Recently, the Appellate Authority (NCLAT) in the matter of Laxmi Pat Surana v. Union Bank of India & Ors.1 has held that an application under Insolvency and Bankruptcy Code, 2016 (‘I&B Code') is maintainable against the corporate guarantor of a sole proprietorship firm.
The Appeal was preferred by the Promoter/Director and Shareholder of Surana Metals Ltd. against the admission order passed by Ld. Adjudicating Authority, Kolkata Bench2 wherein a Section 7 application under the I&B Code filed on behalf of Union Bank of India was admitted against the corporate guarantor of the sole proprietorship firm.
The point for adjudication which fell before the NCLAT was:
- whether the application filed under Section 7 of I&B Code by the bank before the Ld. Adjudicating Authority was time barred; and
- whether insolvency proceedings can be initiated against the corporate guarantor of a sole proprietorship firm.
On behalf of the Corporate Debtor, the first contention which was raised was that the application filed on behalf of the bank under Section 7 of the I&B Code before the Ld. Adjudicating Authority, Kolkata is time barred. The Corporate Debtor pointed out that the date of default was 03.01.2010 and the application was filed on 13.02.2019 which was much beyond the period of limitation. The Corporate Debtor submitted that the letters dated 03.03.2012, 27.05.2015, 24.10.2016 and 08.12.2018 issued by the principal borrower (M/s Mahaveer Construction) in favour of the bank are not an acknowledgment of debt and since there is no admission of liability the aforesaid letters do not start the fresh period of limitation under Section 18 of the Limitation Act, 1963.
The NCLAT on this point held that after the date of default in the year 2010, not only the original borrower but also the Corporate Debtor admitted and acknowledged the debt even in the year 2018. Hence, the application filed under Section 7 of I&B Code on behalf of the bank is well within the period of limitation.
The second contention which was raised on behalf of Corporate Debtor was that since no insolvency proceedings can be initiated against the sole proprietorship firm, as such no insolvency proceedings can also be initiated against the Corporate Guarantor of the sole proprietorship firm. The Corporate Debtor pointed out that he cannot be a corporate guarantor in view of the definition of corporate guarantor as stated in Section 5(5A) of I&B Code. As per the Corporate Debtor since he is the guarantor to the individual and not a corporate person, no proceeding can lie against it under I&B Code.
The bank on the other side submitted that the principal borrower (M/s Mahaveer Construction) had borrowed the money against the payment of interest and the Corporate Debtor being the corporate guarantor is registered under the Companies Act, 2013 and as such the corporate guarantor comes under the purview of Corporate Debtor and therefore application under Section 7 of I&B Code filed on behalf of bank is maintainable under law.
It was also submitted on behalf of the bank that the corporate guarantor had duly executed the Letters of the Guarantors dated 02.02.2007, 17.02.2007 and 03.08.2008 in respect of the loan facilities signed by the bank to the principal borrower therefore, it will come under the purview of the definition of ‘Corporate Guarantor' as per Section 5(5A) of I&B Code. Further, it was submitted that the Corporate Debtor acknowledged in reply dated 08.12.2018 its outstanding debt towards the bank.
The NCLAT after going through the merits of the case held that Section 5(5A) of I&B Code states that a Corporate Guarantor means the corporate person who is surety in contract to a Corporate Debtor. Section 3(8) of the I&B Code defines a Corporate Debtor to mean a corporate person who owes debt of any person. There is no dispute that a Corporate Debtor (who is a corporate person) by virtue of Deed of Guarantee owes a debt to a bank. The NCLAT also upheld the findings of NCLT that the Corporate definition in Section 5(5A) of corporate guarantor is just an explanatory definition as to who could be called as corporate guarantor. In this case, the Corporate Debtor was the guarantor of the individual who executed the Deed of Guarantee thereby undertaking to repay the debt in case of default by the principal borrower. The definition of Corporate Debtor in Section 5(5A) of I&B Code cannot be used to show applicability or inapplicability of provisions of I&B Code as it is just an explanatory definition.
The NCLAT also observed that that the ‘Financial Debt' includes a ‘Debt' owed to a Creditor by a ‘Principal' and ‘Guarantor'. A just omission or failure to pay on the part of a Guarantor to pay the ‘Financial Creditor' when the principal sum is claimed certainly, will come within the scope of ‘Default' under Section 3(12) of the I&B Code. The proceeding under Section 7 of I&B Code can be triggered by a ‘Financial Creditor' who had taken Guarantee in respect of ‘Debt' against ‘Guarantor' for failure to repay the money borrowed by the Principal Borrower.
The NCLAT has expanded the scope of definition of ‘Corporate Guarantor' and included guarantors of a sole proprietorship firm in it. The NCLAT in its judgment did not specifically mention the principles laid down under Sections 126, 127, 128 and 129 of the Indian Contract Act, 1872. Under Sections 126 and 127 of the Indian Contract Act, a guarantee is given by the surety in favour of the creditor if the principal debtor defaults in making payments and if any promise is made for the benefit of the principal debtor it may be a sufficient consideration to the surety for giving the guarantee. It is well settled that a contract of guarantee is an autonomous contract. It is in common parlance that by issuing a guarantee, a guarantor undertakes to discharge liability when the principal debtor fails in his duty to repay his debts. As per Section 128 and 129 of Indian Contract Act the liability of the guarantor (surety) is co-extensive with that of the principal debtor and the same is continuing in nature when the same is extended to a series of transactions. Therefore, a surety/guarantor cannot escape from the lawful liability of the principal debtor in case default is committed by the principal debtor. The creditor also has a right to proceed against the surety/guarantor in place of the principal debtor in case the default is committed by the principal debtor. The surety/guarantor cannot take a stand that the creditor ought to move against the principal debtor first.
From the above and as per the Judgment of NCLAT it is made clear that the Financial Creditor or any other Creditor can always proceed against the guarantor of the principal debtor by invoking the guarantee.
1. Company Appeal (AT) (Ins) No. 77 of 2020 dated 19.03.2020
2. C.P. (IB) No. 346/KB/2019 dated 06.12.2019
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