Thursday 13 May 2021

Whether the borrower can initiate an insolvency proceeding against the corporate person who is a guarantor regarding the loan account given to the partnership firm?

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. {Para 23}

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  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.


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. 

27. In law, the status of the guarantor, who is a corporate

person, metamorphoses into corporate debtor, the moment

principal borrower (regardless of not being a corporate person)

commits default in payment of debt which had become due and

payable. Thus, action under Section 7 of the Code could be

legitimately invoked even against a (corporate) guarantor being a corporate debtor. The definition of “corporate guarantor” in

Section 5(5A) of the Code needs to be so understood.

28. A priori, we find no substance in the argument advanced

before us that since the loan was offered to a proprietary firm

(not a corporate person), action under Section 7 of the Code

cannot be initiated against the corporate person even though it

had offered guarantee in respect of that transaction. Whereas,

upon default committed by the principal borrower, the liability of the company (corporate person), being the guarantor, instantly triggers the right of the financial creditor to proceed against the corporate person (being a corporate debtor). Hence, the first question stands answered against the appellant. 

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2734 OF 2020

LAXMI PAT SURANA  Vs  UNION BANK OF INDIA 

Author: A.M. Khanwilkar, J.

Bench: A.M. Khanwilkar, Dinesh Maheshwari,B R Gawai JJ

Dated: March 26, 2021.

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, 20161 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

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

Asset2,

being the date of default, is not barred by

limitation?

2. Briefly stated, respondent No. 1 bank3 extended credit

facility to M/s. Mahaveer Construction4, 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 Limited5, 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, 19936 against the Principal Borrower before the

Debt Recovery Tribunal7 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 Proceeding8 against the Corporate Debtor,

before the National Company Law Tribunal, Kolkata9. 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 Tribunal10, 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: “

23.1 Section 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, 196311. 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 Associates14,

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, 187218.

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 subclause

(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.


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

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

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.


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

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

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

(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 Industries22, B.K. Educational

Services23, Swiss Ribbons24, K. Sashidhar25, Jignesh

Shah26, Vashdeo R. Bhojwani27, Gaurav Hargovindbhai

Dave28 and Sagar Sharma29 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. 64445,

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

timebarred33,

and there appears to be no rationale

to exclude the extension of this principle of law to

the Code.

28.2. Further, nonapplication

of the law on

limitation creates the following problems: first, it reopens

the right of financial and operational creditors

holding timebarred

debts under the Limitation Act

to file for CIRP, the trigger for which is default on a

debt above INR one lakh. The purpose of the law of

limitation is ‘to prevent disturbance or deprivation of

what may have been acquired in equity and 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 counterintuitive.

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

(pursuant to issuance of a public notice) to file timebarred

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 casetocase

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 windingup

proceeding.”

(emphasis supplied)

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

(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

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 19th January, 2007, the Financial

Creditor also send a Letter on 19th 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 19th 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

3rd March, 2012 requested the Financial

Creditor regarding outstanding of its

liability as on 29.02.2012 and on 27th

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 3rd December, 2018 issued by the

Financial Creditor, the Corporate

Debtor vide its letter dated 8th

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 31st January,

2019 as per the following particulars:Statement

of Account of the Principal

Borrower is attached herewith.

Date of default was 30/01/2010 and the

total claim of the Financial Creditor as of

the date of default is 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 14th July, 2010 filed an

application Under Section 19 of the RDDB

Act, 1993 before the Debts Recovery

Tribunal3,

Kolkata being O.A. No.130 of

2010 which is still pending for final

adjudication and in that proceeding the

said Principal Borrower as well as

Corporate Debtor are appearing and several

interim orders have been passed from time

to time related to collection of rents from

the subLicensee.”

(emphasis supplied in italics)

Again, in Part V specifying about the particulars of financial debt

in paragraphs 5 and 8, it is mentioned as follows:

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 CreditorUnion

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

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

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


corporate guarantor (corporate debtor). Section 18 of the

Limitation Act, however, posits that a fresh period of limitation

shall be computed from the time when the party against whom

the right is claimed acknowledges its liability. The financial

creditor has not only the right to recover the outstanding dues by

filing a suit, but also has a right to initiate resolution process

against the corporate person (being a corporate debtor) whose

liability is coextensive with that of the principal borrower and

more so when it activates from the written acknowledgment of

liability and failure of both to discharge that liability.

42. Suffice it to conclude that there is no substance even in the

second ground urged by the appellant regarding the

maintainability of the application filed by the respondentfinancial

creditor under Section 7 of the Code on the ground of

being barred by limitation. Instead, we affirm the view taken by

the NCLT and which commended to the NCLAT — that a fresh

period of limitation is required to be computed from the date of

acknowledgment of debt by the principal borrower from time to

time and in particular the (corporate) guarantor/corporate debtor

vide last communication dated 08.12.2018. Thus, the

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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