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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 ..... his Appeal are: i. M/s Spanco Nagpur Discom Ltd (SND Ltd.), the borrower entered into a Memorandum of Agreement for a term loan for sums not exceeding Rs.80 Crores on 25.02.2013. The Corporate Guarantor (Respondent No.2) and one Essel Utilities Distribution Company Ltd. executed a combined Corporate Guarantee dated 25.02.2013 to secure the Term Loan. Another Memorandum of Agreement was executed between SND Ltd. and the State Bank of India for a working capital credit facility for amounts not exceeding Rs.78,75,00,000/-. ii. Combined Corporate Guarantee was executed on 01.03.2013 by Respondent No.2 and Essel Utilities Distribution Company Ltd. A Supplemental working capital consortium agreement was executed. iii. Another combined corporate guarantee was executed by Respondent No.2 and Essel Utilities Distribution Company Ltd. for loans sanctioned to SND Ltd. on 17.07.2018 for an amount not exceeding Rs.185,27,00,000/-. iv. On 17.05.2019, fresh Corporate Guarantee was executed by the Respondent No.2 and Essel Utilities Distribution Company Ltd with respect to facilities extended to the SND Ltd. v. On 05.12.2019, SND Ltd. was declared as Non-performing Asset. vi. The conso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place between the period 25.03.2020 to 25.03.2021. The Adjudicating Authority committed error in holding that for Corporate Guarantor date of default shall be 05.09.2019. It is submitted that the Adjudicating Authority not looked into the relevant clauses of the corporate guarantee which clearly contemplated notice of demand by the Bank. On demand guarantee is a different nature of guarantee under which limitation of Guarantor shall come to play only when a demand notice is issued. 4. Learned counsel for the Respondent Bank, Shri Krishnendu Datta refuting the submissions of learned counsel for the Appellant contends that the default committed by the Principal Borrower and the Corporate Guarantor has to be same. The account was declared NPA on 05.12.2019, hence, the default has to be treated as to have taken place three months prior i.e. on 05.09.2019 as per the RBI Circular. When the Principal Borrower committed default on 05.09.2019, the liability of the Corporate Guarantor being coextensive with that of the Principal Borrower, there shall be default on the part of the Corporate Guarantor also. The default having been taken place on 05.09.2019 i.e. before 10A period, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he surety in a contract of guarantee to a corporate debtor;" 8. Section 3 of the Code is a definition clause. Section 3(11) defines 'debt' in following words: "3(11) "debt" means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;" 9. Section 3(12) defines 'default': "3(12) "default" means non-payment of debt 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;" 10. When we look into the definition of 'debt' and 'default' under Section 3(11) and 3(12), it is clear that debt is a liability or obligation in respect of a claim which is due from any person and default is committed when debt which has become due and payable and is not paid by the debtor. Section 3(12) uses two additional words i.e (i) "payable"; and (ii) "is not paid by the debtor". The expression 'debtor' as used in Section 3(12), in the present case, is to be read as 'Corporate Guarantor'. The Indian Contract Act, 1972 contains provisions in Chapter VII- 'of Indemnity and Guarantee'. Section 126 defines "Contract of guarantee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he undertaking by the defendant is to pay any amount that may be due by the company at the foot of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, 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, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach, under Article 115 of the schedule to the Limitation Act, 1908. When the Bombay High Court considered the matter in the first instance and held that the suit was not barred by limitation, J. C. Shah, J., speaking for the Court said: "On the plain words of the letters of guarantee it is clear that the defendant undertook to pay any amount which may be due by the Company at the foot of the general balance of its account or any other account whatever ..... We are not concerned in this case with the period of limitation for the amount repayable by the Company to the bank. We are concerned with the period of limitation for enforcing the liability of the defendant under the surety bond ...... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed is immaterial. The question of limitation could only arise in regard to the time which had elapsed since the balance guaranteed and used for had been constituted". Later it was again observed (at p. 450): "That document, in their opinion, clearly guarantees the repayment of each debit balance as constituted from time to time, during the continuance of the guarantee, by the surplus of the total debits over the total credits, and accordingly at the date of the counterclaim the Association's claim against the plaintiff for payment of the unpaid balance due from the Nosworthys, with interest, was not statute-barred." 14. The Hon'ble Supreme Court in the above case 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. 15. The next judgment on which reliance has been placed is judgment of Hon'ble Supreme Court in "Syndicate Bank vs. Channaveerappa Beleri & Ors., (2006) 11 SCC 506". Hon'ble Supreme Court in the above case had occasion to consider the provisions of Section 128 and 129 of the Contract Act. Hon'ble Supreme Court in the above case has laid down that the lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and interest will be payable by the guarantors only from the date of demand. In a case where the guarantee is payable on demand, as held in the case of Bradford (supra) and Hartland (supra), the limitation begins to run when the demand is made and the guarantor commits breach by not complying with the demand." 16. It is to be noted that in Para 10 of the above judgment, the Hon'ble Supreme Court had referred to earlier case of 'Margaret Lalita Samuel' and the issue of 'Margaret Lalita Samuel' was noticed in following words: "...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." 17. In Para 15, the Hon'ble Supreme Court further laid down following: "15. The respondents have tried to contend that when the operations ceased and the accounts became dormant, the very cessation of operation of accounts should be treated as a refusal to pay by the principal debtor, as also by the guarantors and, therefore the limitation would begin to run, not when there is a refusal to meet the dema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were negatived by the Adjudicating Authority. The order of the Adjudicating Authority was also affirmed in appeal. Thereafter, the Corporate Debtor i.e. Guarantor filed an appeal in the Hon'ble Supreme Court. In the above context, the Hon'ble Supreme Court has occasion to consider the scheme of IBC. The Hon'ble Supreme Court in the above context has held that the liability of the Guarantor is co-extensive with that of the Principal Borrower and the Guarantor is also a Corporate Person and the Guarantor metamorphoses into a Corporate Debtor the moment the Principal Borrower makes default in payment of debt. In Para 30, 31 and 32 following was laid down while answering question no. (i), as noted above: "30. The expression "corporate debtor" is defined in Section 3(8) which applies to the Code as a whole. Whereas, expression "corporate guarantor" in Section 5(5A), applies only to Part II of the Code. Upon harmonious and purposive construction of the governing provisions, it is not possible to extricate the corporate person from the liability (of being a corporate debtor) arising on account of the guarantee given by it in respect of loan given to a person other than corporate person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate debtor commits "default". Section 7, consciously uses the expression "default" - not the date of notifying the loan account of the corporate person as NPA. Further, the expression "default" has been defined in Section 3(12) to mean nonpayment of "debt" 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 writin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the principal borrower and not the guarantor, would not absolve the guarantor of its liability flowing from the letter of guarantee and memorandum of mortgage. 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. Such liability of the guarantor would flow from the guarantee deed and memorandum of mortgage, unless it expressly provides to the contrary." 24. 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 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 Guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old by the Bank after giving to the Guarantors a reasonable notice of sales and the said sum or the proceeds of sale of the securities may be appropriated by the Bank in or towards satisfaction of the said obligations and any liability arising out of nonfulfillment thereof by the Guarantors. 14. The Guarantors hereby agree that notwithstanding any variation made in the terms of the said Agreement of loan and / or any of the said security documents including reallocation/ interchange of the individual limits within the principal sum variation in the rate of interest, extension of the date for payment of the instalments, if any, or any composition made between the Bank and Borrower to give time to or not to sue the Borrower, or the Bank parting with any of the securities given by the Borrower, the Guarantors shall not be released or discharged of their obligation under this Guarantee provided that in the event of any such variation or composition or agreement the liability of the Guarantors shall not withstanding anything herein contained be deemed to have accrued and the Guarantors shall be deemed to have become liable on the date or dates on which the borrower shall become liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of present case. In the present case, admittedly, the Bank has issued notice dated 01.10.2020 to the Principal Borrower as well as to the Guarantor - Essel Infraprojects Ltd. Notice dated 01.10.2020 which has been brought on the record indicate that notice is addressed to the Principal Borrower and to Guarantors. In Para 8 of the notice following has been stated: "8. Our Clients states that, You Nos.2 to 4, executed Deed of Guarantee on respective dates inter alia agreeing to pay on demand and without demur to our clients alongwith interest, cost, charges, expenses and/or other money due thereon from time to time in terms of the Agreement of Loan for overall limits, Agreement of Hypothecation of Goods and Assets and Supplemental Agreements." 28. In Para 12, it is clearly stated that Bank is invoking guarantee agreement and call upon the guarantors to make the payment within seven days. Para 12 and 13 of the notice are as follows: "12. We state that You No. 1 to 4, have mischievously, intentionally, deliberately and malafidely misrepresented before our Clients only in order to avail the said facilities and also have committed various defaults under the terms an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ankruptcy Code, 2016 ("IBC") or any other law, iii) initiating criminal proceedings against directors of the Borrower, iv) initiating proceedings under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; v) informing default/breach under the Working Capital, Cash Credit, Seasonal Limit, Term Loan and Standby Letter of Credit/Bank Guarantee Facility to TransUnion CIBIL, Reserve Bank of India, information utility under IBC or any other reporting authority/body; vi) reporting you and/or Borrower's directors as non-cooperative borrowers or wilful defaulters; vii) initiating civil and criminal proceedings against the Personal Guarantors; and viii) any other step under law or contract to recover the Outstanding Amount." 29. The notice dated 01.10.2020, thus, has been issued invoking the grantee which expression is used in Para 12 above. When the Bank has given time to the Guarantor to make payment on 01.10.2020, there can be no default on part of the Guarantor on any earlier date. The default on part of the Guarantor thus has to be subsequent to the notice dated 01.10.2020 i.e. Non-payment within seven days as requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee shall arise only subsequent to the notice dated 01.10.2020 i.e. non-payment of the amount within seven days i.e. default arise on 08.10.2020. (ii) Default on the part of the Guarantor having arisen on 08.10.2020 i.e. within the period which is covered as prohibited period under Section 10A, application under Section 7 was clearly barred by Section 10A. Issues No. II, III and IV are answered accordingly. (iii) The Adjudicating Authority in the impugned order has not adverted to the relevant clauses of the Deed of Guarantee as noted above. The date of default on part of the Guarantor being subsequent to 01.10.2020 when guarantee was invoked, the application was barred by Section 10A and the Adjudicating Authority committed error in admitting the Section 7 application. 33. In view of the foregoing discussion and conclusions, we answer Issues No. II, III and IV in following manner: Issue No. II: The Deed of Guarantee dated 17.05.2019 is guarantee on demand and the limitation of Guarantor shall ensue only when demand is made to the Guarantor. Issue No. III: The Notice dated 01.10.2020 issued by the State Bank of India to Guarantor has to be treated to be notice on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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