuing guarantee was executed by the Appellant Margaret Lalita Samuel in which she guaranteed to the Bank for repayment of all money which shall at any time shall be due to the Bank by the Company. Bank has filed his suit for recovery of amount by the Guarantor in which one of the defence was raised of the limitati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... illiam 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-namely, that it will apply to (i.e. the guarantor guarantees repayment of) the balance which at any time thereafter is owing by the Nosworthys to the Association. It is difficult to see how effect can be given to this provision except by holding that the repayment of every debit balance is guaranteed as it is constituted from time to time, during the continuance of the guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent 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 shall at any time be due to the Bank from the borrower on the general balance of their accounts with the Bank, and that the guarantee shall be a continuing guarantee to an extent of Rs.10 lakhs. Interpreting the said continuing guarantee, 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 guaranto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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? 19. 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 30.01.2010. The Financial Creditor issued recall notice dated 19.02.2010. The Financial Creditor thereafter filed a Section 19 application under the RDDBFI Act, 1993 against the Principal Borrower. The Principal Borrower has repeatedly assured to pay the outstanding amount. Thereafter the Bank filed an application on 13.02.2019 against the Corporate Debtor - M/s Surana Metals Ltd., which was resisted on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantor 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. 20. The observations made by the Hon ble Supreme Court in the above paragraphs were in reference to question no. (i) and the proceedings were initiated by the Bank treating the date of declaration of NPA as date of default for the Corporate Guarantor. 21. Learned counsel for both the parties have again referred to Para 43 of the judgment on which heavy reliance has been placed. In Para 43, Hon ble Supreme Court has occasion to examine the expression default as used in Section 7. Para 43 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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. 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 undertook to make the payment. It was observed by the Hon ble Supreme Court that acknowledgement under Section 18 shall extend the period of limitation and hence it was held that the application was not barred by limitation. 23. We may further notice Para 44 of the judgment in which it was held that the liability of the guarantor being coextensive with the principal borrower under Section 128 of the Contract Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Now we come to the Deed of Guarantee dated 17.05.2019 which has been brought on record. The relevant clauses of the Deed of Guarantee which has been relied by learned counsel for the Appellant are clause 1, 13, 14 and 20, which are to the following effect: 1. If at any time default shall be made by the Borrower in payment of the principal sum (not exceeding Rs.186,60,00,000/- (Rupees One Hundred Eighty Six Crore Sixty Lacs Only) together with Interest, costs, charges, expenses and/or other monies for the time being due to the Bank in respect of or under the aforesaid credit facilities or any of them the Guarantors shall forthwith on demand pay to the Bank the whole of such principal sum (not exceeding Rs.186,60,00,000/- (Rupees One Hundred Eighty Six Crore Sixty Lacs Only) together with interest, costs, charges, expenses and/or any other monies as maybe then due to the Bank in respect of the aforesaid credit facilities and shall indemnify and keep indemnified the Bank against all losses of the said principal sum, interest or other monies due and all costs charges and expenses whatsoever which the Bank may incur by reason of any default on the part of the Borrower. 13. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich it is required to be despatched under this clause shall he deemed to have been duly served on the Guarantors four days after the date of posting thereof, and shall be sufficient if signed by any officer of the Bank and in proving such service it shall be sufficient if it is established that the envelope containing such notice communication or demand was properly addressed and put into the post office. 26. The judgment of the Hon ble Supreme Court in Syndicate Bank vs. Channaveerappa Beleri Ors. has categorically laid down that liability of the Guarantor depends on the terms of his contract. The relevant clauses of the Deed of Guarantee, as noted above, clearly contemplate demand by the Bank upon the Guarantor. Clause 1 provides that the Guarantors shall forthwith on demand pay to the Bank the whole of such principal sum not exceeding Rs.186,60,00,000/- together with interest . Similarly, Clause 13 uses expression, the Guarantors shall forthwith on demand made by the Bank deposit with the Bank . . Clause 20 again makes it clear that what was guaranteed by the Guarantor was that amount shall be payable to the Bank on serving the Guarantor with notice requiring payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sum of Rs. 166,40,63,441.95 (Rupees One Hundred Sixty Six Crores Forty Lakhs Sixty Three Thousand Four Hundred Forty One and Ninety Five Paise only) to our client State Bank of India as on 31.08.2020, (ii) a sum of Rs.72,51,00,000.00 (Rupees Seventy Two Crores and Fifty One Lakhs only) to our client Canara Bank as on 31.08.2020, iii) a sum of Rs.65,68,15,530.77 (Rupees Sixty Five Crore Sixty Eight Lakh Fifteen Thousand Five Hundred and Thirty and Seventy Seven Paise Only) to our client IIFCL as on 31.08.2020, (iv) a sum of Rs.33,33,64,937.16 (Rupees Thirty Three Crores Thirty Three Lakhs Sixty Four Thousand Nine Hundred Thirty and Sixteen Paise only) to our client Bank of Baroda on 31.08.2020 and (v) a sum of Rs.34,18,16,286.80 (Rupees Thirty Four Crores Eighteen Lakhs Sixteen Thousand Two Hundred Eighty Six and Eighty Paise only) to our client Punjab National Bank an 31.08.2020 together with further interest, additional interest and other charges at the contractual rates upon the footing of compound interest until payment/realisation towards the loan availed by you No.1 herein, failing which our clients will be constrained to initiate necessary action aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otice, the Financial Creditor also invoked the corporate guarantees provided by various group companies of the Borrower, including by the Corporate Debtor herein. A copy of the Notice is marked and annexed hereto as Annexure-I (L). (c) However, despite repeated reminders, the Borrower and the Corporate Debtor has failed to cure its default and the Facilities remain unpaid. Thus, it is submitted that the Corporate Debtor has become insolvent and initiation of corporate insolvency resolution process ( CIRP ) under the Insolvency and Bankruptcy Code, 2016 ( Code ) against the Corporate Debtor, is essential, crucial and in the interests of all stakeholders. (d) Thus, the present Application is filed by the Financial Creditor under Section 7 of the Code, seeking the initiation of CIRP against the Corporate Debtor, in accordance with the provisions of the Code and the Rules and Regulations made thereunder. 31. When the notice dated 01.10.2020 is relied by the Financial Creditor with further stipulation that the 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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