Corporate Debtor includes a corporate guarantor even if Principal Borrower being an individual/sole proprietorship.

2021 (3) TMI 1179 - Supreme Court

Corporate Debtor includes a corporate guarantor even if Principal Borrower being an  individual/sole proprietorship.

The present  matter relates to determination of the status of a "Corporate Debtor" and the effect of acknowledgment of liability on the period of limitation by way of an appeal before the hon'ble NCLAT.

Facts:

A credit facility was accorded to M/s. Mahaveer Construction “the Principal Borrower”, a proprietary firm of the appellant, through loan agreements.

The loan amount was disbursed to the Principal Borrower. 

M/s. Surana Metals Limited the “Corporate Debtor”, of which the appellant is also a Promoter/Director, had offered guarantee to the loan accounts of the Principal Borrower.

The stated loan accounts were declared Non Performing Asset on 30.1.2010.

The Financial Creditor then issued a recall notice on 19.2.2010 to the Principal Borrower, as well as, the Corporate Debtor, demanding repayment of outstanding amount.

An application under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 against the Principal Borrower before the Debt Recovery Tribunal-DRT Kolkata was filed.

The Principal Borrower had repeatedly assured to pay the outstanding amount, but as that commitment remained unfulfilled, the Financial Creditor wrote to the Corporate Debtor on 3.12.2018 in the form of a purported notice of payment under Section 4(1) of the Code.

The Corporate Debtor replied to the said notice of demand vide letter dated 8.12.2018, inter alia, clarifying that it was not the Principal Borrower nor owed any financial debt to the financial creditor and had not committed any default in repayment of the outstanding amount without prejudice.

Financial Creditor then proceeded to file an application under Section 7 of the Code on 13.2.2019 for initiating Corporate Insolvency Resolution Proceeding “CIRP” against the Corporate Debtor, before the National Company Law Tribunal, Kolkata. 

Issue/s:

The application was contested on the ground/s:

that it was not maintainable because the Principal Borrower/"M/s. Mahaveer Construction" was not a “corporate person”;

was barred by limitation, as the date of default was 30.1.2010, whereas, the application had been filed on 13.2.2019 i.e., beyond the period of three years. 

Judgment/s:

These two preliminary objections came to be negatived by the Adjudicating Authority (NCLT) vide judgment and order dated 6.12.2019.

The Appellant/Corporate Debtor i.e."M/s. Surana Metals Limited" went in appeal to the NCLAT. 

The hon'ble appellate court opined that:

Section 18 of the Limitation Act, talks of a fresh period of limitation, that 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 coextensive 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.

Further held by NCLAT that now the remaining matter can proceed on merits in the lower forum/NCLT on “other grounds” and contentions available to both the sides are open to be decided in the pending proceedings before the NCLT. The same should be decided uninfluenced by any observations made in this judgment.

This judgment may give us an understanding about the status of a "corporate person" i.e. a "corporate debtor" includes within its ambit "corporate guarantor" and can be as subject of Corporate Insolvency Resolution Process (CIRP).  Even if a demand is not raised against the Principal Borrower there is an obligation of the "Corporate Debtor" being also a "corporate guarantor" in the present case. 

"A corporate guarantor can thus too be a subject of CIRP proceedings under the IBC Code, 2016."

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2021 (3) TMI 1179 - Supreme Court