The appellant filed an appeal against the judgement of National Company Law Tribunal, whereby upheld the order of Adjudicating Authority.
No Acts & Articles mentioned in this case
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2734 OF 2020
LAXMI PAT SURANA ...APPELLANT
Versus
UNION BANK OF INDIA & ANR. ...RESPONDENTS
J U D G M E N T
A.M. Khanwilkar, J.
1.Two central issues arise for our determination in this
appeal, as follows:
(i)Whether an action under Section 7 of the
Insolvency and Bankruptcy Code, 2016
1
can be
initiated by the financial creditor (Bank) against a
corporate person (being a corporate debtor)
concerning guarantee offered by it in respect of a
loan account of the principal borrower, who had
1 for short, “the Code”
1
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
2
,
being the date of default, is not barred by
limitation?
2.Briefly stated, respondent No. 1 bank
3
extended credit
facility to M/s. Mahaveer Construction
4
, a proprietary firm of the
appellant, through two loan agreements in years 2007 and 2008
for a term loan of Rs.9,60,00,000/ (Rupees nine crore sixty
lakhs only) and an additional amount of Rs.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
5
, 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 declared NPA on 30.1.2010. The Financial Creditor then
issued a recall notice on 19.2.2010 to the Principal Borrower, as
2 for short, “NPA”
3 for short, “the Financial Creditor”
4 for short, “the Principal Borrower”
5 for short, the “Corporate Debtor”
2
well as, the Corporate Debtor, demanding repayment of
outstanding amount of Rs.12,35,11,548/ (Rupees twelve crore
thirtyfive lakhs eleven thousand five hundred fortyeight only).
3.The Financial Creditor then filed an application under
Section 19 of the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993
6
against the Principal Borrower before the
Debt Recovery Tribunal
7
at Kolkata.
4.During the pendency of the stated action initiated by the
Financial Creditor, the Principal Borrower had repeatedly
assured to pay the outstanding amount, but as that commitment
remained unfulfilled, 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
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 stated
outstanding amount. This communication was sent without
prejudice.
6 for short, “the 1993 Act”
7 for short, “DRT”
3
5.The Financial Creditor then proceeded to file an application
under Section 7 of the Code on 13.2.2019 for initiating Corporate
Insolvency Resolution Proceeding
8
against the Corporate Debtor,
before the National Company Law Tribunal, Kolkata
9
. 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 30.1.2010, whereas, the application had
been filed on 13.2.2019 i.e., beyond the period of three years.
These two preliminary objections came to be negatived by the
Adjudicating Authority vide judgment and order dated 6.12.2019.
6.The Adjudicating Authority held that the action had been
initiated against the Corporate Debtor, being coextensively liable
to repay the debt of the Principal Borrower and having failed to
do so despite the recall notice, became Corporate Debtor and
thus liable to be proceeded with under Section 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 for short, “the CIRP”
9 for short, the “Adjudicating Authority” or “NCLT”, as the case may be.
4
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
10
, 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
Bankruptcy Code.
Issue notice confined to the aforesaid aspect
returnable in four weeks.
Steps be taken within three days from today. If the
steps are not taken within the stipulated time, the civil
appeal shall stand dismissed without further reference to
the Court.
10 for short, “NCLAT”
5
There shall be interim stay on the operation of
impugned judgment till the next date of hearing.
List in the last week of August, 2020.”
9.According to the appellant, Section 7 plainly ordains that an
application can be filed by a financial creditor only against the
corporate debtor. A corporate debtor can either be a corporate
person, who had borrowed money or a corporate person, who
gives guarantee regarding repayment of money borrowed by
another corporate person. In other words, the Code cannot apply
in respect of “debts” of an entity who is not a “corporate person”.
This position is reinforced by the fact that initiation of insolvency
of firms and/or individuals in terms of Part III of the Code has
still not been notified. Further, Section 2 of the Code came to be
amended to clarify that partnership firms and proprietorship
firms would fall within Part III of the Code on the basis of the
differentiation made in the report of the Insolvency Law
Committee, February, 2020, which reads thus:
“2.DEFINITION OF ‘PROPRIETORSHIP FIRMS’
2.1 Part III of the Code is applicable to debtors who are
individuals or partnership firms. Section 2 of the Code
was recently amended to clarify the different categories of
debtors falling within Part III of the Code – (i) personal
guarantors to corporate debtors, (ii) partnership firms and
proprietorship firms, and (iii) other individuals. Though
section 2(f) of the Code now includes the words
6
“proprietorship firms”, this term has not been defined in
another legislation.
2.2 Proprietorship firms are businesses that are owned,
managed and controlled by one person. They are the
most common form of businesses in India and are based
in unlimited liability of the owner. Legally, a
proprietorship is not a separate legal entity and is merely
the name under which a proprietor carries on business.
Due to this, proprietorships are usually not defined in
statutes. Though some statutes define proprietorships,
such definition is limited to the context of the statute.
For example, Section 2(haa) of the Chartered Accountants
Act, 1949 defined 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 entities, such as
partnership firms and proprietorship firms and/or individuals,
who are governed by Part III of the Code, without notifying the
same. According to the appellant, a corporate guarantee is one
7
which is extended in respect of a loan given to a “corporate
person”, coming within the purview of Part II of the Code. That is
reinforced by the amendment Act 26 of 2018 on account of
insertion of definition of “corporate guarantor” with effect from
6.6.2018, as can be discerned from the portion of report of
Insolvency Law Committee, dated 26.3.2018, which reads thus:
“23.1Section 60 of the Code requires that the
Adjudicating Authority for the corporate debtor and
personal guarantors should be the NCLT which has
territorial jurisdiction over the place where the registered
office of the corporate debtor is located. This creates a
link between the insolvency resolution or bankruptcy
processes of the corporate debtor and the personal
guarantor such that the matters relating to the same debt
are dealt in the same tribunal. However, no such link is
present between the insolvency resolution or liquidation
processes of the corporate debtor and the corporate
guarantor. It was decided that section 60 may be
suitably amended to provide for the same NCLT to
deal with the insolvency resolution or liquidation
processes of the corporate debtor and its corporate
guarantor. For this purpose, the term “corporate
guarantor” will also be defined.”
(emphasis supplied)
In substance, it is urged that since an application under Section
7 of the Code cannot be maintained against a principal borrower,
who is not a “corporate person”, it must follow that in respect of
such transaction, no action under Section 7 of the Code can be
maintained against a company or corporate person, merely
because it had extended guarantee thereto.
10.As regards maintainability of the subject application under
Section 7 on the ground of being barred by limitation, it is urged
8
by the appellant that the date of default must be reckoned as
30.1.2010, on which date, the loan accounts were declared as
NPA. That fact has been duly noted in the subject application
filed on 13.2.2019. Hence, the application was ex facie barred by
limitation in view of Article 137 of the Limitation Act, 1963
11
. It 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 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
11 for short, “the Limitation Act”
9
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
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 which is relevant for giving benefit
under Section 18 of the Limitation Act as expounded in Shanti
Conductors Private Limited vs. Assam State Electricity
Board & Ors.
12
, has been stated therein. In other words,
respondent No. 1 has failed to set forth a case in that behalf in
the application as filed. Further, letters relied upon do not
mention about the factum of acknowledgment of debt by the
Principal Borrower or the Corporate Debtor, as the case may be.
The said communications were sent without prejudice and
cannot be read as an acknowledgment of liability as such. The
communication dated 8.12.2018, therefore, will be of no avail to
the Financial Creditor. All other relied upon communications
have been sent by the Principal Borrower and not the Corporate
Debtor, who is an independent legal entity. The socalled
12 (2020) 2 SCC 677
10
acknowledgment by the Principal Borrower, therefore, cannot
bind the Corporate Debtor. Communications sent by the
Principal Borrower after the original limitation period had
expired, in any case, cannot be taken into account for invoking
remedy under Section 7 of the Code. Obviously, there was delay
in filing of the application under Section 7 and despite that, it
was not accompanied by application for condonation of delay
under Section 5 of the Limitation Act. According to the appellant,
the factum of application being barred by limitation is a mixed
question of fact and law and would involve triable issues. Those
aspects can be finally adjudicated after production of evidence in
the form of affidavits before the Adjudicating Authority.
11.Reliance is placed by the appellant on the dictum of this
Court in Babulal Vardharji Gurjar vs. Veer Gurjar Aluminium
Industries Private Limited & Anr. (I)
13
, B.K. Educational
Services Private Limited vs. Parag Gupta and Associates
14
,
Gaurav Hargovindbhai Dave vs. Asset Reconstruction
Company (India) Limited & Anr.
15
, Vashdeo R. Bhojwani vs.
13 (2019) 15 SCC 209
14 (2019) 11 SCC 633
15 (2019) 10 SCC 572
11
Abhyudaya Cooperative Bank Limited & Anr.
16
and Sagar
Sharma & Anr. vs. Phoenix Arc Private Limited & Anr.
17
.
12.The Financial Creditor has refuted the plea 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
18
.
This legal position is wellestablished by now (see –Bank of
Bihar Ltd. vs. Dr. Damodar Prasad & Anr.
19
). 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
16 (2019) 9 SCC 158
17 (2019) 10 SCC 353
18 for short, “the Contract Act”
19 (1969) 1 SCR 620
12
“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 sole proprietorship
of the appellant against payment of interest for which the
Corporate Debtor stood guarantee or indemnity, was also a
“financial debt” of the Corporate Debtor and for that reason, the
Financial Creditor respondent No. 1, could proceed under
Section 7 of the Code. It is further urged that the definition of
“corporate guarantor” introduced by way of amendment of 2018
is to define a corporate guarantor in relation to a corporate
debtor against whom any CIRP is to be initiated, in reference to
Section 60 of the Code. The objection regarding maintainability
of the application against a corporate guarantor, is, therefore,
devoid of merit and needs to be rejected.
13.As regards the second issue of application being barred by
limitation, it is contended that this Court had issued limited
notice in the present appeal only to examine the question noted
in the order dated 28.7.2020. Hence, the second objection of
limitation need not be examined. It is then urged that in any
case, there is no substance even in this objection. Referring to
the decisions relied upon by the appellant, it is urged that it was
13
open to the Financial Creditor to maintain the application even
after three years from the declaration of accounts as NPA
because of the acknowledgment of debt including by the
Corporate Debtor from time to time and lastly on 8.12.2018,
whereby it admitted the initial loan granted by the Financial
Creditor in favour of the Principal Borrower and also of having
provided collateral security to secure the liability of the Principal
Borrower. The Adjudicating Authority, as well as, the NCLAT had
justly taken due cognizance of the said admission to conclude
that fresh period of limitation commenced because of such
acknowledgment by the Corporate Debtor. Further, the default
committed by the Corporate Debtor is a continuing one. It is
urged that the Court must look behind the veil of corporate entity
M/s. Surana Metals Limited, being the alter ego of the appellant
herein. The Code is a special enactment for resolution of a
financial debt and it is in larger public interest that financial
debts are recovered and the debts of corporate person are
restructured to revive the failing corporate entity. Thus
understood, the process is not for recovery as such, but for
resolution of the insolvency of the corporate person. It is further
urged that there is no need to relegate the parties before the
Adjudicating Authority on the question of limitation. It is not a
14
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):
15
16.Section 7 of the Code propounds the manner in which
corporate insolvency resolution process (CIRP) may be initiated
by the “financial creditor” against a “corporate person being the
corporate debtor”. It predicates that a financial creditor either by
itself or jointly with other financial creditors or any other person
on behalf of the financial creditor, as may be notified by the
Central Government, may file an application for initiating CIRP
against a corporate debtor before the Adjudicating Authority
when a default is committed by it. The expression “default” is
expounded in Section 3(12) to mean nonpayment of debt which
had become due and payable and is not paid by the debtor or the
corporate debtor, as the case may be.
17.Section 7 is an enabling provision, which permits the
financial creditor to initiate CIRP against a corporate debtor. The
corporate debtor can be the principal borrower. It can also be a
corporate person assuming the status of corporate debtor having
offered guarantee, if and when the principal borrower/debtor (be
it a corporate person or otherwise) commits default in payment of
its debt.
16
18.The term “financial creditor” has been defined in Section
5(7) read with expression “Creditor” in Section 3(10) of the Code
to mean a person to whom a financial debt is owed and includes
a person to whom such debt has been legally assigned or
transferred to. This means that the applicant should be a person
to whom a financial debt is owed. The expression “financial debt”
has been defined in Section 5(8). Amongst other categories
specified therein, it could be a debt along with interest, which is
disbursed against the consideration for the time value of money
and would include the amount of any liability in respect of any of
the guarantee or indemnity for any of the items referred to in
subclauses (a) to (h) of the same clause. It is so provided in sub
clause (i) of Section 5(8) of the Code to take within its ambit a
liability in relation to a guarantee offered by the corporate person
as a result of the default committed by the principal borrower.
The expression “debt” has been defined separately in the Code in
Section 3(11) to mean a liability or obligation in respect of “a
claim” which is due from any person and includes a financial
debt and operational debt. The expression “claim” would
certainly cover the right of the financial creditor to proceed
against the corporate person being a guarantor due to the default
17
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 debtor
or a corporate debtor if it happens to be a corporate person,
within the meaning of Section 3(8) of the Code. For, as aforesaid,
expression “default” has also been defined in Section 3(12) of the
18
Code to mean nonpayment of debt when whole or any part or
instalment of the amount of debt has become due or payable and
is not paid by the debtor or the corporate debtor, as the case may
be.
20.A priori, in the context of the provisions of the Code, if the
guarantor is a corporate person (as defined in Section 3(7) of the
Code), it would come within the purview of expression “corporate
debtor”, within the meaning of Section 3(8) of the Code.
21.It may be useful to also advert to the generic provision
contained in Section 3(37). It postulates that the words and
expressions used and not defined in the Code, but defined in
enactments referred to therein, shall have the meanings
respectively assigned to them in those Acts. Drawing support
from this provision, it must follow that the lender would be a
financial creditor within the meaning of the Code. The principal
borrower may or may not be a corporate person, but if a
corporate person extends guarantee for the loan transaction
concerning a principal borrower not being a corporate person, it
would still be covered within the meaning of expression
“corporate debtor” in Section 3(8) of the Code.
19
22.Thus understood, it is not possible to countenance the
argument of the appellant that as the principal borrower is not a
corporate person, the financial creditor could not have invoked
remedy under Section 7 of the Code against the corporate person
who had merely offered guarantee for such loan account. That
action can still proceed against the guarantor being a corporate
debtor, consequent to the default committed by the principal
borrower. There is no reason to limit the width of Section 7 of
the Code despite law permitting initiation of CIRP against the
corporate debtor, if and when default is committed by the
principal borrower. For, the liability and obligation of the
guarantor to pay the outstanding dues would get triggered
coextensively.
23.To get over this position, much reliance was placed on
Section 5(5A) of the Code, which defines the expression
“corporate guarantor” to mean a corporate person, who is the
surety in a contract of guarantee to a Corporate debtor. This
definition has been inserted 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
20
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
a claim which is due from any person and includes a financial
debt and operational debt. The expression “debt” in Section 3(11)
is wide enough to include liability of a corporate person on
account of guarantee given by it in relation to a loan account of
any person including not being a corporate person in the event of
21
default committed by the latter. It would still be a “financial
debt” of the corporate person, arising from the guarantee given by
it, within the meaning of Section 5(8) of the Code.
25.Notably, the expression “corporate guarantee” is not defined
in the Code. Whereas, expression “corporate guarantor” is
defined in Section 5(5A) of the Code. If the legislature intended to
exclude a corporate person offering guarantee in respect of a loan
secured by a person not being a corporate person, from the
expression “corporate debtor” occurring in Section 7, it would
have so provided in the Code (at least when Section 5(5A) came to
be inserted defining expression “corporate guarantor”). It was
also open to the legislature to amend Section 7 of the Code and
replace the expression “corporate debtor” by a suitable
expression. It could have even amended Section 3(8) to exclude
liability arising from a guarantee given for the loan account of an
entity not being a corporate person. Similarly, it could have also
amended expression “financial debt” in Section 5(8) of the Code,
“claim” in Section 3(6), “debt” in Section 3(11) and “default” in
Section 3(12). There is no indication to that effect in the
contemporaneous legislative changes brought about.
22
26.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. The liability of the
guarantor is coextensive with that of the principal borrower. The
remedy under Section 7 is not for recovery of the amount, but is
for reorganisation and insolvency resolution of the corporate
debtor who is not in a position to pay its debt and commits
default in that regard. It is open to the corporate debtor 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
23
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 (being a corporate debtor). Hence, the first
question stands answered against the appellant.
ISSUE (ii):
29.As noted earlier, this Court while entertaining the present
appeal in its order dated 28.07.2020 had adverted to only one
contention which already stands answered against the
appellant. However, the appellant would contend that the other
plea taken by him and having been dealt with by the NCLT as
well as the NCLAT, the appellant ought to be allowed to pursue
24
that plea — regarding the maintainability of application under
Section 7 of the Code, on the ground of being barred by
limitation. Inasmuch as, if this ground is answered in favour of
the appellant, it would go to the root of the matter touching upon
the jurisdiction of the NCLT to entertain the subject application
under Section 7 of the Code. Hence, despite the objection of the
respondent (financial creditor) not to permit the appellant to
canvas this ground, in our opinion, it is necessary to answer this
ground as well in the interest of justice; and also, because it is
the duty of the court under Section 3 of the Limitation Act, to
answer the stated issue at the threshold or at appropriate stage,
as the case may be, even if it is not expressly raised by the
opposite party.
30.The objection regarding limitation has been negatived by the
NCLT vide judgment dated 06.12.2019. It observed in paragraph
7 of its judgment as follows:
“7. It is seen from the evidence on record that not
only the original borrower but also the Corporate
Debtor admitted and acknowledged the debt time and
again on 27.05.2015 (exhibit J1) and 08.12.2018
(exhibit K). The Corporate Debtor replied the notice
issued by the Bank clearly admitting the debt . We
have gone through his reply to the notice. We hold that
his reply is in form of admission of debt and nothing else.
The Corporate Debtor contended that recovery proceeding
is pending in Debt Recovery Tribunal, Kolkata against the
Corporate Debtor. It cannot be said that debt become
25
due and payable. We hold that it is admission of debt
and his only defense is that it is yet to become due
and payable. In this case, by virtue of guarantee in
favour of the Bank, the Corporate Debtor undertook
to clear loan of the original borrower in case original
borrower commit default and it is duty of the
Corporate Debtor to clear the outstanding. His
defence is that debt is 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,
26
27.5.2015, 24.10.2016, and executed by the Appellant
(Vide Page. No.196, 197, 140, 198) and on 8.12.2018
executed by the (M/s Surana Metals Ltd.) page no.141
respectively against the execution of the Letters of
Guarantee. Significantly, the Corporate Debtor in its
Reply dated 8.12.2018 had tacitly admitted the execution
of Guarantors Agreement dated 2.2.2007, 17.2.2007,
3.8.2008 in and by which the Corporate Debtor had
agreed to pay Rs.12,05,00,000/ crore and interest on
such sum.”
(emphasis supplied)
Finally, in paragraph 30 of the impugned judgment, the NCLAT
after analysing the relevant decisions relied upon by the parties
in B.K. Educational Services Private Limited (supra), Jignesh
Shah and Anr. vs. Union of India and Anr.
20
and Gaurav
Hargovindbhai Dave (supra), concluded as follows:
“30. In the light of detailed qualitative and quantitative
discussions aforesaid and also this Tribunal keeping in
mind the present facts and circumstances of the instant
case in an integral fashion, which float on the surface
case comes to an inescapable conclusion that there is an
acknowledgment of ‘Debt’ on various dates like 2.2.07,
17.2.07, 3.8.07 for the loan facilities availed by Mahaveer
Construction the Letters of Guarantee Acknowledged
by the Corporate Debtor (M/s Surana Metals Ltd.) on
16.9.10, 3.3.12, 27.5.15, 24.10.16 executed by the
Appellant and on 8.12.18 by the Surana Metals Ltd.
etc. This apart, here is an acknowledgment of Debt by
the Principal Borrower but also the Corporate Debtor
on 27.5.15 & 8.12.18 respectively. The object of
specifying time limit for limitation is undoubtedly based
on ‘Public Policy’. The application projected before the
Adjudicating Authority (NCLT) Kolkata Bench, on 13.2.19
is well within limitation and not barred by Limitation.
Looking at from any angle, the present Appeal sans
merits and the same is dismissed without costs. …”
20 (2019) 10 SCC 750
27
(emphasis supplied)
33.We may straight away advert to the decision of this Court in
Babulal Vardharji Gurjar vs. Veer Gurjar Aluminium
Industries Private Limited & Anr. (II)
21
wherein after analysing
the earlier decisions of this Court, the Court summed up the
position in the following words:
“32. When Section 238A of the Code is read with the
above noted consistent decisions of this Court
in Innoventive Industries
22
, B.K. Educational
Services
23
, Swiss Ribbons
24
, K. Sashidhar
25
, Jignesh
Shah
26
, Vashdeo R. Bhojwani
27
, Gaurav Hargovindbhai
Dave
28
and Sagar Sharma
29
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,
21 (2020) 15 SCC 1
22 Innoventive Industries Ltd. vs. ICICI Bank, (2018) 1 SCC 407
23 supra at footnote 14
24 Swiss Ribbons (P) Ltd. vs. Union of India, (2019) 4 SCC 17
25 K. Sashidhar vs. Indian Overseas Bank, (2019) 12 SCC 150
26 supra at footnote 20
27 supra at footnote 16
28 supra at footnote 15
29 supra at footnote 17
28
that is to say, that the right to apply under the Code
accrues on the date when default occurs;
(f) that default referred to in the Code is that of actual
nonpayment by the corporate debtor when a debt has
become due and payable; and
(g) that if default had occurred over three years prior
to the date of filing of the application, the application
would be timebarred save and except in those cases
where, on facts, the delay in filing may be condoned; and
(h) an application under Section 7 of the Code is not
for enforcement of mortgage liability and Article 62 of the
Limitation Act does not apply to this application.”
34.In the earlier part of this reported decision, the Court did
advert to the exposition in Jignesh Shah (supra). In that
decision, the Court had analysed the provisions of the Code by
first adverting to the decision in B.K. Educational Services
Private Limited (supra) in which Section 238A of the Code was
referred to. Paragraphs 7 and 8 of the decision in Jignesh Shah
(supra) read thus:
“7. Having heard the learned Senior Counsel for the
parties, it is important to first advert to this Court's
decision in B.K. Educational Services (P) Ltd.
30
in which
Section 238A of the Code was referred to, which states
as follows:
“238A. Limitation.—The provisions of the
Limitation Act, 1963 (36 of 1963) shall, as far as
may be, apply to the proceedings or appeals before
the Adjudicating Authority, the National Company Law
Appellate Tribunal, the Debts Recovery Tribunal or the
Debts Recovery Appellate Tribunal, as the case may
be.”
8. In para 7 of the said judgment, the Report of the
Insolvency Law Committee of March 2018 was referred to
30 supra at footnote 14
29
as follows: (B.K. Educational Services case, SCC pp. 644
45, para 11)
“11. Having heard the learned counsel for both sides, it
is important to first set out the reason for the
introduction of Section 238A into the Code. This is to
be found in the Report of the Insolvency Law
Committee of March 2018, as follows:
‘28. Application of Limitation Act, 1963
28.1. The question of applicability of the Limitation
Act, 1963 (“the Limitation Act”) to the Code has been
deliberated upon in several judgments of NCLT
and NCLAT. The existing jurisprudence on this
subject indicates that if a law is a complete code,
then an express or necessary exclusion of the
Limitation Act should be respected.
31
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.
32
This requires being read
with the definition of “debt” and “claim” in the Code.
Further, debts in windingup proceedings cannot be
timebarred
33
, 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 re
opens 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 justice
by long enjoyment or what may have been lost by a
party's own inaction, negligence or laches’
34
. Though
the Code is not a debt recovery law, the trigger
being “default in payment of debt” renders the
exclusion of the law of limitation counter
intuitive. Second, it reopens the right of claimants
31 Ravula Subba Rao vs. CIT, AIR 1956 SC 604
32 Punjab National Bank vs. Surendra Prasad Sinha, 1993 Supp (1) SCC
499
33 Interactive Media and Communication Solution (P) Ltd. vs. GO Airlines
Ltd., 2013 SCC OnLine Del 445
34 Rajender Singh vs. Santa Singh, (1973) 2 SCC 705
30
(pursuant to issuance of a public notice) to file time
barred claims with the IRP/RP, which may
potentially be a part of the resolution plan. Such a
resolution plan restructuring timebarred debts and
claims may not be in compliance with the existing
laws for the time being in force as per Section 30(4)
of the Code.
28.3. Given that the intent was not to package the
Code as a fresh opportunity for creditors and
claimants who did not exercise their remedy under
existing laws within the prescribed limitation period,
the Committee thought it fit to insert a specific section
applying the Limitation Act to the Code. The relevant
entry under the Limitation Act may be on a case
tocase basis. It was further noted that the
Limitation Act may not apply to applications of
corporate applicants, as these are initiated by the
applicant for its own debts for the purpose of CIRP
and are not in the form of a creditor's remedy.’”
(emphasis in original and supplied)”
(emphasis supplied)
In paragraph 21 after analysing the decisions on the point, the
Court noted as follows:
“21. The aforesaid judgments correctly hold that a suit for
recovery based upon a cause of action that is within
limitation cannot in any manner impact the separate and
independent remedy of a windingup proceeding. In law,
when time begins to run, it can only be extended in
the manner provided in the Limitation Act. For
example, an acknowledgment of liability under
Section 18 of the Limitation Act would certainly
extend the limitation period, but a suit for recovery,
which is a separate and independent proceeding
distinct from the remedy of winding up would, in no
manner, impact the limitation within which the
windingup proceeding is to be filed, by somehow
keeping the debt alive for the purpose of the winding
up proceeding.”
(emphasis supplied)
31
35.The purport of such observation has been dealt with in the
case of Babulal Vardharji Gurjar (II) (supra). Suffice it to
observe that this Court had not ruled out the application of
Section 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 casetocase 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.
32
After enactment of Section 238A of the Code on 06.06.2018,
validity whereof has been upheld by this Court, it is not open to
contend that the limitation for filing application under Section 7
of the Code would be limited to Article 137 of the Limitation Act
and extension of prescribed period in certain cases could be only
under Section 5 of the Limitation Act. There is no reason to
exclude the effect of Section 18 of the Limitation Act to the
proceedings initiated under the Code. Section 18 of the
Limitation Act reads thus:
“18. Effect of acknowledgment in writing .—(1) Where,
before the expiration of the prescribed period for a suit or
application in respect of any property or right, an
acknowledgment of liability in respect of such property or
right has been made in writing signed by the party
against whom such property or right is claimed, or by any
person through whom he derives his title or liability, a
fresh period of limitation shall be computed from the time
when the acknowledgment was so signed.
(2) Where the writing containing the acknowledgment is
undated, oral evidence may be given of the time when it
was signed; but subject to the provisions of the Indian
Evidence Act, 1872 (1 of 1872), oral evidence of its
contents shall not be received.
Explanation.—For the purposes of this section,—
(a) an acknowledgment may be sufficient though it omits
to specify the exact nature of the property or right, or
avers that the time for payment, delivery, performance
or enjoyment has not yet come or is accompanied by a
refusal to pay, deliver, perform or permit to enjoy, or is
coupled with a claim to set off, or is addressed to a
person other than a person entitled to the property or
right;
(b) the word “signed” means signed either personally or by
an agent duly authorised in this behalf; and
33
(c) an application for the execution of a decree or order
shall not be deemed to be an application in respect of
any property or right.”
37.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 initiate action under Section 7 of the
Code. However, Section 7 comes into play when the corporate
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
34
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
debtor), as the case may be, acknowledge their liability to pay the
debt. Such acknowledgment, however, must be before the
expiration of the prescribed period of limitation including the
fresh period of limitation due to acknowledgment of the debt,
from time to time, for institution of the proceedings under Section
7 of the Code. Further, the acknowledgment must be of a
liability in respect of which the financial creditor can initiate
action under Section 7 of the Code.
38.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
35
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.
39.In the application under Section 7 of the Code filed by the
financial creditor on 13.02.2019, in Part IV thereof, it has been
clearly stated that the corporate debtor duly secured the credit
facilities from time to time. The relevant portion of paragraph 1
of Part IV of the application and paragraph 2 of the same Part
reinforces this position. The same reads thus:
“PART IV
PARTICULARS OF FINANCIAL DEBT
1.TOTAL AMOUNT OF
DEBT GRANTED
AND DATE(S) OF
DISBURSEMENT
…..
The aforesaid credit facilities duly
secured from time to time by the
Corporate Guarantor being the
Corporate Debtor herein as follow:
2.02.2007:
i.Letter of Guarantee for
Rs.9,60,00,000/;
17.02.2007:
i.Letter of Guarantee by the Corporate
36
Debtor;
30.08.2008:
i.Letter of Guarantee for
Rs.12,05,00,000/;
ii.Memorandum of Extension of
Mortgage;
iii.Declaration of the Director of the
Corporate Debtor;
Copies of all the aforesaid Documents are
annexed hereto and marked with Letter ‘F’,
‘F1’, ‘F2’, ‘F3’ and ‘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 19
th
January, 2007, the Financial
Creditor also send a Letter on 19
th
January,
2007 to the said Pantaloons Retail (India)
Limited being the SubLicensee whose
monthly Rent of Rs.21,45,000/ payable to
37
the said Principal Borrower intimating its
conformation sending therewith a copy of
the General Power of Attorney executed by
the Principal Borrower assigned its right of
collecting and receiving Monthly rents from
the said Pantaloons Retail (India) Limited in
favour of the Financial Creditor. A copy of
the said Letter of the Financial Creditor
dated 19.01.2007 is annexed hereto and
marked with Letter ‘H’.
Due to default in repayment in both the
said account of the Principal Borrower
maintained with the Financial Creditor at
its said Strand Road Branch, Kolkata the
said accounts maintained in the name of
the said principal Borrower with the
Financial Creditor duly were Classified and
declared as NPA with effect from
30.01.2010 and as such the Financial
Creditor on 19
th
February, 2010 issued
Recall Notice to the Principal Borrower as
well as its Corporate Guarantor being the
Corporate Debtor herein demanding a total
sum of Rs.12,35,11,548/ including
interest as of 31.01.2010. A copy of the said
Recall Notice dated 19.02.2010 is annexed
hereto and marked with Letter ‘I’. However,
both the Principal borrower and the
Corporate Debtor being the Corporate
Guarantor had defaulted in repayment of
the dues to the Applicant Bank. The
Principal Borrower vide its Letter dated
3
rd
March, 2012 requested the Financial
Creditor regarding outstanding of its
liability as on 29.02.2012 and on 27
th
May, 2015 requested to provide
Statement of accounts. Copies of both
the said letters dated 3.03.2012 and
27.05.2015 are annexed hereto and
marked with Letter ‘J’ and ‘J1’.
In reply of to the Notice of Demand
dated 3
rd
December, 2018 issued by the
Financial Creditor, the Corporate
Debtor vide its letter dated 8
th
38
December, 2018 not only admitted the
initial Loans Granted by the Financial
Creditor in favour of the Principal
Borrower but also providing Collateral
Security by the Corporate Debtor to
secure the liability of the principal
borrower. A copy of the said letter of the
Corporate Debtor dated 8.12.2018 is
annexed hereto and marked with Letter
‘K’.
2.AMOUNT CLAIMED
TO BE IN DEFAULT
AND THE DATE ON
WHICH THE
DEFAULT
OCCURRED
(ATTACH THE
WORKINGS FOR
COMPUTATION OF
AMOUNT AND DAYS
OF DEFAULT IN
TABULAR FORM)
Amount in default:
Rs.23,90,35,759.00 as on 31
st
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 Rs.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 14
th
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:
39
“PART V
PARTICULARS OF FINANCIAL DEBT
…..
5.THE LATEST AND
COMPLETE COPY
OF THE FINANCIAL
CONTRACT
REFLECTING ALL
AMENDMENTS AND
WAIVERS TO DATE
(ATTACH A COPY)
Attached to this application.
Sanction letters dated 19.01.2007 and
25.08.2008 and Letter dated 08.12.2018
written by the Corporate Debtor
acknowledging their liability towards
Financial CreditorUnion Bank of India.
8.LIST OF OTHER
DOCUMENTS
ATTACHED TO THIS
APPLICATION IN
ORDER TO PROVE
THE EXISTENCE OF
FINANCIAL DEBT,
THE AMOUNT AND
DATE OF DEFAULT.
Letter dated 08.12.2018 written by the
Corporate Debtor acknowledging their
liability towards Financial Creditor
Union Bank of India.”
(emphasis supplied)
40.Besides the clear assertion made in the application about
the last acknowledgment on 08.12.2018 resulting in fresh period
of limitation, the Tribunal adverted to the correspondence
exchanged between the principal borrower, corporate guarantor
(corporate debtor) and the financial creditor (Bank) during the
relevant period after 30.01.2010 until filing of application under
Section 7 of the Code on 13.02.2019. The last such
acknowledgement by the (corporate) guarantor/corporate debtor
taken note of by the NCLT as also the NCLAT reads thus:
“SURANA METALS LIMITED
12, BONFIELD LANE, KOLKATA700001
CIN:L27209WB1983PLC36141
40
SML/SB/2/1819/08
December 08, 2018
The Chief Manager,
Union Bank of India,
Asset Recovery Branch, Kolkata,
15, India Exchange Place,
KOLKATA700 001.
WITHOUT PREJUDICE
Sir,
SUB:Notice regarding initiation of
proceedings under the Insolvency
and Bankruptcy Code, 2016.
We acknowledge the receipt of your Notice being
No.ARB:KOL:198:1819 dated 03.12.2018 issued under
Section 4(1) of The Insolvency and Bankruptcy Code,
2016 and are really surprised to note its contents. We
deny each and every allegation contained therein
including the nature of loan and quantum of claim and
wish to inform you as under:
1.No Term Loan was sanctioned by you to M/s.
Mahaveer Construction, 12, Bonfield Lane, Kolkata
for a sum of Rs.9,45,00,000/ and
Rs.2,45,00,000/ as alleged by you in your above
stated letter. We understand that a loan for Rs.945
lacs and Rs.245 lacs was sanction by you to M/s
Mahaveer Construction of No.12, Bonfield Lane,
Kolkata700001 under “rent securitization” 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
41
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
Debutter Trust Estate. Our corporate guarantee
was issued in accordance with the provisions of
The Companies Act, 1956 only .
3. You have initiated legal proceedings for recovery of
your loan against Mahaveer Construction in the
Learned Debt Recovery Tribunal III, at Kolkata
treating them as defaulters and the said proceeding
is awaiting adjudication. We have not committed
any default as alleged by you and therefore cannot
be termed as a defaulter, far less to speak of
corporate defaulter, by any stretch of imagination.
You are, therefore, not authorized legally to initiate
further proceedings for the self same cause under
the pretext of The Insolvency and Bankruptcy Code,
2016.
4. Until the recovery proceedings initiated by you
against M/s Mahaveer Construction in the
Learned Court of Debt Recovery Tribunal III at
Kolkata attains finality you are, under the
provisions of law, not authorized to further
threaten us and/or initiate any proceedings
against us for recovery of loan granted to M/s
Mahaveer Construction.
5. The Insolvency and Bankruptcy Code, 2016
proceeds to secure the benefits of all creditors,
dealing with the assets of the debtor in The
Insolvency and Bankruptcy Code, 2016. Therefore
before proceeding under The Insolvency and
Bankruptcy Code, 2016 you have to surrender all
the securities for the benefit of all the creditors
(COC). That would also include the assets involved
in SARFAESI Act and RDBA, 1973 proceedings.
Thus the Bank has to choose before proceeding
under The Insolvency and Bankruptcy Code, 2016
whether to surrender the security or to exclusively
deal with the same as a secured creditor. If you
choose to deal with the property as secured creditor
42
you cannot proceed under The Insolvency and
Bankruptcy Code, 2016. O.A. and S.A. are the
remedies. Per contra if the Bank chooses to offer
and/or surrender its security then it has to waive
its right over the secured asset and proceed under
The Insolvency and Bankruptcy Code, 2016 but not
OA and SA.
6. You have not made demand against the Principal
Borrower – Mahaveer Construction. Thus
without any demand being made against/from
the Principal Borrower the issuance of deemed
notice upon the Corporate Guarantor is bad in
law.
7. The IBC cannot be made as a tool to recover
debt. Issuance of the purported notice is
nothing but a threat to recover debt. We are
commercially 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,
43
Yours faithfully,
For Surana Metals Limited.
Sd/
SURANA METALS LIMITED
12, BONFIELD LANE,
KOLKATA700 001”
(emphasis supplied)
Indeed, this communication has been sent without prejudice by
the corporate guarantor (corporate debtor). Nevertheless, it does
acknowledge the liability of M/s. Mahaveer Construction
(principal borrower); and of corporate guarantee having been
offered by the corporate debtor in that behalf. As aforesaid, the
liability of the corporate guarantor (corporate debtor) is
coextensive with that of the principal borrower and it gets
triggered the moment the principal borrower commits default in
paying the debt when it had become due and payable. The
liability of the corporate debtor (corporate guarantor) also triggers
when the principal borrower acknowledges its liability in writing
within the expiration of prescribed period of limitation, to pay
such outstanding dues and fails to pay the acknowledged debt.
Correspondingly, right to initiate action within three years from
such acknowledgment of debt accrues to the financial creditor.
That however, needs to be exercised within three years when the
44
right to sue/apply accrues, as per Article 137 of the Limitation
Act. This is the effect of Section 18 of the Limitation Act. In that,
a fresh period of limitation is required to be computed from the
time when the acknowledgment was so signed by the principal
borrower or the corporate guarantor (corporate debtor), as the
case may be, provided the acknowledgment is before expiration of
the prescribed period of limitation. Thus, the conclusion reached
by the NCLT and affirmed by the NCLAT on the basis of the
asservation in the application under Section 7 of the Code, read
with the relevant undisputed correspondence, is a possible view.
41.The appellant was at pains to persuade us that the
intention behind the communication dated 08.12.2018 sent to
the financial creditor by the corporate guarantor (corporate
debtor) is a triable matter, as it was sent without prejudice. We
are not impressed by this submission. The fact that the principal
borrower had availed of credit/loan and committed default and
that the (corporate) guarantor/corporate debtor had offered
guarantee in respect of the loan account is not disputed. What is
urged by the appellant is that the acknowledgment of liability to
pay the amount in question was by the principal borrower and
that acknowledgment cannot be the basis to proceed against the
45
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 respondent
financial 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/corporate debtor
vide last communication dated 08.12.2018. Thus, the
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application under Section 7 of the Code filed on 13.02.2019 is
within limitation.
43.As no other issue arises for our consideration — except the
two grounds urged by the appellant regarding the maintainability
of the application for initiating CIRP by the financial creditor
(Bank) under Section 7 of the Code, we dispose of this appeal
leaving all “other grounds” and contentions available to both the
sides open to be decided in the pending proceedings before the
NCLT. The same be decided uninfluenced by any observation(s)
made in the impugned judgment or in the present judgment.
44.Accordingly, this appeal is disposed of in the above terms
with no order as to costs. Pending applications, if any, also
stand disposed of.
………............................J.
(A.M. Khanwilkar)
………............................J.
(B.R. Gavai)
………............................J.
(Krishna Murari)
New Delhi;
March 26, 2021.
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Legal Notes
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