Supreme Court of India
LAXMI PAT SURANAversusUNION BANK OF INDIA & ANR.
- Citation
- 2021 INSC 220
- Decided
- 26 March 2021
- Disposal
- Disposed off
- Bench
- A M KHANWILKAR
Holding
Section 7 of the IBC can be invoked against a corporate guarantor who becomes a corporate debtor upon the principal borrower’s default, and the application filed on 13‑02‑2019 was within the limitation period due to a fresh period arising from acknowledgments under Section 18 of the Limitation Act.
Summary
Union Bank of India extended a term loan to Mahaveer Construction, a proprietorship firm, and obtained a guarantee from Surana Metals Ltd, a corporate entity. After the loan was declared a non‑performing asset on 30‑01‑2010, the bank filed an application under Section 7 of the Insolvency and Bankruptcy Code (IBC) in February 2019 seeking to initiate a corporate insolvency resolution process (CIRP) against Surana Metals Ltd. The appellant challenged the maintainability of the application on two grounds: (i) that Section 7 could not be invoked against a corporate guarantor when the principal borrower was not a corporate person, and (ii) that the application was barred by the three‑year limitation period. The NCLT and NCLAT held that the guarantor, upon the principal borrower’s default, becomes a "corporate debtor" and that successive acknowledgments of liability reset the limitation period under Section 18 of the Limitation Act. The Supreme Court affirmed these findings, holding that Section 7 is applicable to a corporate guarantor and that the application was filed within the refreshed limitation period. The appeal was dismissed.
Issues considered
- Whether a financial creditor can invoke Section 7 of the IBC against a corporate guarantor when the principal borrower is not a corporate person.
- Whether the application filed under Section 7 is barred by the three‑year limitation period.
Legislation cited
- Indian Contract Act, 1872s. 128
- Insolvency and Bankruptcy Code, 2016s. 238A, s. 3(8), s. 5(5A), s. 5(7), s. 5(8), s. 7
- Limitation Act, 1963s. 137, s. 18, s. 5
- Recovery of Debts Due to Banks and Financial Institutions Act, 1993s. 19
Subjects
Insolvency and Bankruptcy CodeSection 7Corporate debtorCorporate guarantorGuaranteeDefaultLimitation ActSection 18Recognition of liabilityNCLTNCLAT
Judgment
924 [2021]REPORTS
SUPREME COURT 2 S.C.R. 924 [2021] 2 S.C.R.
A LAXMI PAT SURANA
v.
UNION BANK OF INDIA & ANR.
(Civil Appeal No. 2734 of 2020)
B MARCH 26, 2021
[A. M. KHANWILKAR, B. R. GAVAI AND
KRISHNA MURARI, JJ.]
Insolvency and Bankruptcy Code, 2016:
C s. 7 - Initiation of corporate insolvency resolution process by
financial creditor – Application for initiating CIRP by Financial
Creditor-Bank u/s. 7 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 –
D Maintainability of – Held: 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
E 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 co-extensive and co-terminous with
that of the principal borrower to defray the debt, as predicated in s.
128 of the Contract Act – As a consequence of such default, the
status of the guarantor metamorphoses into a debtor or a corporate
F debtor if it happens to be a corporate person, within the meaning
of s. 3(8) of the Code – 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
G expression “corporate debtor” in s. 3(8) of the Code – 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) – Thus, action u/s. 7 of the Code could
be legitimately invoked even against a (corporate) guarantor being
H a corporate debtor.
924
LAXMI PAT SURANA v. UNION BANK OF INDIA 925
s. 7 - Application under – For initiation of corporate A
insolvency resolution process by financial creditor-Bank against
corporate debtor concerning guarantee offered by it in respect of
a loan account of the principal borrower, who committed default –
Application filed after three years from the date of declaration of
the loan account as Non-performing Asset, being the date of default,
B
if barred by limitation – Held: 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 C
Act – s. 18 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 must be before the expiration of the prescribed
period of limitation including the fresh period of limitation due to
D
acknowledgment of the debt, from time to time, for institution of the
proceedings u/s. 7 of the Code – On facts, NCLT as well as NCLAT
adverted to the acknowledgments by the principal borrower as well
as the corporate guarantor-debtor after declaration of NPA time
and again after 30.01.2010 and lastly on 08.12.2018 – View taken
by the NCLT and NCLAT that a fresh period of limitation is required E
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, is affirmed – Thus, the application u/s. 7 of the Code
filed on 13.02.2019 is within limitation – Limitation Act, 1963 - s.
F
18.
s. 3(8) – Expression ‘corporate debtor’ – Meaning of.
s. 5(5A) – Expression ‘corporate guarantor – Meaning of.
s. 5(7) – Expression ‘financial creditor’ – Meaning of.
G
Disposing of the appeal, the Court
HELD: 1.1 Section 7 of the Insolvency and Bankruptcy
Code is an enabling provision, which permits the financial creditor
to initiate Corporate Insolvency Resolution Process-CIRP against
H
926 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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. [Para 17][942-F]
B 1.2 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
C discharge his obligation in respect of amount of debt. For, the
obligation of the guarantor is co-extensive 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
D 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 Code to mean non-payment of debt when whole or any part
or installment of the amount of debt has become due or payable
and is not paid by the debtor or the corporate debtor, as the case
E may be. 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. [Paras 19 and 20][943-D-H]
F 1.3 The generic provision contained in Section 3(37)
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 s. 3 (37), it must follow that the lender
G 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
H
LAXMI PAT SURANA v. UNION BANK OF INDIA 927
would still be covered within the meaning of expression A
“corporate debtor” in Section 3(8) of the Code. [Para 21]
[944-A-C]
1.4 It is not possible to countenance the submission of the
appellant that as the principal borrower is not a corporate person,
the financial creditor could not have invoked remedy under B
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 C
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 co-extensively.
[Para 22][944-C-E]
1.5 Section 5(5A) of the Code defines the expression D
“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 is essentially in the
context of a corporate debtor against whom CIRP is to be initiated E
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 F
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. [Para 23][944-E-H] G
1.6 Accepting the submission 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 H
928 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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
B
corporate person, arising from the guarantee given by it, within
the meaning of Section 5(8) of the Code. [Para 24][945-A-C]
1.7 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
C 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
D 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), “claim” in
E 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. [Para 25][945-C-F]
1.8 The expression “corporate debtor” is defined in Section
3(8) which applies to the Code as a whole. Whereas, expression
F “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
G person other than corporate person. The liability of the guarantor
is co-extensive with that of the principal borrower. The remedy
under Section 7 is not for recovery of the amount, but is for re-
organisation and insolvency resolution of the corporate debtor
who is not in a position to pay its debt and commits default in that
H
LAXMI PAT SURANA v. UNION BANK OF INDIA 929
regard. It is open to the corporate debtor to pay off the debt, A
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. [Para 26][945-F-H; 946-A]
1.9 In law, the status of the guarantor, who is a corporate
person, metamorphoses into corporate debtor, the moment B
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. C
[Para 27][946-B]
1.10 A priori, it cannot be said 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. D
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). [Para
28][946-C-D] E
2.1 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 F
or the Debt Recovery Appellate Tribunal, as the case may be.
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 G
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. [Para 36][952-H;
953-A-C]
H
930 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 2.2 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
B
corporate person as NPA. Further, the expression “default” has
been defined in Section 3(12) to mean non-payment of “debt”
when whole or any part or installment 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
C 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 non-payment of debt. Thus, when the
principal borrower and/or the (corporate) guarantor admit and
D
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
E the 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
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
F
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
G which the financial creditor can initiate action under Section 7 of
the Code. [Para 37][954-A-F]
2.3 The NCLT as well as the NCLAT have adverted to the
acknowledgments by the principal borrower as well as the
H
LAXMI PAT SURANA v. UNION BANK OF INDIA 931
corporate guarantor - debtor after declaration of NPA from time A
to time and lastly on 08.12.2018. The fact that acknowledgment
within the limitation period was 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 co-extensive with
B
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 f rom the guarantee deed and
memorandum of mortgage, unless it expressly provides to the
contrary. [Para 38][954-G-H; 955-A] C
2.4 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 D
relevant period after 30.01.2010 until filing of application under
Section 7 of the Code on 13.02.2019, wherein it is clearly stated
that the corporate debtor duly secured the credit facilities from
time to time. The last such acknowledgement by the (corporate)
guarantor/corporate debtor taken note of by the NCLT as also
the NCLAT. Indeed, this communication has been sent without E
prejudice by the corporate guarantor - corporate debtor.
Nevertheless, it does acknowledge the liability of the principal
borrower; and of corporate guarantee having been offered by the
corporate debtor in that behalf. The liability of the corporate
guarantor - corporate debtor is co-extensive with that of the F
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 G
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
H
932 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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
B
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 is a possible view.
[Para 40][957-G-H; 961-D-H; 962-A]
C 2.5 It is the appellant’s submission 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
D 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 co-extensive with that of the
E principal borrower and more so when it activates from the written
acknowledgment of liability and failure of both to discharge that
liability. [Para 41][962-C-E]
2.6 The view taken by the NCLT and which commended to
the NCLAT-that a fresh period of limitation is required to be
F 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, is affirmed. Thus, the
application under Section 7 of the Code filed on 13.02.2019 is
G within limitation. [Para 42][962-F]
Gaurav Hargovindbhai Dave vs. Asset Reconstruction
Company (India) Limited & Anr. (2019) 10 SCC 572 :
[2019] 13 SCR 224 - distinguished
H
LAXMI PAT SURANA v. UNION BANK OF INDIA 933
Shanti Conductors Private Limited v. Assam State A
Electricity Board & Ors. (2020) 2 SCC 677 : [2019] 16
SCR 252; Babulal Vardharji Gurjar vs. Veer Gurjar
Aluminium Industries Private Limited & Anr. (I) (2019)
15 SCC 209; B.K. Educational Services Private Limited
vs. Parag Gupta and Associates (2019) 11 SCC 633:
B
[2018] 12 SCR 794; Vashdeo R. Bhojwani vs.
Abhyudaya Co-operative Bank Limited & Anr. (2019)
9SCC 158 : [2019] 12 SCR 75; Sagar Sharma & Anr.
vs. Phoenix Arc Private Limited & Anr. (2019) 10 SCC
353; Bank of Bihar Ltd. vs. Dr. Damodar Prasad &
Anr. [1969] 1 SCR 620; Jignesh Shah and Anr. vs. C
Union of India and Anr. (2019) 10 SCC 750 : [2019]
12 SCR 678; Babulal Vardharji Gurjar vs. Veer Gurjar
Aluminium Industries Private Limited & Anr. (II) (2020)
15 SCC 1 - referred to.
Case Law Reference D
[2019] 16 SCR 252 referred to Para 10
(2019) 15 SCC 209 referred to Para 11
[2018] 12 SCR 794 referred to Para 11
[2019] 12 SCR 75 referred to Para 11 E
(2019) 10 SCC 353 referred to Para 11
[(1969] 1 SCR 620 referred to Para 12
[2019] 13 SCR 224 distinguished Para 31
[2019] 12 SCR 678 referred to Para 32 F
(2020) 15 SCC 1 referred to Para 33
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2734
of 2020
From the Judgment and Order dated 19.03.2020 of the National G
Company Law Appellate Tribunal, New Delhi in Company Appeal (AT)
(Insolvency) No. 77 of 2020.
H
934 SUPREME COURT REPORTS [2021] 2 S.C.R.
A Abhijit Sinha, Sandeep Nagar, Ashutosh Dubey, Abhishek
Chauhan, Ms. Rajshri D., V.S. Rawat, Advs. for the Appellant.
O. P. Gaggar, Ms. Astha Prasad, Aditya Gaggar, Advs. for the
Respondents.
The Judgment of the Court was delivered by
B
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
C 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
D 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 Asset2, being the date of default,
is not barred by limitation?
E 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 forty-five lakhs only),
respectively. The loan amount was disbursed to the Principal Borrower.
F
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 well as, the Corporate Debtor, demanding
G repayment of outstanding amount of Rs.12,35,11,548/- (Rupees twelve
crore thirty-five lakhs eleven thousand five hundred forty-eight only).
1
for short, “the Code”
2
for short, “NPA”
3
for short, “the Financial Creditor”
4
for short, “the Principal Borrower”
H 5
for short, the “Corporate Debtor”
LAXMI PAT SURANA v. UNION BANK OF INDIA 935
[A. M. KHANWILKAR, J.]
3. The Financial Creditor then filed an application under Section A
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 B
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 C
not committed any default in repayment of the stated outstanding amount.
This communication was sent without prejudice.
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 D
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 E
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 F
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 8.12.2018 and thus the application filed on 13.2.2019 G
was within limitation.
6
for short, “the 1993 Act”
7
for short, “DRT”
8
for short, “the CIRP”
9
for short, the “Adjudicating Authority” or “NCLT”, as the case may be. H
936 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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.
B
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: -
C “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.
D 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.
E 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
F 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
G 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: -
10
H for short, “NCLAT”
LAXMI PAT SURANA v. UNION BANK OF INDIA 937
[A. M. KHANWILKAR, J.]
“2. DEFINITION OF ‘PROPRIETORSHIP FIRMS’ A
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. B
Though section 2(f) of the Code now includes the words
“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 C
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. D
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.” E
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 F
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 G
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) H
938 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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 which is extended in respect of a loan given
to a “corporate person”, coming within the purview of Part II of the
B
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
C 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
D 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
E corporate debtor and its corporate guarantor. For this
purpose, the term “corporate guarantor” will also be
defined.”
(emphasis supplied)
F 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.
G
10. As regards maintainability of the subject application under
Section 7 on the ground of being barred by limitation, it is urged 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
H application was ex facie barred by limitation in view of Article 137 of
LAXMI PAT SURANA v. UNION BANK OF INDIA 939
[A. M. KHANWILKAR, J.]
the Limitation Act, 196311. It is urged that Section 18 of the Limitation A
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
self-contained code. Section 7 thereof merely refers to the factum of
B
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 C
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 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 Form-1 filed by the financial creditor
D
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 E
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
F
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 so-called acknowledgment by
the Principal Borrower, therefore, cannot bind the Corporate Debtor. G
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
11
for short, “the Limitation Act”
12
(2020) 2 SCC 677 H
940 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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
B
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
C Dave vs. Asset Reconstruction Company (India) Limited & Anr.15,
Vashdeo R. Bhojwani vs. Abhyudaya Co-operative Bank Limited &
Anr.16 and Sagar Sharma & Anr. vs. Phoenix Arc Private Limited &
Anr. 17.
12. The Financial Creditor has refuted the plea regarding
D 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 well-
established by now (see –Bank of Bihar Ltd. vs. Dr. Damodar Prasad
E & 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
F 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 “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
G 13
(2019) 15 SCC 209
14
(2019) 11 SCC 633
15
(2019) 10 SCC 572
16
(2019) 9 SCC 158
17
(2019) 10 SCC 353
18
for short, “the Contract Act”
19
H (1969) 1 SCR 620
LAXMI PAT SURANA v. UNION BANK OF INDIA 941
[A. M. KHANWILKAR, J.]
against payment of interest for which the Corporate Debtor stood A
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
B
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 C
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 open to the Financial Creditor to maintain the D
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 E
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, F
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 G
the parties before the Adjudicating Authority on the question of limitation.
It is not a 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 H
942 SUPREME COURT REPORTS [2021] 2 S.C.R.
A on 13.2.2019 was within limitation. The Financial Creditor-respondent
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 —
B 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
C dues and to establish an Insolvency and Bankruptcy Board of India, and
for matters connected therewith or incidental thereto.
ISSUE (i):
16. Section 7 of the Code propounds the manner in which corporate
insolvency resolution process (CIRP) may be initiated by the “financial
D 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
E Authority when a default is committed by it. The expression “default” is
expounded in Section 3(12) to mean non-payment 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
F 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.
18. The term “financial creditor” has been defined in Section 5(7)
G
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
H other categories specified therein, it could be a debt along with interest,
LAXMI PAT SURANA v. UNION BANK OF INDIA 943
[A. M. KHANWILKAR, J.]
which is disbursed against the consideration for the time value of money A
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 sub-clauses
(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
B
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 committed by the principal borrower. C
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
D
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 E
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 F
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 Code to mean non-payment 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. G
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.
H
944 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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
B
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.
C 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
D 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.
E
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
F 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
G 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
H payment of such a debt.
LAXMI PAT SURANA v. UNION BANK OF INDIA 945
[A. M. KHANWILKAR, J.]
24. Accepting the aforementioned argument of the appellant would A
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”
B
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. C
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 D
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 E
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. F
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 G
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 H
946 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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
B (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
C 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
D 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
E 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.
F 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
G
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
H judgment as follows:
LAXMI PAT SURANA v. UNION BANK OF INDIA 947
[A. M. KHANWILKAR, J.]
“7. It is seen from the evidence on record that not only the A
original borrower but also the Corporate Debtor admitted
and acknowledged the debt time and again on 27.05.2015
(exhibit J-1) 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.
B
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 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 C
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.”
D
(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 E
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.
F
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 G
Bank to M/s Mahaveer Construction also that the Corporate
Debtor had acknowledged its debt on 16.9.2010, 3.3.2012,
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. H
948 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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.”
B (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
C (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
D 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,
E 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
F 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. …”
(emphasis supplied)
33. We may straight away advert to the decision of this Court in
G 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:
20
(2019) 10 SCC 750
H 21
(2020) 15 SCC 1
LAXMI PAT SURANA v. UNION BANK OF INDIA 949
[A. M. KHANWILKAR, J.]
“32. When Section 238-A of the Code is read with the above A
noted consistent decisions of this Court in Innoventive
Industries22, B.K. Educational Services23, Swiss Ribbons24, K.
Sashidhar 25, Jignesh Shah 26, Vashdeo R. Bhojwani27, Gaurav
Hargovindbhai Dave 28 and Sagar Sharma29 respectively, the
following basics undoubtedly come to the fore:
B
(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 C
corporate debtor;
(c) that intention of the Code is not to give a new lease of
life to debts which are time-barred;
(d) that the period of limitation for an application seeking
initiation of CIRP under Section 7 of the Code is governed by D
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, that is to
say, that the right to apply under the Code accrues on the date E
when default occurs;
(f) that default referred to in the Code is that of actual non-
payment by the corporate debtor when a debt has become due
and payable; and
F
(g) that if default had occurred over three years prior to
the date of filing of the application, the application would be time-
barred save and except in those cases where, on facts, the delay
in filing may be condoned; and
22
Innoventive Industries Ltd. vs. ICICI Bank, (2018) 1 SCC 407 G
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 H
950 SUPREME COURT REPORTS [2021] 2 S.C.R.
A (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
B 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
C important to first advert to this Court’s decision in B.K.
Educational Services (P) Ltd.30 in which Section 238-A of the
Code was referred to, which states as follows:
“238-A. Limitation.—The provisions of the Limitation
Act, 1963 (36 of 1963) shall, as far as may be, apply to
D 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
E Law Committee of March 2018 was referred to 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 238-A into the Code. This is to be found in the Report
F 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
G 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
30
supra at footnote 14
31
H Ravula Subba Rao vs. CIT, AIR 1956 SC 604
LAXMI PAT SURANA v. UNION BANK OF INDIA 951
[A. M. KHANWILKAR, J.]
the issue and unanimously agreed that the intent of the A
Code could not have been to give a new lease of life to
debts which are time-barred. It is settled law that when a
debt is barred by time, the right to a remedy is time-barred.32
This requires being read with the definition of “debt” and
“claim” in the Code. Further, debts in winding-up
B
proceedings cannot be time-barred33, and there appears to
be no rationale to exclude the extension of this principle of
law to the Code.
28.2. Further, non-application of the law on limitation creates
the following problems: first, it re-opens the right of financial
and operational creditors holding time-barred debts under C
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 D
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 re-
opens the right of claimants (pursuant to issuance of a public
notice) to file time-barred claims with the IRP/RP, which E
may potentially be a part of the resolution plan. Such a
resolution plan restructuring time-barred 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 F
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 G
Limitation Act may be on a case-to-case basis. It was
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 H
952 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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)”
B (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
C manner impact the separate and independent remedy of a winding-
up 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
D 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 winding-up proceeding is to be filed, by somehow
keeping the debt alive for the purpose of the winding-up
proceeding.”
E
(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
F 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 case-to-case basis. Indeed, the
purport of amendment in the Code was not to reopen or revive the time
G 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
H applicable to the proceedings under the Code, as far as may be applicable.
LAXMI PAT SURANA v. UNION BANK OF INDIA 953
[A. M. KHANWILKAR, J.]
For, Section 238A predicates that the provisions of Limitation Act shall, A
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. 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
B
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 C
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 D
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 E
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 F
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 G
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.”
H
954 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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
B
“default” has been defined in Section 3(12) to mean non-payment 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
C 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 non-payment 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
D
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
E 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
F
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
G 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 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
H of the guarantor being coextensive with the principal borrower under
LAXMI PAT SURANA v. UNION BANK OF INDIA 955
[A. M. KHANWILKAR, J.]
Section 128 of the Contract Act, it triggers the moment principal borrower A
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 B
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 C
PARTICULARS OF FINANCIAL DEBT
1. TOTAL AMOUNT OF …..
DEBT GRANTED The aforesaid credit facilities duly secured from time to
AND DATE(S) OF time by the Corporate Guarantor being the Corporate
DISBURSEMENT Debtor herein as follow:
2.02.2007: D
i. Letter of Guarantee for Rs.9,60,00,000/-;
17.02.2007:
i. Letter of Guarantee by the Corporate 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; E
Copies of all the aforesaid Documents are annexed hereto
and marked with Letter ‘F’, ‘F-1’, ‘F-2’, ‘F-3’ and ‘F-4’.
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
Deedbeing No. for the year in respect of its immovable F
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 G
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 ‘G-1’.
H
956 SUPREME COURT REPORTS [2021] 2 S.C.R.
A Initially while sanctioning the Term Loan-1 dated 19th
January, 2007, the Financial Creditor also send a Letter on
19th January, 2007 to the said Pantaloons Retail (India)
Limited being the Sub-Licensee whose monthly Rent of
Rs.21,45,000/- payable to 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
B 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
C 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
D 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.
rd
The Principal Borrower vide its Letter dated 3 March,
2012 requested the Financial Creditor regarding
outstanding of its liability as on 29.02.2012 and on 27 th
E 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 ‘J-1’.
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 8th December, 2018 not only
F 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 Amount in default:-
G TO BE IN DEFAULT Rs.23,90,35,759.00 as on 31 st January, 2019 as per the
AND THE DATE ON following particulars:- Statement of Account of the
WHICH THE Principal Borrower is attached herewith.
DEFAULT
OCCURRED Date of default was 30/01/2010 and the total claim of the
(ATTACH THE Financial Creditor as of the date of default is
WORKINGS FOR Rs.11,76,80,270.00
H
LAXMI PAT SURANA v. UNION BANK OF INDIA 957
[A. M. KHANWILKAR, J.]
COMPUTATION OF However, since the Principal Borrower as well as its A
AMOUNT AND DAYS Corporate Guarantor being the Corporate Debtor herein
OF DEFAULT IN had defaulted to pay any part or portion of the outstanding
TABULAR FORM) 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 Tribunal-3, Kolkata
being O.A. No.130 of 2010 which is still pending for final
adjudication and in that proceeding the said Principal B
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 sub-Licensee.”
(emphasis supplied in italics)
Again, in Part V specifying about the particulars of financial debt C
in paragraphs 5 and 8, it is mentioned as follows:
“PART V
PARTICULARS OF FINANCIAL DEBT
….. D
5. THE LATEST AND Attached t o this application.
COMPLETE COPY OF Sanction letters dated 19.01.2007 and 25.08.2008 and Letter
THE FINANCIAL dated 08.12.2018 written by the Corporate Debtor
CONTRACT acknowledging their liability towards Financial Creditor-
REFLECTING ALL Union Bank of India.
AMENDMENTS AND
WAIVERS TO DATE
(ATTACH A COPY) E
8. LIST OF OTHER Letter dated 08.12.2018 written by the Corporate Debtor
DOCUMENTS acknowledging their liability towards Financial Creditor-
ATTACHED TO THIS Union Bank of India.”
APPLICATION IN
ORDER TO PROVE
THE EXISTENCE OF
FINANCIAL DEBT,
THE AMOUNT AND F
DATE OF DEFAULT.
(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 G
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:
H
958 SUPREME COURT REPORTS [2021] 2 S.C.R.
A “SURANA METALS LIMITED
12, BONFIELD LANE, KOLKATA-700001
CIN:L27209WB1983PLC36141
SML/SB/2/18-19/08
B December 08, 2018
The Chief Manager, WITHOUT PREJUDICE
Union Bank of India,
Asset Recovery Branch, Kolkata,
15, India Exchange Place,
C KOLKATA-700 001.
Sir,
SUB: Notice regarding initiation of proceedings under
the Insolvency and Bankruptcy Code, 2016.
D We acknowledge the receipt of your Notice being
No.ARB:KOL:198:18-19 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:
E
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
F Mahaveer Construction of No.12, Bonfield Lane, Kolkata-
700001 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,
G 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
H Receiver appointed by the Ld. DRT-III, Kolkata, without
LAXMI PAT SURANA v. UNION BANK OF INDIA 959
[A. M. KHANWILKAR, J.]
any intimation to M/s Mahaveer Construction. As such A
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 borrowers and/or the
corporate debtor as claimed by you in your aforesaid
notice. B
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 C
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 D
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.
E
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 F
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 G
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 H
960 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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
B
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,
C 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
D 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
E 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
F securitization. Thus the Bank cannot proceed under The
Insolvency and Bankruptcy Code, 2016.
8. There is no mis-match between the asset and liability. In
fact asset held as security is for more valuable than
liability. Thus venturing upon the provisions of The
G 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.
H
LAXMI PAT SURANA v. UNION BANK OF INDIA 961
[A. M. KHANWILKAR, J.]
Under the circumstances it is most humbly requested to A
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, B
Yours faithfully,
For Surana Metals Limited.
Sd/- C
SURANA METALS LIMITED
12, BONFIELD LANE,
KOLKATA-700 001"
(emphasis supplied)
D
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 E
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 F
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 G
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 H
962 SUPREME COURT REPORTS [2021] 2 S.C.R.
A 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
B 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
C 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
D 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.
E 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
F 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
G 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
H
LAXMI PAT SURANA v. UNION BANK OF INDIA 963
[A. M. KHANWILKAR, J.]
uninfluenced by any observation(s) made in the impugned judgment or A
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.
B
Nidhi Jain Appeal disposed of.
C
D
E
F
G
H
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