# LAXMI PAT SURANA v. UNION BANK OF INDIA & ANR

- **Citation:** [2021] 2 S.C.R. 924
- **Court:** Supreme Court of India
- **Decided:** 2021-03-26
- **Case number:** Civil Appeal No. 2734 of 2020
- **Bench:** A. M. Khanwilkar, B. R. Gavai, Krishna Murari
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/laxmi-pat-surana-v-union-bank-of-india-anr-34944
- **Pages:** 40

## Headnote

Insolvency and Bankruptcy Code, 2016:
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 -
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
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
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
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
a corporate debtor.
[2021] 2 S.C.R. 924
924
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s. 7 - Application under - For initiation of corporate
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,
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
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
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
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.
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.
Disposing of the appeal, the Court
H

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[2021] 2 S.C.R.
LAXMI PAT SURANA
v.
UNION BANK OF INDIA & ANR.
(Civil Appeal No. 2734 of 2020)
MARCH 26, 2021
[A. M. KHANWILKAR, B. R. GAVAI AND
KRISHNA MURARI, JJ.]
Insolvency and Bankruptcy Code, 2016:
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 -
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
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
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
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
a corporate debtor.
[2021] 2 S.C.R. 924
924
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s. 7 - Application under - For initiation of corporate
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,
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
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
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
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.
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.
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
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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]
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
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
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
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]
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
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
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would still be covered within the meaning of expression
"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
Section 7 of the Code against the corporate person who had merely
offered guarantee for such loan account. That action can still
proceed against the guarantor being a corporate debtor,
consequent to the default committed by the principal borrower.
There is no reason to limit the width of Section 7 of the Code
despite law permitting initiation of CIRP against the corporate
debtor, if and when default is committed by the principal borrower.
For, the liability and obligation of the guarantor to pay
the outstanding dues would get triggered co-extensively.
[Para 22][944-C-E]
1.5 Section 5(5A) of the Code 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 is essentially in the
context of a corporate debtor against whom CIRP is to be initiated
in terms of the amended Section 60 of the Code, which amendment
is introduced by the same Amendment Act of 2018. This change
was to empower NCLT to deal with the insolvency resolution or
liquidation processes of the corporate debtor and its corporate
guarantor in the same tribunal pertaining to same transaction,
which has territorial jurisdiction over the place where the
registered office of the corporate debtor is located. That does
not mean that proceedings under Section 7 of the Code cannot
be initiated against a corporate person in respect of guarantee to
the loan amount secured by person not being a corporate person,
in case of default in payment of such a debt. [Para 23][944-E-H]
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
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which is due from any person and includes a financial debt and
operational debt. The expression "debt" in Section 3(11) is wide
enough to include liability of a corporate person on account of
guarantee given by it in relation to a loan account of any person
including not being a corporate person in the event of default
committed by the latter. It would still be a "financial debt" of the
corporate person, arising from the guarantee given by it, within
the meaning of Section 5(8) of the Code. [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
to exclude a corporate person offering guarantee in respect of a
loan secured by a person not being a corporate person, from the
expression "corporate debtor" occurring in Section 7, it would
have so provided in the Code (at least when Section 5(5A) came
to be inserted defining expression "corporate guarantor"). It was
also open to the legislature to amend Section 7 of the Code and
replace the expression "corporate debtor" by a suitable
expression. It could have even amended Section 3(8) to exclude
liability arising from a guarantee given for the loan account of an
entity not being a corporate person. Similarly, it could have also
amended expression "financial debt" in Section 5(8), "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. [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
"corporate guarantor" in Section 5(5A), applies only to Part II of
the Code. Upon harmonious and purposive construction of the
governing provisions, it is not possible to extricate the corporate
person from the liability (of being a corporate debtor) arising on
account of the guarantee given by it in respect of loan given to a
person other than corporate person. The liability of the guarantor
is co-extensive 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
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regard. It is open to the corporate debtor to pay off the debt,
which had become due and payable and is not paid by the principal
borrower, to avoid the rigours of Chapter II of the Code in general
and Section 7 in particular. [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
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.
[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.
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]
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
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
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]
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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
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
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
acknowledge their liability after declaration of NPA but before
the expiration of three years therefrom including the fresh period
of limitation due to (successive) acknowledgments, it is not
possible to extricate them from the renewed limitation accruing
due to the effect of Section 18 of the Limitation Act. Section 18 of
the 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
acknowledgment, however, must be before the expiration of the
prescribed period of limitation including the fresh period of
limitation due to acknowledgment of the debt, from time to time,
for institution of the proceedings under Section 7 of the Code.
Further, the acknowledgment must be of a liability in respect of
which the financial creditor can initiate action under Section 7 of
the Code. [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
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corporate guarantor - 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 of the guarantor being co-extensive with
the principal borrower under Section 128 of the Contract Act, it
triggers the moment principal borrower commits default in paying
the acknowledged debt. This is a legal fiction. Such liability of
the guarantor would flow from the guarantee deed and
memorandum of mortgage, unless it expressly provides to the
contrary. [Para 38][954-G-H; 955-A]
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
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
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
principal borrower and it gets triggered the moment the principal
borrower commits default in paying the debt when it had become
due and payable. The liability of the corporate debtor - corporate
guarantor also triggers when the principal borrower acknowledges
its liability in writing within the expiration of prescribed period of
limitation, to pay such outstanding dues and fails to pay the
acknowledged debt. Correspondingly, right to initiate action within
three years from such acknowledgment of debt accrues to the
financial creditor. That however, needs to be exercised within
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three years when the right to sue/apply accrues, as per Article
137 of the Limitation Act. This is the effect of Section 18 of the
Limitation Act. In that, a fresh period of limitation is required to
be computed from the time when the acknowledgment was so
signed by the principal borrower or the corporate guarantor -
corporate debtor, as the case may be, provided the
acknowledgment is before expiration of the prescribed period of
limitation. Thus, the conclusion reached by the NCLT and
affirmed by the NCLAT on the basis of the asservation in the
application under Section 7 of the Code is a possible view.
[Para 40][957-G-H; 961-D-H; 962-A]
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
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
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
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
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
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Shanti Conductors Private Limited v. Assam State
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:
[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.
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
[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
(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
(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
Company Law Appellate Tribunal, New Delhi in Company Appeal (AT)
(Insolvency) No. 77 of 2020.
LAXMI PAT SURANA v. UNION BANK OF INDIA
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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
A. M. KHANWILKAR, J.
1. Two central issues arise for our determination in this appeal, as
follows: -
(i)
Whether an action under Section 7 of the Insolvency and
Bankruptcy Code, 20161 can be initiated by the financial
creditor (Bank) against a corporate person (being a
corporate debtor) concerning guarantee offered by it in
respect of a loan account of the principal borrower, who
had committed default and is not a "corporate person" within
the meaning of the Code?
(ii)
Whether an application under Section 7 of the Code filed
after three years from the date of declaration of the loan
account as Non-performing Asset2, being the date of default,
is not barred by limitation?
2. Briefly stated, respondent No. 1 bank3 extended credit facility
to M/s. Mahaveer Construction4, a proprietary firm of the appellant,
through two loan agreements in years 2007 and 2008 for a term loan of
Rs.9,60,00,000/- (Rupees nine crore sixty lakhs only) and an additional
amount of Rs.2,45,00,000/- (Rupees two crore forty-five lakhs only),
respectively. The loan amount was disbursed to the Principal Borrower.
M/s. Surana Metals Limited5, of which the appellant is also a Promoter/
Director, had offered guarantee to the two loan accounts of the Principal
Borrower. The stated loan accounts were declared NPA on 30.1.2010.
The Financial Creditor then issued a recall notice on 19.2.2010 to the
Principal Borrower, as well as, the Corporate Debtor, demanding
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"
5 for short, the "Corporate Debtor"
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3. The Financial Creditor then filed an application under Section
19 of the Recovery of Debts Due to Banks and Financial Institutions
Act, 19936 against the Principal Borrower before the Debt Recovery
Tribunal7 at Kolkata.
4. During the pendency of the stated action initiated by the Financial
Creditor, the Principal Borrower had repeatedly assured to pay the
outstanding amount, but as that commitment remained unfulfilled, the
Financial Creditor eventually wrote to the Corporate Debtor on 3.12.2018
in the form of a purported notice of payment under Section 4(1) of the
Code. The Corporate Debtor replied to the said notice of demand vide
letter dated 8.12.2018, inter alia, clarifying that it was not the Principal
Borrower nor owed any financial debt to the financial creditor and had
not committed any default in repayment of the stated outstanding amount.
This communication was sent without prejudice.
5. The Financial Creditor then proceeded to file an application
under Section 7 of the Code on 13.2.2019 for initiating Corporate
Insolvency Resolution Proceeding8 against the Corporate Debtor, before
the National Company Law Tribunal, Kolkata9. This application came to
be resisted on diverse counts and in particular, on the preliminary ground
that it was not maintainable because the Principal Borrower was not a
"corporate person"; and further, it was barred by limitation, as the date
of default was 30.1.2010, whereas, the application had been filed on
13.2.2019 i.e., beyond the period of three years. These two preliminary
objections came to be negatived by the Adjudicating Authority vide
judgment and order dated 6.12.2019.
6. The Adjudicating Authority held that the action had been initiated
against the Corporate Debtor, being coextensively liable to repay the
debt of the Principal Borrower and having failed to do so despite the
recall notice, became Corporate Debtor and thus liable to be proceeded
with under Section 7 of the Code. As regards the second objection, the
Adjudicating Authority found that the Principal Borrower, as also, the
Corporate Debtor had admitted and acknowledged the debt time and
again, lastly on 8.12.2018 and thus the application filed on 13.2.2019
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.
LAXMI PAT SURANA v. UNION BANK OF INDIA
[A. M. KHANWILKAR, J.]
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7. The appellant carried the matter before the National Company
Law Appellate Tribunal10, New Delhi by way of Company Appeal (AT)
(Ins) No. 77 of 2020. The NCLAT vide impugned judgment and order
dated 19.3.2020, dismissed the appeal and affirmed the conclusion
reached by the Adjudicating Authority on the two preliminary objections
raised by the appellant.
8. The appellant, feeling aggrieved, has approached this Court by
way of present appeal reiterating the two preliminary objections referred
to above. This Court vide order dated 28.7.2020 issued notice in this
appeal, recording the principal ground urged at that time. The order reads
thus: -
"A question has been raised by learned counsel for
the appellant that the proprietorship firm had taken the loan,
the principal borrower has to be corporate entity, in order
to maintain the proceedings under the Insolvency and
Bankruptcy Code.
Issue notice confined to the aforesaid aspect
returnable in four weeks.
Steps be taken within three days from today. If the
steps are not taken within the stipulated time, the civil appeal
shall stand dismissed without further reference to the Court.
There shall be interim stay on the operation of
impugned judgment till the next date of hearing.
List in the last week of August, 2020."
9. According to the appellant, Section 7 plainly ordains that an
application can be filed by a financial creditor only against the corporate
debtor. A corporate debtor can either be a corporate person, who had
borrowed money or a corporate person, who gives guarantee regarding
repayment of money borrowed by another corporate person. In other
words, the Code cannot apply in respect of "debts" of an entity who is
not a "corporate person". This position is reinforced by the fact that
initiation of insolvency of firms and/or individuals in terms of Part III of
the Code has still not been notified. Further, Section 2 of the Code came
to be amended to clarify that partnership firms and proprietorship firms
would fall within Part III of the Code on the basis of the differentiation
made in the report of the Insolvency Law Committee, February, 2020,
which reads thus: -
10 for short, "NCLAT"
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"2. DEFINITION OF 'PROPRIETORSHIP FIRMS'
2.1 Part III of the Code is applicable to debtors who are individuals
or partnership firms. Section 2 of the Code was recently amended
to clarify the different categories of debtors falling within Part III
of the Code - (i) personal guarantors to corporate debtors, (ii)
partnership firms and proprietorship firms, and (iii) other individuals.
Though section 2(f) of the Code now includes the words
"proprietorship firms", this term has not been defined in another
legislation.
2.2 Proprietorship firms are businesses that are owned, managed
and controlled by one person. They are the most common form of
businesses in India and are based in unlimited liability of the owner.
Legally, a proprietorship is not a separate legal entity and is merely
the name under which a proprietor carries on business. Due to
this, proprietorships are usually not defined in statutes. Though
some statutes define proprietorships, such definition is limited to
the context of the statute.
For example, Section 2(haa) of the Chartered Accountants Act,
1949 defined a 'sole proprietorship' as "an individual who
engages himself in practice of accountancy or engages in
services ...". Notably, 'proprietorship firms' have also not been
statutorily defined in many other jurisdictions."
We may also usefully advert to Chapter 7 of the same report. It
deals with the issue relating to Guarantors. Paragraph 7.3 thereof reads
thus: -
"7.3 The Committee noted that while, under a contract of
guarantee, a creditor is not entitled to recover more than what is
due to it, an action against the surety cannot be prevented solely
on the ground that the creditor has an alternative relief against the
principal borrower. Further, as discussed above, the creditor
is at liberty to proceed against either the debtor alone, or
the surety alone, or jointly against both the debtor and the
surety. Therefore, restricting a creditor from initiating CIRP
against both the principal borrower and the surety would prejudice
the right of the creditor provided under the contract of guarantee
to proceed simultaneously against both of them."
(emphasis supplied)
LAXMI PAT SURANA v. UNION BANK OF INDIA
[A. M. KHANWILKAR, J.]
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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
Code. That is reinforced by the amendment Act 26 of 2018 on account
of insertion of definition of "corporate guarantor" with effect from
6.6.2018, as can be discerned from the portion of report of Insolvency
Law Committee, dated 26.3.2018, which reads thus: -
"23.1 Section 60 of the Code requires that the Adjudicating
Authority for the corporate debtor and personal guarantors should
be the NCLT which has territorial jurisdiction over the place where
the registered office of the corporate debtor is located. This creates
a link between the insolvency resolution or bankruptcy processes
of the corporate debtor and the personal guarantor such that the
matters relating to the same debt are dealt in the same tribunal.
However, no such link is present between the insolvency resolution
or liquidation processes of the corporate debtor and the corporate
guarantor. It was decided that section 60 may be suitably
amended to provide for the same NCLT to deal with the
insolvency resolution or liquidation processes of the
corporate debtor and its corporate guarantor. For this
purpose, the term "corporate guarantor" will also be
defined."
(emphasis supplied)
In substance, it is urged that since an application under Section 7
of the Code cannot be maintained against a principal borrower, who is
not a "corporate person", it must follow that in respect of such transaction,
no action under Section 7 of the Code can be maintained against a
company or corporate person, merely because it had extended guarantee
thereto.
10. As regards maintainability of the subject application under
Section 7 on the ground of being barred by limitation, it is urged by the
appellant that the date of default must be reckoned as 30.1.2010, on
which date, the loan accounts were declared as NPA. That fact has
been duly noted in the subject application filed on 13.2.2019. Hence, the
application was ex facie barred by limitation in view of Article 137 of
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the Limitation Act, 196311. It is urged that Section 18 of the Limitation
Act invoked by the Financial Creditor and which commended to the
Adjudicating Authority and the NCLAT, has no application to the
proceedings under the Code. It applies only to suits for recovery and in
respect of property or right. The Insolvency and Bankruptcy Code is a
self-contained code. Section 7 thereof merely refers to the factum of
default being the cause of action for maintaining the application. The
amended provision in the form of Section 238A of the Code, which has
come into effect with effect from 6.6.2018, is only a clarificatory provision.
It is urged that there is distinction between the proceedings for recovery
and winding up under the Companies Act and the action under Section 7
of the Code. It is further urged that action under the Code cannot be
invoked nor can be used as a fresh opportunity for creditors and claimants
who had failed to invoke remedy in respect of claims which had become
time barred under the existing laws. It 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
before the adjudicating authority in no way makes out the case for granting
benefit under Section 18 of the Limitation Act. The factual narration in
the subject application is that the date of default was 30.1.2010 being
the date of declaration of accounts as NPA, and no other fact which is
relevant for giving benefit under Section 18 of the Limitation Act as
expounded in Shanti Conductors Private Limited vs. Assam State
Electricity Board & Ors.12, has been stated therein. In other words,
respondent No. 1 has failed to set forth a case in that behalf in the
application as filed. Further, letters relied upon do not mention about the
factum of acknowledgment of debt by the Principal Borrower or the
Corporate Debtor, as the case may be. The said communications were
sent without prejudice and cannot be read as an acknowledgment of
liability as such. The communication dated 8.12.2018, therefore, will be
of no avail to the Financial Creditor. All other relied upon communications
have been sent by the Principal Borrower and not the Corporate Debtor,
who is an independent legal entity. The so-called acknowledgment by
the Principal Borrower, therefore, cannot bind the Corporate Debtor.
Communications sent by the Principal Borrower after the original
limitation period had expired, in any case, cannot be taken into account
for invoking remedy under Section 7 of the Code. Obviously, there was
11 for short, "the Limitation Act"
12 (2020) 2 SCC 677
LAXMI PAT SURANA v. UNION BANK OF INDIA
[A. M. KHANWILKAR, J.]
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delay in filing of the application under Section 7 and despite that, it was
not accompanied by application for condonation of delay under Section
5 of the Limitation Act. According to the appellant, the factum of
application being barred by limitation is a mixed question of fact and law
and would involve triable issues. Those aspects can be finally adjudicated
after production of evidence in the form of affidavits before the
Adjudicating Authority.
11. Reliance is placed by the appellant on the dictum of this Court
in Babulal Vardharji Gurjar vs. Veer Gurjar Aluminium Industries
Private Limited & Anr. (I)13, B.K. Educational Services Private
Limited vs. Parag Gupta and Associates14, Gaurav Hargovindbhai
Dave vs. Asset Reconstruction Company (India) Limited & Anr.15,
Vashdeo R. Bhojwani vs. 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
maintainability of the application against the Corporate Debtor. According
to the Financial Creditor, the liability of the Principal Borrower and of
the Guarantor is coextensive or coterminous, as predicated in Section
128 of the Indian Contract Act, 187218. This legal position is wellestablished by now (see -Bank of Bihar Ltd. vs. Dr. Damodar Prasad
& Anr.19). Section 7 of the Code enables the financial creditor to initiate
CIRP against the principal borrower if it is a corporate person, including
against the corporate person being a guarantor in respect of loans obtained
by an entity not being a corporate person. The Financial Creditor besides
placing reliance on Section 7, would also rely on definition of expressions
"corporate debtor" in Section 3(8), "debt" in Section 3(11), "financial
creditor" in Section 5(7) and "financial debt" in Section 5(8) of the Code.
It is urged that upon conjoint reading of these provisions, it is crystal
clear that a "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
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 (1969) 1 SCR 620
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against payment of interest for which the Corporate Debtor stood
guarantee or indemnity, was also a "financial debt" of the Corporate
Debtor and for that reason, the Financial Creditor - respondent No. 1,
could proceed under Section 7 of the Code. It is further urged that the
definition of "corporate guarantor" introduced by way of amendment of
2018 is to define a corporate guarantor in relation to a corporate debtor
against whom any CIRP is to be initiated, in reference to Section 60 of
the Code. The objection regarding maintainability of the application against
a corporate guarantor, is, therefore, devoid of merit and needs to be
rejected.
13. As regards the second issue of application being barred by
limitation, it is contended that this Court had issued limited notice in the
present appeal only to examine the question noted in the order dated
28.7.2020. Hence, the second objection of limitation need not be
examined. It is then urged that in any case, there is no substance even in
this objection.