Status as on- 11/06/2022
Introduction
Banks and financial institutions grant loans to the corporate person only by obtaining a guarantee from a promoter/ any subsidiary of such corporations. The Indian Contract Act, 1872 deals with the extent of liability of the surety along with the principal borrower. Section 128 of the Indian Contract Act deals with the surety’s liability as the liability of the surety is co-extensive to the liability of the principal debtor. If there is any default on the part of the principal debtor, then the financial creditor can proceed against the principal debtor or the surety or simultaneously against both principal debtor and surety. The question of initiation of a corporate insolvency procedure against corporate debtors (principal borrower/ corporate guarantor) simultaneously for the same debt is raised in the judgment of Dr. Vishnu Kumar Agarwal v. M/s. Piramal Enterprises Limited and the NCLAT held that “there is no bar in the Insolvency and Bankruptcy Code, 2016 for filing simultaneously two applications under Section 7 against the ‘Principal Borrower’ as well as the ‘Corporate Guarantor (s). However, once the same set of claim applications under Section 7 by the financial creditor is admitted against one ‘Corporate Debtor’ i.e., ‘Principal Borrower’ or ‘Corporate Guarantor’, a second application by the same financial creditor for the same set of claim and default cannot be admitted against the other ‘Corporate Debtor’ i.e., ‘Principal Borrower’ or ‘Corporate Guarantor’.
FACTUAL MATRIX
In the present case, the financial creditor the bank had extended credit facility to the principal borrower i.e., M/s Mahaveer Construction, a proprietary firm, through two loan agreements in the years 2007 and 2008 for a term loan of Rupees Nine Crore approx. and an additional amount of Rupees Two Crore approx. The corporate guarantor i.e., M/s. Surana Metals Limited had offered a guarantee to the two loan accounts of the principal borrower. The stated loan accounts were declared a Non-Performing Asset (“NPA“) in the year 2010. The bank then issued a recall notice in the year 2010 to the principal borrower, as well as, the corporate debtor, demanding repayment of the outstanding amount. Then they filled an application under Section 19 of the Recovery of Debts Due to Bank and Financial Institution, 1993 against the principal debtor before the Debt recovery tribunal, Kolkata. The Financial Creditor eventually 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 guarantor/debtor replied to the notice of demand vide a letter dated 8th December 2018, inter alia, clarifying that it was not the principal borrower nor owed any financial debt to the bank and had not committed any default in repayment of the outstanding amount. The bank then proceeded to file an application under Section 7 of the IBC on 13th February 2019 for initiating Corporate Insolvency Resolution Proceeding (“CIRP“) against the corporate guarantor/debtor before the National Company Law Tribunal (“NCLT“), Kolkata. This application came to be resisted on diverse counts and in particular, on the preliminary ground that it was not maintainable because the principal borrower was not a ‘corporate person’; and further, it was barred by limitation, as the date of default was 1st January 2010, whereas, the application had been filed on 13th February 2019 i.e., beyond the period of three years. The NCLT held that the action had been initiated against the corporate guarantor, being coextensively liable to repay the debt of the principal borrower and having failed to do so despite the recall notice, became the corporate debtor and thus liable to be proceeded with under Section 7 of the IBC. And the aggrieved party appealed to NCLAT and NCLAT dismissed the order and upheld the order of the NCLT
ISSUES BEFORE THE SUPREME COURT
- Whether an action under Section 7 of the IBC can be initiated by the financial creditor against a corporate person (being a corporate debtor) concerning a guarantee offered by it in respect of a loan account of the principal borrower, who had committed default and is not a ‘corporate person’?
- Whether an application under Section 7 of the IBC filed after three years from the date of declaration of the loan amount as an NPA, being the date of default, is not barred by limitation?
Decision Upheld
- The Supreme Court held that the maintainability of an application under Section 7 of the IBC, according to Section 7 of the Code which permits the financial creditor to co-extend the liability of the Principal borrower to the corporate guarantor and initiate the CIRP procedure against the corporate guarantor on default of the principal borrower and court observed that Section 7 of the IBC is a self-contained code as it merely refers to the factum of default is the cause of action for maintaining the application. And the court also held that the application including Form-1 filed by the financial creditor before the adjudicating authority in no way makes out the case for granting benefit under Section 18 of the Limitation Act. The factual narration in the subject application is that the date of default was 30.1.2010 being the date of declaration of accounts as NPA, and no other fact is relevant for giving benefit under Section 18 of the Limitation Act and it is also noted by the Hon’ble court that since an application under Section 7 cannot be maintained against a “ principal borrower” who is not a “ corporate person” for this kind of transaction no action under Section 7 of the Code can be maintained against a company or a corporate person just because it had extended its guarantee. It also is urged that Section 18 of the Limitation Act invoked by the Financial 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 rights.
CONCLUSION
Section 7 of the Code permits a financial creditor to initiate a CIRP procedure against the guarantor being a corporate debtor in accordance with the default committed by the principal borrower. The liability of the corporate guarantor is co-extensive to the default of non-payment of dues by the principal borrower.
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