Citation: Laxmi Pat Surana Vs Union Bank of India and Anr. 2020 SCC OnLine SC 1187

Date of Judgement: 26/03/2021

Equivalent citation: Civil Appeal no.2734 of 2020 (SC);

Case No.: Civil Appeal no. 2734 of 2020

Case Type: Civil Appeal

Appellant: Laxmi Pat Surana                                            

Respondent:  Union bank of India & Anr.

Bench: Hon’ble Justice A.M. Khanwilkar, Hon’ble Justice Dinesh Maheshwari

Court: Supreme court of India

Statue Referred:

  • Limitation Act 1963, Section 3, 5, 7, 18
  • Recovery of Debts Due to Banks and Financial Institutions Act, 1993; Section 19 
  • Chartered Accountants Act, 1949; Section 2
  • Indian Contract Act, 1872; Section 128
  • Companies Act, 1956; Section 125,127,137

Cases Referred:

  • Shanti Conductors Private Limited Vs Assam State Electricity Board & Ors. Civil Appeal No.8450 of 2016,
  • Babulal Vardharji Gurjar Vs Veer Gurjar Aluminium Industries Private Limited & Anr. (I) Civil Appeal No. 6347 of 2019,
  • Vashdeo R. Bhojwani Vs (2019) 15 SCC 209 14 (2019) 11 SCC 633 15 (2019) 10 SCC 572,
  • B.K. Educational Services Private Limited Vs Parag Gupta  and  Associates (2019) 11 SCC 633
  • Abhyudaya Co­operative Bank Limited & Anr. Civil Appeal No. 11020 of 2018,
  • Sagar Sharma & Anr. Vs Phoenix Arc Private Limited & Anr. Civil Appeal No. 7673 of 2019
  • Bank   of Bihar Ltd. Vs Dr. Damodar Prasad & Anr (1969) 1 SCR 620
  • Jignesh Shah and Anr. Vs Union of India and Gaurav Hargovindbhai Dave (2019) 10 SCC 750
  • Babulal Vardharji Gurjar Vs Veer Gurjar Aluminium Industries Private Limited & Anr.  (2020) 15 SCC 1
  • Innoventive Industries Ltd. Vs ICICI Bank, (2018) 1 SCC 40 23
  • Swiss Ribbons (P) Ltd. Vs Union of India, (2019) 4 SCC 17
  • K. Sashidhar Vs Indian Overseas Bank, (2019) 12 SCC 150
  • Ravula Subba Rao Vs CIT, AIR 1956 SC 604
  • Punjab National Bank Vs Surendra Prasad Sinha, 1993 Supp (1) SCC  499
  • Interactive Media and Communication Solution (P) Ltd. Vs GO Airlines Ltd., 2013 SCC OnLine Del 445
  • Rajender Singh Vs Santa Singh, (1973) 2 SCC 705

Facts:

  • Bank extended the credit facility to M/s. Mahaveer Construction, 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/- and a further amount of Rs.2,45,00,000/- respectively.
  • The loan amount was disbursed to the Principal Borrower.
  • M/s. Surana Metals Limited, is additionally a Promoter/Director, who had offered guarantee to the two loan accounts of the Principal Borrower.
  • The stated loan accounts were declared NPA (Non-Performing Asset) on 30.1.2010.
  • The Financial Creditor later then issued a recall notice on 19.2.2010 to the Principal Borrower.
  • The Financial Creditor then filed an application under Section 19 of the Recovery of Debts to Banks and Financial Institutions Act, 1993 against the Principal Borrower before the Debt Recovery Tribunal at Kolkata.
  • During the pendency of the action, it was stated by 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 company Debtor on 3.12.2018 within the type of a purported notice of payment under Section 4(1) of the Recovery of Debts to Banks and Financial Institutions Act, 1993.
  • A corporate debtor under the Insolvency and Bankruptcy Code2016 (IBC) is a corporate person who owes a debt to any person.
  • The Corporate Debtor replied to the said notice of demand vide letter dated 8.12.2018, inter alia, clarifying that it had been not the Principal Borrower nor owed any financial debt, to the financial creditor and had not committed any kind of default while repayment of the stated outstanding amount.
  • This application came to be resisted on diverse counts and specifically, on the preliminary ground that it absolutely was not maintainable because the Principal Borrower wasn’t a “corporate person”; and further, it had been barred by limitation, because the date of default was 30.1.2010, whereas the appliance had been filed on 13.2.2019 i.e., beyond the amount of three years.
  • These two preliminary objections came to be negatived by the Adjudicating Authority vide judgment and order dated 6.12.2019.
  • The Adjudicating Authority held that the action had been initiated against the company Debtor, as being coextensively vulnerable to repay the debt of the Principal Borrower and having he did not pay despite of the recall notice became Corporate Debtor and thus vulnerable 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 company Debtor had admitted and acknowledged the debt time and again, lastly for short, “the CIRP” for, “Adjudicating Authority” or “NCLT”, because the case is also. 8.12.2018 and thus the appliance filed on 13.2.2019 was within limitation.
  • The Appellant carried the matter before the National Company Law Appellate Tribunal, national capital by way of Company Appeal (AT) (Ins) No. 77 of 2020.
  • The NCLAT vide disputed judgment and order dated 19.3.2020, dismissed the Appeal and affirmed the conclusion that the Adjudicating Authority on the preliminary objections raised by the Appellant.
  • The Appellant, feeling aggrieved, approached the Court by way of present Appeal reiterating the preliminary objections brought up.

Issues involved:

  • Whether an application under Section 7 of the Insolvency and Bankruptcy Code. filed after three years from the date of declaration of the loan account as Non-Performing Asset, being the date of default, isn’t barred by limitation?
  • Whether the proprietorship firm who had taken the loan, the principal borrower must be corporate entity, so as to take care of the proceedings under the Insolvency and Bankruptcy Code.

Contention of Appellant:

Counsel for the Appellant contended that:

  • Counsel for the Appellant stated that the proprietorship firm had taken the loan, the principal borrower must be corporate entity, so as to take care of the proceedings under the Insolvency and Bankruptcy Code.
  • The counsel urged that there shall be interim continue the operation of impugned judgment till the subsequent date of hearing. List within the last week of August, 2020.
  • According to the Appellant, Section 7 plainly ordains that an application will be filed by a financial creditor only against the company debtor. A corporate debtor can either be a company person, who had borrowed money or a company person, who gives guarantee regarding repayment of cash borrowed by another corporate person.
  • This position is reinforced by the very fact that initiation of insolvency of firms and/or individuals in terms of Part III of the Insolvency and Bankruptcy Code, 2016 has still not been notified. Further, Section 2 came to be amended to clarify that partnership firms and proprietorship firms would fall within Part III of the Code on the idea of the differentiation made within the report of the Insolvency Law Committee, February, 2020.
  • According to the Appellant, a company 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.

Contention of Respondent:

The counsel of the Respondent contended that:

  • It was urged by the counsel that, the money borrowed by sole proprietorship of the Appellant against payment of interest that the company Debtor stood guarantee or indemnity, was also a “financial debt” of the company Debtor and for that reason, the Financial Creditor ¬ Respondent No. 1, could proceed under Section 7 of Insolvency   and   Bankruptcy Code, 2016.
  • It is further urged that the definition of “corporate guarantor” introduced by way of amendment of 2018 is to define a company guarantor in regard to a company debtor against whom any CIRP is to be initiated, in respect to Section 60 of Insolvency and Bankruptcy Code, 2016.
  • The objection regarding maintainability of the applying against a company guarantor, is, therefore, empty merit and desires to be rejected.
  • As regards the second issue of application being barred by limitation, it’s contended that this Court had issued limited notice within the present Appeal only to look at the question noted within the order dated 28.7.2020.
  • Hence, the second objection of limitation needn’t be examined. it’s then urged that in any case, there’s no substance even during this objection.

Judgement:

The Appeal was disposed of.

  • The present Appeal was disposed of leaving all “other grounds” and contentions available to both the perimeters receptive be decided within the pending proceedings before the NCLT.
  • The same be decided uninfluenced by any observation(s) made within the impugned judgment or within the present judgment.

Ratio Decidendi:

  • The fact that acknowledgment within the limitation period was only by the principal borrower and not the guarantor, wouldn’t absolve the guarantor of its liability flowing from the letter of guarantee and memorandum of mortgage.
  • The liability of the guarantor being coextensive with the principal borrower under Section 128 of the Contract Act, it triggers the instant principal borrower commits default in paying the acknowledged debt.
  • This is a legal fiction. Such liability of the guarantor would ensue the guaranteed deed and memorandum of mortgage, unless it expressly provides to the contrary.

Conclusion:

To conclude we can say that, the financial creditor has not only the option to recover the outstanding dues by filing a suit, but also incorporates a right to initiate resolution process against the company person whose liability is coextensive thereupon of the principal borrower and more so when it activates from the written acknowledgment of liability and failure of both to discharge that liability.

There is no substance even within the second ground urged by the Appellant we affirm the view 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 specifically the (corporate) guarantor/corporate debtor vide last communicated.

Drafted By: Bharti Verma, Chanderprabhu Jain college of Higher Studies and School of Law.

Published On: September 28, 2021 at 19:54 IST

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