TMI Blog2021 (3) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... ate 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 08.12.2018. The fact that acknowledgment within the limitation period was only by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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? (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 declar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 7 of the Code. As regards the second objection, 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 Bankrupt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sole proprietorship as an individual who engages himself in practice 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 entiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial Creditor and which commended to the Adjudicating Authority and the NCLAT, has no 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 granti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a regarding maintainability of the application against the Corporate Debtor. According to the Financial 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 so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to relegate the parties before the Adjudicating Authority on the question of limitation. It is not a mixed question 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. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceed against the corporate person being a guarantor due to the default committed by the principal borrower. The expression 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 deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of an amendment, which has come into force on 6.6.2018. This provision, as rightly urged by the respondents, 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. 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 (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yet to become due is not sustainable. (emphasis supplied) 31. After so observing, the NCLT proceeded to advert to the decision in Gaurav Hargovindbhai 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, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otnote 14 , Swiss Ribbons Swiss Ribbons (P) Ltd. vs. Union of India, (2019) 4 SCC 17 , K. Sashidhar K. Sashidhar vs. Indian Overseas Bank, (2019) 12 SCC 150 , Jignesh Shah supra at footnote 20 , 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 ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respected. Ravula Subba Rao vs. CIT, AIR 1956 SC 604 In light of the confusion in this regard, the Committee deliberated on the issue and unanimously agreed that the intent of the Code could not have been to give a new lease of life to debts which are timebarred. It 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 justic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 18 of the Limitation Act to the proceedings under the Code, if the fact situation of the case so warrants. Considering that the purport of Section 238A of the Code, as enacted, is clarificatory in nature and being a procedural law had been given retrospective effect; which included application of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt 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 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 debto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d F4 . In addition to the above the aforesaid Credit facility not only secured by execution of Guarantee by the Corporate Debtor as aforesaid but also by deposit of Title Deed being No. for the year in respect of its immovable property being ALL THAT piece and parcel of Government Khas Mahal Land measuring about 50 Cottahs comprised in Touzi No.1298 in Dihi Panchanan Gram, Division II, together 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 SubLi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 31st January, 2019 as per the following particulars:Statement of Account of the Principal Borrower is attached herewith. Date of default was 30/01/2010 and the total claim of the Financial Creditor as of the date of default is ₹ 11,76,80,270.00 However, since the Principal Borrower as well as its Corporate Guarantor being the Corporate Debtor herein had defaulted to pay any part or portion of the outstanding amount to UNION BANK OF INDIA 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 CO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e. against future rent receivables from M/s Pantaloon Retail (India) Ltd. (now known as Future Retail Ltd.) for the development of a commercial complex at Kharagpur, on a government land, on the basis of securities provided by them of which you are fully aware of. We also understand that M/s Mahaveer Construction has executed a power of attorney in your favour authorizing you to collect the future rent receivables from M/s Pantaloon Retail (India) Ltd. and you have been collecting the rent from them directly and/or through a Receiver appointed by the Ld. DRTIII, Kolkata, without any intimation to M/s Mahaveer Construction. As such 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 Debut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly solvent and the alleged debt is disputed since O.A. No.310 of 2010 and is pending adjudication before the Learned Debt Recovery Tribunal III at Kolkata, and therefore the debt is not yet crystallized, wherein you have unequivocally stated that Pantaloon Retail (India) Ltd. is liable to repay the loan granted to Mahaveer Construction under rent securitization. Thus the Bank cannot proceed under The Insolvency and Bankruptcy Code, 2016. 8. There is no mismatch between the asset and liability. In fact asset held as security is for more valuable than liability. Thus venturing upon the provisions of The Insolvency and Bankruptcy Code, 2016 is unfounded/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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis 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 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. 42. Suffice it to conclude that there is 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/corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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