2021 Supreme(SC) 161

SUPREME COURT OF INDIA
A.M. Khanwilkar, B.R. Gavai and Krishna Murari, JJ.
LAXMI PAT SURANA – APPELLANT
Versus
UNION BANK OF INDIA AND ANOTHER – RESPONDENT
Civil Appeal No. 2734 of 2020
Decided on : 26-03-2021

IMPORTANT POINTS
(1) Initiation of Corporate Insolvency Resolution Proceeding – Action under Section 7 of Code could be legitimately invoked even against a (corporate) guarantor being a corporate debtor.
(2) Principal borrower may or may not be a corporate person, but if a corporate person extends guarantee for loan transaction concerning a principal borrower not being a corporate person, it would still be covered within meaning of expression “corporate debtor” in Section 3(8) of Insolvency and Bankruptcy Code, 2016.
(3) Provisions of Limitation Act have been made applicable to proceedings under Insolvency and Bankruptcy Code, 2016, as far as may be applicable. There is no reason to exclude effect of Section 18 of Limitation Act to proceedings initiated under the Code.

Headnote:

(A) Insolvency and Bankruptcy Code, 2016 – Section 7 – Contract Act, 1872 – Section 128 – Initiation of Corporate Insolvency Resolution Proceeding – Section 7 is an enabling provision which permits financial creditor to initiate CIRP against a corporate debtor – Corporate debtor can be principal borrower – It can also be a corporate person assuming status of corporate debtor having offered guarantee, if and when principal borrower/debtor (be it a corporate person or otherwise) commits default in payment of its debt – Right or cause of action would enure to lender (financial creditor) to proceed against principal borrower, as well as guarantor in equal measure in case they commit default in repayment of amount of debt acting jointly and severally – It would still be a case of default committed by guarantor itself, if and when principal borrower fails to discharge his obligation in respect of amount of debt – For, obligation of guarantor is co-extensive and co-terminous with that of principal borrower to defray debt – As a consequence of such default, status of guarantor metamorphoses into a debtor or a corporate debtor if it happens to be a corporate person, within meaning of Section 3(8) of Code – A priori, in context of provisions of Code, if guarantor is a corporate person (as defined in Section 3(7) of Code), it would come within purview of expression “corporate debtor”, within meaning of Section 3(8) of Code – Lender would be a financial creditor within meaning of Code – Principal borrower may or may not be a corporate person, but if a corporate person extends guarantee for loan transaction concerning a principal borrower not being a corporate person, it would still be covered within meaning of expression “corporate debtor” in Section 3(8) of Code. (Paras 17, 19, 20 and 21)

(B) Insolvency and Bankruptcy Code, 2016 – Sections 7 and 3(11) – Contract Act, 1872 – Section 128 – Initiation of Corporate Insolvency Resolution Proceeding – There is no reason to limit width of Section 7 of Code despite law permitting initiation of CIRP against corporate debtor, if and when default is committed by principal borrower – Liability and obligation of guarantor to pay outstanding dues would get triggered co-extensively – 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 corporate person, arising from guarantee given by it, within meaning of Section 5(8) of Code – Liability of guarantor is coextensive with that of principal borrower – Remedy under Section 7 is not for recovery of amount, but is for reorganisation and insolvency resolution of corporate debtor who is not in a position to pay its debt and commits default in that regard – It is open to corporate debtor to pay off debt, which had become due and payable and is not paid by principal borrower, to avoid rigours of Chapter II of Code in general and Section 7 in particular – In law, status of 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 – Action under Section 7 of Code could be legitimately invoked even against a (corporate) guarantor being a corporate debtor – Definition of “corporate guarantor” in Section 5(5A) of Code needs to be so understood. (Paras 22, 24, 26 and 27)

(C) Insolvency and Bankruptcy Code, 2016 – Sections 7 and 238A – Limitation Act, 1963 – Section 18 – Initiation of Corporate Insolvency Resolution Proceeding – Limitation – Provisions of Limitation Act have been made applicable to proceedings under the Code, as far as may be applicable – There is no reason to exclude effect of Section 18 of Limitation Act to proceedings initiated under the Code – Section 18 of 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 Code enures – Section 18 of Limitation Act would come into play every time when principal borrower and/or the corporate guarantor (corporate debtor), as the case may be, acknowledge their liability to pay debt – Such acknowledgment, however, must be before expiration of prescribed period of limitation including fresh period of limitation due to acknowledgment of debt, from time to time, for institution of proceedings under Section 7 of Code – Acknowledgment must be of a liability in respect of which financial creditor can initiate action under Section 7 of Code – Fact that acknowledgment within limitation period was only by principal borrower and not guarantor, would not absolve guarantor of its liability flowing from letter of guarantee and memorandum of mortgage – Liability of guarantor being co-extensive with principal borrower under Section 128 of Contract Act, it triggers the moment principal borrower commits default in paying acknowledged debt – This is a legal fiction – Such liability of guarantor would flow from guarantee deed and memorandum of mortgage, unless it expressly provides to the contrary. (Paras 36, 37 and 38)

Facts of the case:

Two central issues arise for our determination in this appeal: (i) Whether an action under Section 7 of Insolvency and Bankruptcy Code, 2016 can be initiated by financial creditor (Bank) against a corporate person (being a corporate debtor) concerning guarantee offered by it in respect of a loan account of 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 Non-performing Asset, being the date of default, is not barred by limitation?

Findings of Court:

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 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.

Result : Appeal disposed of with observations.