TMI Blog2023 (4) TMI 1081X X X X Extracts X X X X X X X X Extracts X X X X ..... t is committed. When default is committed by the Principal Borrower the amount becomes due not only against the Principal Borrower but also against the Corporate Guarantor, which is the scheme of the I B Code. When we read with as is delineated by Section 3(11) of the Code, debt becomes due both on Principal Borrower and the Guarantor, as noted above. The definition of default under Section 3(12) in addition to expression due occurring in Section 3(11) uses two additional expressions i.e payable and is not paid by the debtor or corporate debtor - It is well settled that the loan agreement with the Principal Borrower and the Bank as well as Deed of Guarantee between the Bank and the Guarantor are two different transactions and the Guarantor s liability has to be read from the Deed of Guarantee. Although the Guarantor immediately become liable on any default committed by the Principal Borrower but for initiating any action against the Guarantor, a demand is to be made. Without there being any demand to the Guarantor, it cannot be accepted that period of limitation against the Guarantor shall commence. In the present case, Section 7 application filed by the Bank has been brou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee dated 23.03.2011 issued by the Corporate Guarantor in favour of the Indian Bank (erstwhile Allahabad Bank) (hereinafter referred to as Bank ). The Principal Borrower also executed an escrow agreement dated 23.03.2011 with the Bank. ii. The Principal Borrower wrote to the Bank on 07.03.2012 that the project is being delayed due to reasons beyond its control and the Principal Borrower would be unable to meet the original COD (April 2012). iii. Till April 2012, the Bank has only disbursed a principal sum of Rs.25 Crores out of the total loan amount of Rs.62 Crores to the Principal Borrower. iv. On 31.03.2017, the Bank declared the Principal Borrower as NPA. v. On 03.04.2017, the Bank issued a demand notice under Section 13(2) of the SARFAESI Act, 2002 claiming an amount of Rs.45,05,22,863/- due against the Corporate Guarantor. The Corporate Guarantor issued its objection to Section 13(2) notice through its reply dated 17.11.2017. The Bank also took action under Section 13(4) of the SARFAESI Act. The Corporate Guarantor approached the Debts Recovery Tribunal against the action of the Bank by filing S.A. No. 43 of 2018. The DRT passed order dated 03.04.2018 restrai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be on the same date on which Principal Borrower committed default i.e. 31.12.2016. Limitation for filing Section 7 application against the Corporate Guarantor commence w.e.f. date of default i.e. 31.12.2016 came to an end on 31.12.2019, the application filed in 17.03.2020 was clearly barred by time. It is submitted that the Adjudicating Authority committed error in coming to the conclusion that right to file Section 7 application will commence from post 60 days of the recall notice dated 03.04.2017. The liability of Corporate Guarantor is coextensive with that of the Principal Borrower. It is submitted that present is a fit case where the Adjudicating Authority ought to have exercised its discretion in not admitting Section 7 application on the principle as laid down by the Hon ble Supreme Court in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd., (2022) 8 SCC 352 . 4. Shri Debal Banerjee, learned counsel appearing for the Bank refuting the submissions of learned counsel for the Appellant submits that application filed by the Bank was well within three years period. It is submitted that although the liability of Corporate Guarantor is coextensive with the Principal Borrower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 9. 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 Corporate Guarantor. The Corporate Guarantor is defined under Section (5A) in following manner: (5A) corporate guarantor means a corporate person who is the surety in a contract of guarante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Surety i.e. Guarantor co-extensive with that of the Principal Debtor. 14. 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 limitation. The Hon ble Supreme Court in the above judgment while considering the question of limitation made following observations in Para 10: 10. The guarantee is seen to be a continuing guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 guarantee, by the excess of the total debits over the total credits. If that be true construction of this document, as their Lordships think it is, the number of years which have expire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor 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 guarantor to carry out the obligation, the period of limitation could not be said to have commenced running. 11. But in the case on hand, the guarantee deeds specifically state that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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? 21. 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 several grounds including that the Principal Borrower is not a corporate person; and further it is barred by limitation, as the date of default was 30.01.2010 and application has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roprietary 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. 22. 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. 23. 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 the judgment is as follows: 43. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 25. 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, it triggers the moment principal borrower commits default in paying the acknowledged debt. This is a legal fiction. Para 44 of the judgment is as follows: 44. In the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... committed in particular as per the Deed of Guarantee. Para 2 of Deed of Guarantee states that the guarantee restricted to the sum of Rs.62 Crores, which was a continuing guarantee to the Bank. Para 2 of the Deed of Guarantee is as follows: 2. I/We declare that my/our liability under this guarantee shall be limited and restricted to the sum of Rs. 62,00,00,000/- (Rupees. Sixty Two Crore Only) with Interest at the rate aforesaid but subject to such limit shall nevertheless be a continuing guarantee to the Bank as hereinafter specified for all sums whatsoever which may at any time be or become payable by the Principal to the Bank with Interest at the rate aforesaid till repayment together with commission Bank charges, legal and other expenses which the Bank may incur in enforcing or seeking to enforce any security for or obtaining or seeking to obtain payment for all or any part of the money hereby guaranteed or otherwise in respect of this agreement. 28. Para 9 of the Deed of Guarantee uses expression continue to be enforceable . Intent is clear that the Deed of Guarantee need to be enforced by the Bank. Para 9 is as follows: 9. I/We further agree and declare that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2017 has been mentioned in Part IV and total amount in default as on 31.12.2019 has been computed. The Application under Section 7 thus proceeds on date of NPA. The notice dated 03.04.2017 is also on the record as Annexure A-21, which notice was issued by the Bank to the Guarantors M/s N. Kumar Housing and Infrastructure Pvt. Ltd. and its Directors. Para 3 mentions about the Guarantee Deed dated 23.03.2011 executed by the Corporate Guarantor and in Para 7, the Corporate Guarantor was called upon to discharge the entire liabilities. Para 3 and 7 of the notice dated 03.04.2017 are as follows: 3. In consideration of the above loan/ credit facilities to the said borrower you have executed a guarantee agreement/ letter/ deed dated 23/03/2011 in favour of the Bank and to secure repayment of the said loan/ credit facilities you have executed various documents whereby and where under you created charge/ mortgage/ hypothecation/ assignment over your movable/ Immovable properties/ assets in favour of the Bank, details of which are given hereunder:- Details of securities charged/ mortgaged/ hypothecated/ assigned/ assigned etc. by the guarantor/third party to be given S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not commit any error in admitting Section 7 application. The Adjudicating Authority also noted in the order that the disbursement of Rs.25 Crores was not even disputed. 33. In view of our discussion on Issue No. I, Issue Nos. II III are answered as follows: Issue No. II : In the facts of the present case, application filed by the Bank on 17.03.2020 was not barred by limitation. Issue No. III : The order of the Adjudicating Authority admitting Section 7 application is sustainable. 34. The submission made by learned counsel for the Appellant that there has been no disbursement to the Principal Borrower as per the sanction and apart from Rs.25 Crores no amount was disbursed and the amount which was disbursed in the Escrow Account was adjusted by the Bank towards repayment and there has been no disbursement of the entire sanctioned amount, need no further consideration since disbursement to the extent of Rs.25 Crores is not disputed either in this Appeal or before the Adjudicating Authority. 35. The submission of the learned counsel for the Appellant is that present was a case where the Adjudicating Authority ought to have exercised its discretion in not admittin ..... 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