Insolvency and Bankruptcy Code is a special enactment for resolution of a financial debt: Supreme Court of India

Two central issues arise for our determination in this i) Whether an action under Section 7 of the Insolvency and Bankruptcy Code 20161 can be corporate person and an additional amount of Rs.2 45 00 000 ­ Rupees two crore forty­five lakhs only) respectively. The loan 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 well as the Corporate Debtor demanding repayment of outstanding amount of Rs.12 35 11 548 ­ (Ins) No. 77 of 2020. The NCLAT vide impugned judgment and order dated 19.3.2020 dismissed the Authority on the two preliminary objections raised by the 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 to maintain the proceedings under the Insolvency and Issue notice confined to the aforesaid aspect Steps be taken within three days from today. If the 10 for short “NCLAT” There shall be interim stay on the operation of person who had borrowed money or a corporate person who gives guarantee regarding repayment of money borrowed by of firms and or individuals in terms of Part III of the Code has amended to clarify that partnership firms and proprietorship differentiation made in the report of the Insolvency Law Committee February 2020 which reads thus: ­ debtors falling within Part III of the Code personal proprietorship firms and other individuals. Though section 2(f) of the Code now includes the words “proprietorship firms” this term has not been defined in 2.2 Proprietorship firms are businesses that are owned managed and controlled by one person. They are the in unlimited liability of the owner. Legally a Due to this proprietorships are usually not defined in statutes. Though some statutes define proprietorships in services …”. Notably ‘proprietorship firms’ have also deals with the issue relating to Guarantors. Paragraph 7.3 The Committee noted that while under a 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 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 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 same. According to the appellant a corporate guarantee is one which is extended in respect of a loan given to a “corporate 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: ­ Section 60 of the Code requires that the Adjudicating Authority for the corporate debtor and personal guarantors should be the NCLT which has link between the insolvency resolution or bankruptcy processes of the corporate debtor and the personal 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 maintained against a company or corporate person merely by the appellant that the date of default must be reckoned as 30.1.2010 on which date the loan accounts were declared as urged that Section 18 of the Limitation Act invoked by the Financial Creditor and which commended to the Adjudicating under the Code. It applies only to suits for recovery and in respect of property or right. The Insolvency and Bankruptcy 238A of the Code which has come into effect with effect from and claimants who had failed to invoke remedy in respect of to be applied to an action under Section 7 of the Code the 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 as NPA and no other fact which is relevant for giving benefit Conductors Private Limited vs. Assam State Electricity Board & Ors.12 has been stated therein. In other words the application as filed. Further letters relied upon do not mention about the factum of acknowledgment of debt by the The said communications were sent without prejudice and communication dated 8.12.2018 therefore will be of no avail to the Financial Creditor. All other relied upon communications Debtor who is an independent legal entity. The so­called 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 was not accompanied by application for condonation of delay 11. Reliance is placed by the appellant on the dictum of this Industries Private Limited & Anr. Limited & Anr.15 Vashdeo R. Bhojwani vs Abhyudaya Co­operative Bank Limited & Anr.16 and Sagar 12. The Financial Creditor has refuted the plea regarding predicated in Section 128 of the Indian Contract Act 1872 18 This legal position is well­established by now “debt” in Section 3(11) “financial creditor” in Section 5(7 any guarantee or indemnity for any money borrowed against of the appellant against payment of interest for which the Corporate Debtor stood guarantee or indemnity was also a Financial Creditor ­ respondent No. 1 could proceed under is to define a corporate guarantor in relation to a corporate of the application against a corporate guarantor is therefore limitation it is contended that this Court had issued limited 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 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 Borrower. The Adjudicating Authority as well 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 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 urged that there is no need to relegate the parties before the mixed question of fact and law as contended but on the facts the liability vide communication dated 8.12.2018 for which 14. We have heard Mr. Abhijit Sinha learned counsel for the 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 Insolvency and Bankruptcy Board of India and for matters 16. Section 7 of the Code propounds the manner in which on behalf of the financial creditor as may be notified by the against a corporate debtor before the Adjudicating Authority 17. Section 7 is an enabling provision which permits the 18. The term “financial creditor” has been defined in Section a person to whom such debt has been legally assigned or has been defined in Section 5(8). Amongst other categories specified therein it could be a debt along with interest which is the guarantee or indemnity for any of the items referred to 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 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 lender to proceed against the principal guarantor itself if and when the principal borrower fails to discharge his obligation in respect of amount of debt. For the Section 128 of the Contract Act. As a consequence of such 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 20. A priori in the context of the provisions of the Code if the 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 borrower may or may not be a corporate person but if a corporate person extends guarantee for the loan transaction would still be covered within the meaning of expression 22. Thus understood it is not possible to countenance the corporate person the financial creditor could not have invoked who had merely offered guarantee for such loan account. That debtor consequent to the default committed by the principal 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 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 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 liquidation processes of the corporate debtor and its corporate which has territorial jurisdiction over the place where the mean that proceedings under Section 7 of the Code cannot be 24. Accepting the aforementioned argument of the appellant debtor” occurring in Section 7 of the Code which means a is wide enough to include liability of a corporate person on default committed by the latter. It would still be a “financial 25. Notably the expression “corporate guarantee” is not defined in the Code. Whereas expression “corporate guarantor” is secured by a person not being a corporate person from the expression “corporate debtor” occurring in Section 7 it would be inserted defining expression “corporate guarantor”). It was replace the expression “corporate debtor” by a suitable “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 26. The expression “corporate debtor” is defined in Section 3(8 which applies to the Code as a whole. Whereas expression person other than corporate person. The liability of the for reorganisation and insolvency resolution of the corporate debtor who is not in a position to pay its debt and commits In law the status of the guarantor who is a corporate person metamorphoses into corporate debtor the moment principal borrower action under Section 7 of the Code had offered guarantee in respect of that transaction. Whereas the company being the guarantor instantly corporate person 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 it is as the case may be even if it is not expressly raised by the “7. It is seen from the evidence on record that not only the original borrower but also the Corporate again on 27.05.2015 and 08.12.2018 issued by the Bank clearly admitting the debt. We Corporate Debtor. It cannot be said that debt become due and payable. We hold that it is admission of debt and payable. In this case by virtue of guarantee in favour of the Bank the Corporate Debtor undertook 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 31. After so observing the NCLT proceeded to advert to the decision in Gaurav Hargovindbhai Dave and distinguished the same on the ground that in that case the acknowledged the debt after the date of default which had present case however the principal borrower as well as the 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 32. Even the NCLAT noted this ground urged by the appellant “21. In the instant case the Corporate Debtor 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 Bank to M s 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 respectively against the execution of the Letters of Guarantee. Significantly the Corporate Debtor in its 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 Finally in paragraph 30 of the impugned judgment the NCLAT Shah and Anr. vs. Union of India and Anr.20 and Gaurav “30. In the light of detailed qualitative and quantitative discussions aforesaid and also this Tribunal keeping in case in an integral fashion which float on the surface acknowledgment of ‘Debt’ on various dates like 2.2.07 Construction the Letters of Guarantee Acknowledged 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 on 27.5.15 & 8.12.18 respectively. The object of on ‘Public Policy’. The application projected before the is well within limitation and not barred by Limitation Looking at from any angle the present Appeal sans Babulal Vardharji Gurjar vs. Veer Gurjar Aluminium the earlier decisions of this Court the Court summed up the “32. When Section 238­A of the Code is read with the above noted consistent decisions of this Court Sashidhar25 Jignesh Services23 Swiss Ribbons24 K Shah26 Vashdeo R. Bhojwani27 Gaurav Hargovindbhai Dave28 and Sagar Sharma29 respectively the following put the corporate debtor back on its feet and is not a d) that the period of limitation for an application governed by Article 137 of the Limitation Act and is creditor is default on the part of the corporate debtor that is to say that the right to apply under the Code non­payment by the corporate debtor when a debt has to the date of filing of the application the application would be time­barred save and except in those cases where on facts the delay in filing may be condoned and advert to the exposition in Jignesh Shah Ltd.30 in which “238­A. Limitation.—The provisions of Limitation Act 1963 shall as far as may be apply to the proceedings or appeals before Debts Recovery Appellate Tribunal as the case may 8. In para 7 of the said judgment the Report of the as follows: (supra). Suffice it to observe that this Court had not ruled out the application of Section 18 of the 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 of fresh period of limitation in terms of Section 18 of the 36. Notably the provisions of Limitation Act have been made 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 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 application in respect of any property or right an right has been made in writing signed by the party person through whom he derives his title or liability a was signed but subject to the provisions of the Indian Evidence Act 1872 oral evidence of its avers that the time for payment delivery performance refusal to pay deliver perform or permit to enjoy or is 37. Ordinarily upon declaration of the loan account debt as 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 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 would get triggered the moment the principal borrower commits default due to non­payment of debt. Thus when the principal borrower and or the guarantor period of limitation due toacknowledgments it is not 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 7 of the Code. Further the acknowledgment must be of a liability in respect of which the financial creditor can initiate adverted to the acknowledgments by the principal borrower as well as the corporate guarantor ­ corporate debtor after 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 coextensive with the principal borrower under the guarantee deed and memorandum of mortgage unless it financial creditor on 13.02.2019 in Part IV thereof it has been DEBT GRANTED AND DATE(S) OF The aforesaid credit facilities duly secured from time to time by the Corporate Guarantor being the Rs.9 60 00 000 ­ Rs.12 05 00 000 ­ Memorandum of Extension of Declaration of the Director of the Copies of all the aforesaid Documents are ‘F­1’ ‘F­2’ ‘F­3’ and ‘F­4’. In addition to the above the aforesaid Credit facility not only secured by of Title Deed being No. for the year in 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 the immovable property as aforesaid duly extended by the Corporate Guarantor lastly on 25.08.2008 Creation of such charge filed with the Corporate Debtor in Form No.8 Under Section 125 127 137 of the Companies the Title Deed is annexed hereto and dated 19th January 2007 the Financial 2007 to the said Pantaloons Retail and the financial creditor during the Section 7 of the Code on 13.02.2019. The last such 12 BONFIELD LANE KOLKATA­700001 Asset Recovery Branch Kolkata 15 India Exchange Place SUB: Notice regarding initiation of We acknowledge the receipt of your Notice being No.ARB:KOL:198:18­19 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 Rs.9 45 00 000 ­ 1. No Term Loan was sanctioned by you to M s Mahaveer Construction 12 Bonfield Lane Kolkata for a sum of Rs.2 45 00 000 ­ as alleged by you in your above Mahaveer Construction of No.12 Bonfield Lane Kolkata­700001 under “rent securitization” i.e for the development of a commercial complex at Kharagpur on a government land on the basis of Construction has executed a power of attorney in your favour authorizing you to collect the future Ltd. and you have been collecting the rent from by the Ld. DRT­III Kolkata without any intimation to M s Mahaveer Construction. As such M s Mahaveer Construction is a lawful borrower and unconditionally accepted by you. We are not the 2. We have at the request of M s Mahaveer 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 Lessee only. It is a your loan against Mahaveer Construction in the Learned Debt Recovery Tribunal ­III at Kolkata is awaiting adjudication. We have not committed be termed as a defaulter far less to speak of You are therefore not authorized legally to initiate against M s Mahaveer Construction in the Kolkata 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 5. The Insolvency and Bankruptcy Code 2016 proceeds to secure the benefits of all creditors dealing with the assets of the debtor in The before proceeding under The Insolvency and the securities for the benefit of all the creditors in SARFAESI Act and RDBA 1973 proceedings Thus the Bank has to choose before proceeding deal with the same as a secured creditor. If you 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 Borrower Mahaveer Construction. Thus without any demand being made against from the Principal Borrower the issuance of deemed 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 adjudication before the Learned Debt Recovery Tribunal ­III at Kolkata and therefore the debt is repay the loan granted to Mahaveer Construction under rent securitization. Thus the Bank cannot proceed under The Insolvency and Bankruptcy 8. There is no mis­match between the asset and valuable than liability. Thus venturing upon the 9. This letter is issued reserving our rights to add Under the circumstances it is most humbly Yours faithfully 12 BONFIELD LANE acknowledge the liability of M s. Mahaveer Construction principal borrower) and of corporate guarantee having been liability of the corporate guarantor is coextensive with that of the principal borrower and it gets paying the debt when it had become due and payable. The within the expiration of prescribed period of limitation to pay right to sue apply accrues as per Article 137 of the Limitation borrower or the corporate guarantor as the by the NCLT and affirmed by the NCLAT on the basis of the 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 guarantor corporate debtor had offered corporate guarantor whose liability is coextensive with that of the principal borrower and more so when it activates from the written acknowledgment of second ground urged by the appellant regarding the maintainability of the application filed by the respondent­ vide last communication dated 08.12.2018. Thus the application under Section 7 of the Code filed on 13.02.2019 is of the application for initiating CIRP by the financial creditor Bank) under Section 7 of the Code we dispose of this appeal 44. Accordingly this appeal is disposed of in the above terms with no order as to costs. Pending applications if any also

Summary: There was no substance to the second ground urged by the appellant regarding the maintainability of the application filed by the respondent financial creditor under Section 7 of the IB Code on the ground of being barred by limitation and that the code is a special enactment for the resolution of financial debt and it is in the larger public interest that financial debts are recovered and the debts of corporate person are restructured to revive the failing corporate entity. This extensive judgment was passed by the Hon’ble Supreme Court of India in the matter of LAXMI PAT SURANA v. UNION BANK OF INDIA &amp; ANR. [CIVIL APPEAL NO. 2734 OF 2020] headed by Justice A.M. Khanwilkar. In the concerned petition, there were two central issues: It was held by the adjudicating authority 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.” This court stated that “The term “financial creditor” has been defined in Section 5(7) 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.”