SUPREME COURT HOLDS THAT INSOLVENCY PROCEEDING IS MAINTAINABLE AGAINST A CORPORATE GUARANTOR OF A NON CORPORATE PRINCIPAL BORROWER

The Supreme Court of India in the case of Laxmi Pat Surana versus Union Bank of India & Anr. [Civil Appeal No. 2734/2020], vide Judgment dated 26.03.2021 held that #CorporateInsolvencyResolutionProceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘#IBC’) is maintainable against a #CorporateGuarantor even if the Principal Borrower is not a corporate person within the meaning of Section 3(8) of the IBC. As per this Section a “#corporatedebtor” means a corporate person who owes a debt to any person.

In this case, the Union Bank of India (the ‘Financial Creditor’), provided credit facility to M/s. Mahaveer Construction (the ‘Principal Borrower’), a proprietary firm of Shri Laxmi Pat Surana (the ‘Appellant’), vide two Loan Agreements in years 2007 and 2008 for a term loan of Rs.9, 60,00,000/­ (Rupees Nine Crore Sixty Lacs Only) and an additional amount of Rs. 2,45,00,000/­ (Rupees Two Crore Forty­Five Lacs Only), respectively.

M/s. Surana Metals Limited (the ‘Corporate Debtor’), of which the Appellant is also a Promoter/Director, had offered guarantee to the aforesaid two loan accounts of the Principal Borrower. The said loan accounts were declared Non-Performing Accounts (NPA) on 30.01.2010. The Financial Creditor issued a Notice to the Principal Borrower demanding repayment of the amounts however on non-fulfillment of the said Notice by the Principal Borrower, the Financial Creditor issued another Notice to the Corporate Debtor on 03.12.2018 for payment of its dues under Section 4(1) of the IBC. The said Notice was replied by the Corporate Debtor stating that it is not the Principal Borrower and did not owe any financial debt to the Financial Creditor. It further stated that it had not committed any default in repayment of the stated outstanding amount.

Consequently, the Financial Creditor filed an Application under Section 7 of the IBC against the Corporate Debtor, before the National Company Law Tribunal, Kolkata (‘NCLT’) on 13.02.2019. The maintainability of the said Application was challenged on the ground that the Principal Borrower was not a ‘corporate person’ being a proprietorship firm. It was also challenged that the date of default was 30.01.2010 whereas, the Application had been filed on 13.02.2019 therefore it was barred by limitation that is beyond the period of three years.

The NCLT, vide its Order dated 06.12.2019 held that the action had been initiated against the Corporate Guarantor, being coextensively liable to repay the debt of the Principal Borrower. As the Principal Borrower/Corporate Debtor had failed to repay the debt the Guarantor became liable and could be proceeded under Section 7 of the IBC. With regards to the limitation period the NCLT pointed out that the Principal Borrower and also the Corporate Debtor had admitted as well as acknowledged the debt time and again and lastly on 08.12.2018. Thus, the Application filed on 13.02.2019 was within limitation. The said Order dated 06.12.2019 was appealed before the National Company Law Appellate Tribunal (‘NCLAT’). The NCLAT, vide its Judgment dated 19.03.2020 upheld the NCLT Order dated 06.12.2019.

The Corporate Debtor being aggrieved filed an appeal against the NCLAT Judgment dated 19.03.2020 before the Supreme Court reiterating the same objections referred to above. The Supreme Court framed the following issues:

(1) Whether an action under Section 7 of the IBC can be initiated by the Financial Creditor against a corporate person (being a Corporate Debtor) concerning 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?

The Supreme Court while dealing with this issue said that the provisions for initiation of insolvency of firms and/or individuals in terms of Part III of the IBC have still not been notified. It further observed that 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 IBC cannot apply in respect of “debts” of an entity who is not a “corporate person”.

Referring to the language of Section 7 of the IBC, the Supreme Court clarified that Section 7 is an enabling provision, which permits the financial creditor to initiate insolvency proceedings against a corporate debtor. Supreme Court observed that a corporate person assumes the status of a corporate debtor when it offers a guarantee to repay, in case there is a default in payment of debts by the principal borrower or debtor, be it a corporate person or otherwise. In such a situation, the corporate debtor can be the principal borrower.

Supreme Court observed that the obligation of the guarantor is coextensive and coterminous with that of the principal borrower to defray the debt, as provided in Section 128 of the Contract Act. Consequently, in case of such default, the status of the guarantor converts into a debtor or a corporate debtor if it happens to be a corporate person, within the meaning of Section 3(8) of the IBC. Therefore, the objection as to the maintainability of the Application was negated by the Supreme Court and it held that the Principal Borrower need not be a ‘Corporate Person’ for insolvency process to be initiated against it if a company which stood as its guarantor is a corporate person.

(2) Whether an application under Section 7 of the IBC filed after 3 years from the date of declaration of the loan account as NPA, being the date of default, is barred by limitation?

The Supreme Court upheld the view taken by the NCLT and the NCLAT in its respective Orders. The Supreme Court affirmed the decision of the NCLAT that a fresh period of limitation is required to be computed from the date of acknowledgment of debt by the Principal Borrower and in particular the Corporate Guarantor/Debtor, lastly on 08.12.2018. Thus, Supreme Court held that the Application under Section 7 of the IBC filed on 13.02.2019 was within limitation.

Lakshmi Vishwakarma

Senior Legal Associate

The Indian Lawyer & Allied Services