When A Borrower Is Not A Corporate Person Still Insolvency Suit Lies Against Corporate Guarantor

KEY TAKEAWAYS

• A civil application was filed in the Supreme Court where section 7 of the Bankruptcy and Insolvency Act, 2016 came into question.
• The issue raised before the court was whether an insolvency suit is maintainable against a corporate guarantor in the case where the principal borrower is not a ‘corporate person.
• The case was heard by a 3 judge bench of the Supreme Court of India by Justice K.M Khanwilkar, Justice B.R Gavai and Justice Krishna Murari.

BACKGROUND DETAILS

• The Union Bank of India provided credit to M/s. Mahaveer Construction, a proprietary firm the principal borrower.
• M/s. Surana Metals Ltd, a company that is the corporate debtor in this case offered to be a guarantor for 2 loan accounts of the principal borrower.
• The 2 loan accounts were declared NPA and the bank issued a notice to both; the principal borrower and the corporate guarantor.
• Thus the financial creditor I.e. the bank initiated an insolvency suit against M/s. Surana Metals in NCLT, Kolkata.

FURTHER DETAILS

• The corporate debtor in this case I.e. Surana Metals Limited objected to the maintainability of the insolvency suit stating that as the principal borrower is not a company the bank could not invoke a remedy under section 7 of the Insolvency and Bankruptcy Code, 2016.
• Also it contended that the bank could not have invoked such a remedy against M/s. Surana Metals company acting barely as a guarantor for such loan accounts.
• The NCLT in its judgement held that despite recall notice given by the bank it failed to repay the debt as the guarantor of the principal borrower and so it is broadly liable as a corporate debtor and thus a suit can proceed under section 7 of the code.

SUPREME COURT VERDICT

• The order of NCLT was challenged and an appeal was filed in the Supreme Court against the order.
• The Supreme Court clarified that if a company acts as a guarantor for such a principal borrower regardless of whether it is or it is not a corporate person it would still be covered under the meaning of ‘corporate debtor' under section 3(8) of the code.
• It also said that the lender I.e. the bank has the right to take action under section 7 of this code against both the principal borrower as well as the corporate debtor because it acted as a guarantor.
• The appeal was thus dismissed and a fresh period of limitation is required to be computed from the date the principal borrower acknowledged the debt and the last communication date with the corporate debtor the Supreme Court said.