Bank Can Initiate Insolvency Suit Against Corporate Guarantor Even If Principal Borrower Is Not A ‘Corporate Person.’

KEY TAKEAWAYS

• The case in reference is Laxmi Pat Surana v. Union Bank of India [C.A. 2734 of 2020] of the Supreme Court of India.
• The decision in the case was pronounced by a 3 judge bench of the Supreme Court justice K.M Khanwilkar, justice B.R Gavai and justice Krishna Murari.
• The order of the NCLT, Kolkata was challenged before the Supreme Court of India.
• The civil application before the court was in essence of "whether the bank can initiate action against a corporate person who offered a guarantee of the principal borrower who is not a corporate person".

BACKGROUND DETAILS

• A credit facility was provided by Union Bank of India to a proprietary firm named M/s. Mahaveer Construction the principal borrower in this case.
• M/s. Surana Metals Limited (corporate guarantor / corporate debtor in this case) acted as a guarantor for 2 loan accounts of the principal borrower.
• On 30th January 2010 the bank declared the stated loan accounts as NPA (Non-performing Assets).
• The bank issued notice to the principal borrower as well as the guarantor.
• On 13th February 2019 the bank (I.e. financial creditor) initiated legal proceedings under section 7 of the Insolvency and Bankruptcy Code, 2016 against the corporate debtor in National Company Law Tribunal (NCLT), Kolkata.

FURTHER DETAILS

• Surana Metals Limited Company objected that the principal borrower is not a corporate person so the application in the tribunal against the metal company is not maintainable. Also, it just acted as a guarantor so proceedings under section 7 could not be initiated by the bank under this code.
• However, the NCLT held that the corporate debtor is widely liable to repay the debt of the principal borrower as it acted as its guarantor.
• The metal company became a corporate debtor because despite the recall notices to pay the debts it failed to do so and the metal company becomes liable to be sued by the bank under section 7 of the IB code.
• It was also found by the adjudicating authority that the debt was acknowledged by the principal borrower and the corporate debtor time and again and the last period of acknowledgement was noted on 8th December 2018 and so the application was filed within the limitation period I.e. on 13th February 2019.
• The above order passed by the National Company Law Tribunal, Kolkata was also upheld by the appellate bench of NCLT.

SUPREME COURT – FINDINGS & VERDICT

• An appeal was filed before the Supreme Court of India challenging the order passed by NCLT.
• The court while answering the main issues raised in this case elucidated that firstly when a company becomes a guarantor for any loan transaction concerning a principal borrower regardless of whether the principal borrower is or is not a corporate person, the company would still be covered within the meaning of section 3(8) of the code.
• Also the obligation of the guarantor is co-extensive with that of the principal borrower to discharge the debt as affirmed by section 128 of the contract act.
• Secondly action under section 7 of the IB Code can proceed against the guarantor as he is the corporate debtor as there is no reason to limit the wideness of section 7.
• The bench interpreted the expression ‘corporate guarantor' under section 5(5)A to mean a surety under the contract of guarantee and the same cannot be interpreted to free a person from corporate liability arising on account of guarantee in respect of a loan.
• Thirdly, the Supreme Court dismissed the appeal and also rejected the contention made by the applicant regarding the maintainability of the suit filed by the bank on the ground of being barred by limitation.
• The Supreme Court observed that as the debt was acknowledged time and again by both the principal borrower as well as the corporate debtor and the last date of the communication noted was on 8th December 2018. Hence it shows that the suit is maintainable and not barred by the limitation act.