LAXMI PAT SURANA versus UNION BANK OF INDIA & ANR. on 26 March 2021

SUPREME COURT REPORTS[2021] 2 S.C.R. 924

[2021] 2 S.C.R.

ALAXMI PAT SURANA

v.

UNION BANK OF INDIA & ANR.

(Civil Appeal No. 2734 of 2020)

BMARCH 26, 2021

[A. M. KHANWILKAR, B. R. GAVAI ANDKRISHNA MURARI, JJ.]

Insolvency and Bankruptcy Code, 2016:

Cs. 7 - Initiation of corporate insolvency resolution process byfinancial creditor – Application for initiating CIRP by FinancialCreditor-Bank u/s. 7 against a corporate person (being a corporatedebtor) concerning guarantee offered by it in respect of a loanaccount of the principal borrower, who had committed default andis not a “corporate person” within the meaning of the Code –DMaintainability of – Held: Right or cause of action would enure tothe lender (financial creditor) to proceed against the principalborrower, as well as the guarantor in equal measure in case theycommit default in repayment of the amount of debt acting jointlyand severally – It would still be a case of default committed by theEguarantor itself, if and when the principal borrower fails todischarge his obligation in respect of amount of debt – For, theobligation of the guarantor is co-extensive and co-terminous withthat of the principal borrower to defray the debt, as predicated in s.128 of the Contract Act – As a consequence of such default, thestatus of the guarantor metamorphoses into a debtor or a corporateFdebtor if it happens to be a corporate person, within the meaningof s. 3(8) of the Code – Principal borrower may or may not be acorporate person, but if a corporate person extends guarantee forthe loan transaction concerning a principal borrower not being acorporate person, it would still be covered within the meaning ofGexpression “corporate debtor” in s. 3(8) of the Code – Upon defaultcommitted by the principal borrower, the liability of the company(corporate person), being the guarantor, instantly triggers the rightof the financial creditor to proceed against the corporate person(being a corporate debtor) – Thus, action u/s. 7 of the Code couldbe legitimately invoked even against a (corporate) guarantor beingHa corporate debtor.

s. 7 - Application under – For initiation of corporateinsolvency resolution process by financial creditor-Bank againstcorporate debtor concerning guarantee offered by it in respect ofa loan account of the principal borrower, who committed default –Application filed after three years from the date of declaration ofthe loan account as Non-performing Asset, being the date of default,if barred by limitation – Held: When the principal borrower and/orthe (corporate) guarantor admit and acknowledge their liabilityafter declaration of NPA but before the expiration of three yearstherefrom including the fresh period of limitation due to (successive)acknowledgments, it is not possible to extricate them from the renewedlimitation accruing due to the effect of Section 18 of the LimitationAct – s. 18 would come into play every time when the principalborrower and/or the corporate guarantor-corporate debtor, as thecase may be, acknowledge their liability to pay the debt – Suchacknowledgment must be before the expiration of the prescribedperiod of limitation including the fresh period of limitation due toacknowledgment of the debt, from time to time, for institution of theproceedings u/s. 7 of the Code – On facts, NCLT as well as NCLATadverted to the acknowledgments by the principal borrower as wellas the corporate guarantor-debtor after declaration of NPA timeand again after 30.01.2010 and lastly on 08.12.2018 – View takenby the NCLT and NCLAT that a fresh period of limitation is requiredto be computed from the date of acknowledgment of debt by theprincipal borrower from time to time and in particular the (corporate)guarantor/corporate debtor vide last communication dated08.12.2018, is affirmed – Thus, the application u/s. 7 of the Codefiled on 13.02.2019 is within limitation – Limitation Act, 1963 - s.18.

s. 3(8) – Expression ‘corporate debtor’ – Meaning of.

s. 5(5A) – Expression ‘corporate guarantor – Meaning of.

s. 5(7) – Expression ‘financial creditor’ – Meaning of.

Disposing of the appeal, the Court

HELD: 1.1 Section 7 of the Insolvency and BankruptcyCode is an enabling provision, which permits the financial creditorto initiate Corporate Insolvency Resolution Process-CIRP against ABC

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Aa corporate debtor. The corporate debtor can be the principalborrower. It can also be a corporate person assuming the statusof corporate debtor having offered guarantee, if and when theprincipal borrower/debtor (be it a corporate person or otherwise)commits default in payment of its debt. [Para 17][942-F]

B1.2 Indubitably, a right or cause of action would enure tothe lender (financial creditor) to proceed against the principalborrower, as well as the guarantor in equal measure in case theycommit default in repayment of the amount of debt acting jointlyand severally. It would still be a case of default committed by theguarantor itself, if and when the principal borrower fails toCdischarge his obligation in respect of amount of debt. For, theobligation of the guarantor is co-extensive and coterminous withthat of the principal borrower to defray the debt, as predicated inSection 128 of the Contract Act. As a consequence of such default,the status of the guarantor metamorphoses into a debtor or aDcorporate debtor if it happens to be a corporate person, withinthe meaning of Section 3(8) of the Code. For, as aforesaid,expression “default” has also been defined in Section 3(12) ofthe Code to mean non-payment of debt when whole or any partor installment of the amount of debt has become due or payableand is not paid by the debtor or the corporate debtor, as the caseEmay be. A priori, in the context of the provisions of the Code, ifthe guarantor is a corporate person (as defined in Section 3(7) ofthe Code), it would come within the purview of expression“corporate debtor”, within the meaning of Section 3(8) of theCode. [Paras 19 and 20][943-D-H]F

1.3 The generic provision contained in Section 3(37)postulates that the words and expressions used and not definedin the Code, but defined in enactments referred to therein, shallhave the meanings respectively assigned to them in those Acts.Drawing support from s. 3 (37), it must follow that the lenderGwould be a financial creditor within the meaning of the Code. Theprincipal borrower may or may not be a corporate person, but if acorporate person extends guarantee for the loan transactionconcerning a principal borrower not being a corporate person, it would still be covered within the meaning of expression“corporate debtor” in Section 3(8) of the Code. [Para 21][944-A-C]

1.4 It is not possible to countenance the submission of theappellant that as the principal borrower is not a corporate person,the financial creditor could not have invoked remedy underSection 7 of the Code against the corporate person who had merelyoffered guarantee for such loan account. That action can stillproceed against the guarantor being a corporate debtor,consequent to the default committed by the principal borrower.There is no reason to limit the width of Section 7 of the Codedespite law permitting initiation of CIRP against the corporatedebtor, if and when default is committed by the principal borrower.For, the liability and obligation of the guarantor to paythe outstanding dues would get triggered co-extensively.[Para 22][944-C-E]

1.5 Section 5(5A) of the Code defines the expression“corporate guarantor” to mean a corporate person, who is thesurety in a contract of guarantee to a Corporate debtor. Thisdefinition has been inserted by way of an amendment, which hascome into force on 6.6.2018. This provision is essentially in thecontext of a corporate debtor against whom CIRP is to be initiatedin terms of the amended Section 60 of the Code, which amendmentis introduced by the same Amendment Act of 2018. This changewas to empower NCLT to deal with the insolvency resolution orliquidation processes of the corporate debtor and its corporateguarantor in the same tribunal pertaining to same transaction,which has territorial jurisdiction over the place where theregistered office of the corporate debtor is located. That doesnot mean that proceedings under Section 7 of the Code cannotbe initiated against a corporate person in respect of guarantee tothe loan amount secured by person not being a corporate person,in case of default in payment of such a debt. [Para 23][944-E-H]

1.6 Accepting the submission of the appellant would resultin diluting or constricting the expression “corporate debtor”occurring in Section 7 of the Code, which means a corporateperson, who owes a debt to any person. The “debt” of a corporateperson would mean a liability or obligation in respect of a claim AB

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Awhich is due from any person and includes a financial debt andoperational debt. The expression “debt” in Section 3(11) is wideenough to include liability of a corporate person on account ofguarantee given by it in relation to a loan account of any personincluding not being a corporate person in the event of defaultcommitted by the latter. It would still be a “financial debt” of theBcorporate person, arising from the guarantee given by it, withinthe meaning of Section 5(8) of the Code. [Para 24][945-A-C]1.7 The expression “corporate guarantee” is not definedin the Code, whereas, expression “corporate guarantor” isdefined in Section 5(5A) of the Code. If the legislature intendedCto exclude a corporate person offering guarantee in respect of aloan secured by a person not being a corporate person, from theexpression “corporate debtor” occurring in Section 7, it wouldhave so provided in the Code (at least when Section 5(5A) cameto be inserted defining expression “corporate guarantor”). It was Dalso open to the legislature to amend Section 7 of the Code andreplace the expression “corporate debtor” by a suitableexpression. It could have even amended Section 3(8) to excludeliability arising from a guarantee given for the loan account of anentity not being a corporate person. Similarly, it could have alsoamended expression “financial debt” in Section 5(8), “claim” inESection 3(6), “debt” in Section 3(11) and “default” in Section3(12). There is no indication to that effect in the contemporaneouslegislative changes brought about. [Para 25][945-C-F]

1.8 The expression “corporate debtor” is defined in Section3(8) which applies to the Code as a whole. Whereas, expressionF“corporate guarantor” in Section 5(5A), applies only to Part II ofthe Code. Upon harmonious and purposive construction of thegoverning provisions, it is not possible to extricate the corporateperson from the liability (of being a corporate debtor) arising onaccount of the guarantee given by it in respect of loan given to aGperson other than corporate person. The liability of the guarantoris co-extensive with that of the principal borrower. The remedyunder Section 7 is not for recovery of the amount, but is for re-organisation and insolvency resolution of the corporate debtorwho is not in a position to pay its debt and commits default in that H

regard. It is open to the corporate debtor to pay off the debt,which had become due and payable and is not paid by the principalborrower, to avoid the rigours of Chapter II of the Code in generaland Section 7 in particular. [Para 26][945-F-H; 946-A]

1.9 In law, the status of the guarantor, who is a corporateperson, metamorphoses into corporate debtor, the momentprincipal borrower (regardless of not being a corporate person)commits default in payment of debt which had become due andpayable. Thus, action under Section 7 of the Code could belegitimately invoked even against a (corporate) guarantor beinga corporate debtor. The definition of “corporate guarantor”in Section 5(5A) of the Code needs to be so understood.[Para 27][946-B]

1.10 A priori, it cannot be said that since the loan was offeredto a proprietary firm (not a corporate person), action under Section7 of the Code cannot be initiated against the corporate personeven though it had offered guarantee in respect of that transaction.Whereas, upon default committed by the principal borrower, theliability of the company (corporate person), being the guarantor,instantly triggers the right of the financial creditor to proceedagainst the corporate person (being a corporate debtor). [Para28][946-C-D]

2.1 The provisions of Limitation Act have been madeapplicable to the proceedings under the Code, as far as may beapplicable. For, Section 238A predicates that the provisions ofLimitation Act shall, as far as may be, apply to the proceedings orappeals before the Adjudicating Authority, the NCLAT, the DRTor the Debt Recovery Appellate Tribunal, as the case may be.After enactment of Section 238A of the Code on 06.06.2018,validity whereof has been upheld by this Court, it is not open tocontend that the limitation for filing application under Section 7of the Code would be limited to Article 137 of the Limitation Actand extension of prescribed period in certain cases could be onlyunder Section 5 of the Limitation Act. There is no reason toexclude the effect of Section 18 of the Limitation Act tothe proceedings initiated under the Code. [Para 36][952-H;953-A-C]

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A2.2 Ordinarily, upon declaration of the loan account/debt asNPA that date can be reckoned as the date of default to enablethe financial creditor to initiate action under Section 7 of the Code.However, Section 7 comes into play when the corporate debtorcommits “default”. Section 7, consciously uses the expression“default” - not the date of notifying the loan account of theBcorporate person as NPA. Further, the expression “default” hasbeen defined in Section 3(12) to mean non-payment of “debt”when whole or any part or installment of the amount of debt hasbecome due and payable and is not paid by the debtor or thecorporate debtor, as the case may be. In cases where theCcorporate person had offered guarantee in respect of loantransaction, the right of the financial creditor to initiate actionagainst such entity being a corporate debtor - corporateguarantor, would get triggered the moment the principal borrowercommits default due to non-payment of debt. Thus, when theprincipal borrower and/or the (corporate) guarantor admit andDacknowledge their liability after declaration of NPA but beforethe expiration of three years therefrom including the fresh periodof limitation due to (successive) acknowledgments, it is notpossible to extricate them from the renewed limitation accruingdue to the effect of Section 18 of the Limitation Act. Section 18 ofEthe Act gets attracted the moment acknowledgment in writingsigned by the party against whom such right to initiate resolutionprocess under Section 7 of the Code enures. Section 18 of theAct would come into play every time when the principal borrowerand/or the corporate guarantor - corporate debtor, as the casemay be, acknowledge their liability to pay the debt. SuchFacknowledgment, however, must be before the expiration of theprescribed period of limitation including the fresh period oflimitation due to acknowledgment of the debt, from time to time,for institution of the proceedings under Section 7 of the Code.Further, the acknowledgment must be of a liability in respect ofGwhich the financial creditor can initiate action under Section 7 ofthe Code. [Para 37][954-A-F]

2.3 The NCLT as well as the NCLAT have adverted to theacknowledgments by the principal borrower as well as the H

corporate guarantor - debtor after declaration of NPA from timeto time and lastly on 08.12.2018. The fact that acknowledgmentwithin the limitation period was only by the principal borrowerand not the guarantor, would not absolve the guarantor of itsliability flowing from the letter of guarantee and memorandum ofmortgage. The liability of the guarantor being co-extensive withthe principal borrower under Section 128 of the Contract Act, ittriggers the moment principal borrower commits default in payingthe acknowledged debt. This is a legal fiction. Such liability ofthe guarantor would flow from the guarantee deed andmemorandum of mortgage, unless it expressly provides to thecontrary. [Para 38][954-G-H; 955-A]

2.4 Besides the clear assertion made in the application aboutthe last acknowledgment on 08.12.2018 resulting in fresh periodof limitation, the tribunal adverted to the correspondenceexchanged between the principal borrower, corporate guarantor(corporate debtor) and the financial creditor (Bank) during therelevant period after 30.01.2010 until filing of application underSection 7 of the Code on 13.02.2019, wherein it is clearly statedthat the corporate debtor duly secured the credit facilities fromtime to time. The last such acknowledgement by the (corporate)guarantor/corporate debtor taken note of by the NCLT as alsothe NCLAT. Indeed, this communication has been sent withoutprejudice by the corporate guarantor - corporate debtor.Nevertheless, it does acknowledge the liability of the principalborrower; and of corporate guarantee having been offered by thecorporate debtor in that behalf. The liability of the corporateguarantor - corporate debtor is co-extensive with that of theprincipal borrower and it gets triggered the moment the principalborrower commits default in paying the debt when it had becomedue and payable. The liability of the corporate debtor - corporateguarantor also triggers when the principal borrower acknowledgesits liability in writing within the expiration of prescribed period oflimitation, to pay such outstanding dues and fails to pay theacknowledged debt. Correspondingly, right to initiate action withinthree years from such acknowledgment of debt accrues to thefinancial creditor. That however, needs to be exercised within AB

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Athree years when the right to sue/apply accrues, as per Article137 of the Limitation Act. This is the effect of Section 18 of theLimitation Act. In that, a fresh period of limitation is required tobe computed from the time when the acknowledgment was sosigned by the principal borrower or the corporate guarantor -corporate debtor, as the case may be, provided theBacknowledgment is before expiration of the prescribed period oflimitation. Thus, the conclusion reached by the NCLT andaffirmed by the NCLAT on the basis of the asservation in theapplication under Section 7 of the Code is a possible view.[Para 40][957-G-H; 961-D-H; 962-A]

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2.5 It is the appellant’s submission that the acknowledgmentof liability to pay the amount in question was by the principalborrower and that acknowledgment cannot be the basis toproceed against the corporate guarantor (corporate debtor).Section 18 of the Limitation Act, however, posits that a freshDperiod of limitation shall be computed from the time when theparty against whom the right is claimed acknowledges its liability.The financial creditor has not only the right to recover theoutstanding dues by filing a suit, but also has a right to initiateresolution process against the corporate person (being acorporate debtor) whose liability is co-extensive with that of theEprincipal borrower and more so when it activates from the writtenacknowledgment of liability and failure of both to discharge thatliability. [Para 41][962-C-E]

2.6 The view taken by the NCLT and which commended tothe NCLAT-that a fresh period of limitation is required to beFcomputed from the date of acknowledgment of debt by theprincipal borrower from time to time and in particularthe (corporate) guarantor/corporate debtor vide lastcommunication dated 08.12.2018, is affirmed. Thus, theapplication under Section 7 of the Code filed on 13.02.2019 isGwithin limitation. [Para 42][962-F]

Gaurav Hargovindbhai Dave vs. Asset ReconstructionCompany (India) Limited & Anr. (2019) 10 SCC 572 :[2019] 13 SCR 224 - distinguished H

Shanti Conductors Private Limited v. Assam StateElectricity Board & Ors. (2020) 2 SCC 677 : [2019] 16SCR 252; Babulal Vardharji Gurjar vs. Veer GurjarAluminium Industries Private Limited & Anr. (I) (2019)15 SCC 209; B.K. Educational Services Private Limitedvs. Parag Gupta and Associates (2019) 11 SCC 633:[2018] 12 SCR 794; Vashdeo R. Bhojwani vs.Abhyudaya Co-operative Bank Limited & Anr. (2019)9SCC 158 : [2019] 12 SCR 75; Sagar Sharma & Anr.vs. Phoenix Arc Private Limited & Anr. (2019) 10 SCC353; Bank of Bihar Ltd. vs. Dr. Damodar Prasad &Anr. [1969] 1 SCR 620; Jignesh Shah and Anr. vs.Union of India and Anr. (2019) 10 SCC 750 : [2019]12 SCR 678; Babulal Vardharji Gurjar vs. Veer GurjarAluminium Industries Private Limited & Anr. (II) (2020)15 SCC 1 - referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2734of 2020

From the Judgment and Order dated 19.03.2020 of the NationalCompany Law Appellate Tribunal, New Delhi in Company Appeal (AT)(Insolvency) No. 77 of 2020.

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AAbhijit Sinha, Sandeep Nagar, Ashutosh Dubey, AbhishekChauhan, Ms. Rajshri D., V.S. Rawat, Advs. for the Appellant.

O. P. Gaggar, Ms. Astha Prasad, Aditya Gaggar, Advs. for theRespondents.

The Judgment of the Court was delivered byBA. M. KHANWILKAR, J.

1. Two central issues arise for our determination in this appeal, asfollows: -

(i) Whether an action under Section 7 of the Insolvency andCBankruptcy Code, 2016[1] can be initiated by the financialcreditor (Bank) against a corporate person (being acorporate debtor) concerning guarantee offered by it inrespect of a loan account of the principal borrower, whohad committed default and is not a “corporate person” withinDthe meaning of the Code?

(ii) Whether an application under Section 7 of the Code filedafter three years from the date of declaration of the loanaccount as Non-performing Asset[2], being the date of default,is not barred by limitation?

E2. Briefly stated, respondent No. 1 bank[3] extended credit facilityto M/s. Mahaveer Construction[4], a proprietary firm of the appellant,through two loan agreements in years 2007 and 2008 for a term loan ofRs.9,60,00,000/- (Rupees nine crore sixty lakhs only) and an additionalamount of Rs.2,45,00,000/- (Rupees two crore forty-five lakhs only),respectively. The loan amount was disbursed to the Principal Borrower.FM/s. Surana Metals Limited[5], of which the appellant is also a Promoter/Director, had offered guarantee to the two loan accounts of the PrincipalBorrower. The stated loan accounts were declared NPA on 30.1.2010.The Financial Creditor then issued a recall notice on 19.2.2010 to thePrincipal Borrower, as well as, the Corporate Debtor, demandingGrepayment of outstanding amount of Rs.12,35,11,548/- (Rupees twelvecrore thirty-five lakhs eleven thousand five hundred forty-eight only).

1 for short, “the Code”

2 for short, “NPA”

3 for short, “the Financial Creditor”

4 for short, “the Principal Borrower”

H5 for short, the “Corporate Debtor”

3. The Financial Creditor then filed an application under Section19 of the Recovery of Debts Due to Banks and Financial InstitutionsAct, 1993[6] against the Principal Borrower before the Debt RecoveryTribunal[7] at Kolkata.

4. During the pendency of the stated action initiated by the FinancialCreditor, the Principal Borrower had repeatedly assured to pay theoutstanding amount, but as that commitment remained unfulfilled, theFinancial Creditor eventually wrote to the Corporate Debtor on 3.12.2018in the form of a purported notice of payment under Section 4(1) of theCode. The Corporate Debtor replied to the said notice of demand videletter dated 8.12.2018, inter alia, clarifying that it was not the PrincipalBorrower nor owed any financial debt to the financial creditor and hadnot committed any default in repayment of the stated outstanding amount.This communication was sent without prejudice.

5. The Financial Creditor then proceeded to file an applicationunder Section 7 of the Code on 13.2.2019 for initiating CorporateInsolvency Resolution Proceeding[8] against the Corporate Debtor, beforethe National Company Law Tribunal, Kolkata[9]. This application came tobe resisted on diverse counts and in particular, on the preliminary groundthat it was not maintainable because the Principal Borrower was not a“corporate person”; and further, it was barred by limitation, as the dateof default was 30.1.2010, whereas, the application had been filed on13.2.2019 i.e., beyond the period of three years. These two preliminaryobjections came to be negatived by the Adjudicating Authority videjudgment and order dated 6.12.2019.

6. The Adjudicating Authority held that the action had been initiatedagainst the Corporate Debtor, being coextensively liable to repay thedebt of the Principal Borrower and having failed to do so despite therecall notice, became Corporate Debtor and thus liable to be proceededwith under Section 7 of the Code. As regards the second objection, theAdjudicating Authority found that the Principal Borrower, as also, theCorporate Debtor had admitted and acknowledged the debt time andagain, lastly on 8.12.2018 and thus the application filed on 13.2.2019was within limitation.

6 for short, “the 1993 Act”

7 for short, “DRT”

8 for short, “the CIRP”

9 for short, the “Adjudicating Authority” or “NCLT”, as the case may be.

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A7. The appellant carried the matter before the National CompanyLaw Appellate Tribunal[10], New Delhi by way of Company Appeal (AT)(Ins) No. 77 of 2020. The NCLAT vide impugned judgment and orderdated 19.3.2020, dismissed the appeal and affirmed the conclusionreached by the Adjudicating Authority on the two preliminary objectionsraised by the appellant.B

8. The appellant, feeling aggrieved, has approached this Court byway of present appeal reiterating the two preliminary objections referredto above. This Court vide order dated 28.7.2020 issued notice in thisappeal, recording the principal ground urged at that time. The order readsthus: -C

“A question has been raised by learned counsel forthe appellant that the proprietorship firm had taken the loan,the principal borrower has to be corporate entity, in orderto maintain the proceedings under the Insolvency andBankruptcy Code.

Issue notice confined to the aforesaid aspectreturnable in four weeks.

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Steps be taken within three days from today. If thesteps are not taken within the stipulated time, the civil appealshall stand dismissed without further reference to the Court.

EThere shall be interim stay on the operation ofimpugned judgment till the next date of hearing.

List in the last week of August, 2020.”

9. According to the appellant, Section 7 plainly ordains that anapplication can be filed by a financial creditor only against the corporateFdebtor. A corporate debtor can either be a corporate person, who hadborrowed money or a corporate person, who gives guarantee regardingrepayment of money borrowed by another corporate person. In otherwords, the Code cannot apply in respect of “debts” of an entity who isnot a “corporate person”. This position is reinforced by the fact thatinitiation of insolvency of firms and/or individuals in terms of Part III ofGthe Code has still not been notified. Further, Section 2 of the Code cameto be amended to clarify that partnership firms and proprietorship firmswould fall within Part III of the Code on the basis of the differentiationmade in the report of the Insolvency Law Committee, February, 2020,which reads thus: - “2. DEFINITION OF ‘PROPRIETORSHIP FIRMS’

“2. DEFINITION OF ‘PROPRIETORSHIP FIRMS’

2.1 Part III of the Code is applicable to debtors who are individualsor partnership firms. Section 2 of the Code was recently amendedto clarify the different categories of debtors falling within Part IIIof the Code – (i) personal guarantors to corporate debtors, (ii)partnership firms and proprietorship firms, and (iii) other individuals.Though section 2(f) of the Code now includes the words“proprietorship firms”, this term has not been defined in anotherlegislation.

2.2 Proprietorship firms are businesses that are owned, managedand controlled by one person. They are the most common form ofbusinesses in India and are based in unlimited liability of the owner.Legally, a proprietorship is not a separate legal entity and is merelythe name under which a proprietor carries on business. Due tothis, proprietorships are usually not defined in statutes. Thoughsome statutes define proprietorships, such definition is limited tothe context of the statute.

For example, Section 2(haa) of the Chartered Accountants Act,1949 defined a ‘sole proprietorship’ as “an individual whoengages himself in practice of accountancy or engages inservices …”. Notably, ‘proprietorship firms’ have also not beenstatutorily defined in many other jurisdictions.”

We may also usefully advert to Chapter 7 of the same report. Itdeals with the issue relating to Guarantors. Paragraph 7.3 thereof readsthus: - “7.3 The Committee noted that while, under a contract ofguarantee, a creditor is not entitled to recover more than what isdue to it, an action against the surety cannot be prevented solelyon the ground that the creditor has an alternative relief against theprincipal borrower. Further, as discussed above, the creditoris at liberty to proceed against either the debtor alone, orthe surety alone, or jointly against both the debtor and thesurety. Therefore, restricting a creditor from initiating CIRPagainst both the principal borrower and the surety would prejudicethe right of the creditor provided under the contract of guaranteeto proceed simultaneously against both of them.”

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AIt is urged that any other view would inevitably result in indirectlyenforcing the Code even against entities, such as partnership firms andproprietorship firms and/or individuals, who are governed by Part III ofthe Code, without notifying the same. According to the appellant, acorporate guarantee is one which is extended in respect of a loan givento a “corporate person”, coming within the purview of Part II of theBCode. That is reinforced by the amendment Act 26 of 2018 on accountof insertion of definition of “corporate guarantor” with effect from6.6.2018, as can be discerned from the portion of report of InsolvencyLaw Committee, dated 26.3.2018, which reads thus: - “23.1 Section 60 of the Code requires that the AdjudicatingCAuthority for the corporate debtor and personal guarantors shouldbe the NCLT which has territorial jurisdiction over the place wherethe registered office of the corporate debtor is located. This createsa link between the insolvency resolution or bankruptcy processesof the corporate debtor and the personal guarantor such that theDmatters relating to the same debt are dealt in the same tribunal.However, no such link is present between the insolvency resolutionor liquidation processes of the corporate debtor and the corporateguarantor. It was decided that section 60 may be suitablyamended to provide for the same NCLT to deal with theinsolvency resolution or liquidation processes of theEcorporate debtor and its corporate guarantor. For thispurpose, the term “corporate guarantor” will also bedefined.”

FIn substance, it is urged that since an application under Section 7of the Code cannot be maintained against a principal borrower, who isnot a “corporate person”, it must follow that in respect of such transaction,no action under Section 7 of the Code can be maintained against acompany or corporate person, merely because it had extended guaranteethereto.G

10. As regards maintainability of the subject application underSection 7 on the ground of being barred by limitation, it is urged by theappellant that the date of default must be reckoned as 30.1.2010, onwhich date, the loan accounts were declared as NPA. That fact hasbeen duly noted in the subject application filed on 13.2.2019. Hence, theHapplication was ex facie barred by limitation in view of Article 137 of the Limitation Act, 1963[11]. It is urged that Section 18 of the LimitationAct invoked by the Financial Creditor and which commended to theAdjudicating Authority and the NCLAT, has no application to theproceedings under the Code. It applies only to suits for recovery and inrespect of property or right. The Insolvency and Bankruptcy Code is aself-contained code. Section 7 thereof merely refers to the factum ofdefault being the cause of action for maintaining the application. Theamended provision in the form of Section 238A of the Code, which hascome into effect with effect from 6.6.2018, is only a clarificatory provision.It is urged that there is distinction between the proceedings for recoveryand winding up under the Companies Act and the action under Section 7of the Code. It is further urged that action under the Code cannot beinvoked nor can be used as a fresh opportunity for creditors and claimantswho had failed to invoke remedy in respect of claims which had becometime barred under the existing laws. It is finally urged that even if Section18 of the Limitation Act was to be applied to an action under Section 7of the Code, the application including Form-1 filed by the financial creditorbefore the adjudicating authority in no way makes out the case for grantingbenefit under Section 18 of the Limitation Act. The factual narration inthe subject application is that the date of default was 30.1.2010 beingthe date of declaration of accounts as NPA, and no other fact which isrelevant for giving benefit under Section 18 of the Limitation Act asexpounded in Shanti Conductors Private Limited vs. Assam StateElectricity Board & Ors.[12], has been stated therein. In other words,respondent No. 1 has failed to set forth a case in that behalf in theapplication as filed. Further, letters relied upon do not mention about thefactum of acknowledgment of debt by the Principal Borrower or theCorporate Debtor, as the case may be. The said communications weresent without prejudice and cannot be read as an acknowledgment ofliability as such. The communication dated 8.12.2018, therefore, will beof no avail to the Financial Creditor. All other relied upon communicationshave been sent by the Principal Borrower and not the Corporate Debtor,who is an independent legal entity. The so-called acknowledgment bythe Principal Borrower, therefore, cannot bind the Corporate Debtor.Communications sent by the Principal Borrower after the originallimitation period had expired, in any case, cannot be taken into accountfor invoking remedy under Section 7 of the Code. Obviously, there was 11 for short, “the Limitation Act”

12 (2020) 2 SCC 677

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Adelay in filing of the application under Section 7 and despite that, it wasnot accompanied by application for condonation of delay under Section5 of the Limitation Act. According to the appellant, the factum ofapplication being barred by limitation is a mixed question of fact and lawand would involve triable issues. Those aspects can be finally adjudicatedafter production of evidence in the form of affidavits before theBAdjudicating Authority.

11. Reliance is placed by the appellant on the dictum of this Courtin Babulal Vardharji Gurjar vs. Veer Gurjar Aluminium IndustriesPrivate Limited & Anr. (I)[13], B.K. Educational Services PrivateLimited vs. Parag Gupta and Associates[14], Gaurav HargovindbhaiCDave vs. Asset Reconstruction Company (India) Limited & Anr.[15],Vashdeo R. Bhojwani vs. Abhyudaya Co-operative Bank Limited &Anr.[16] and Sagar Sharma & Anr. vs. Phoenix Arc Private Limited &Anr.[17].

12. The Financial Creditor has refuted the plea regardingDmaintainability of the application against the Corporate Debtor. Accordingto the Financial Creditor, the liability of the Principal Borrower and ofthe Guarantor is coextensive or coterminous, as predicated in Section128 of the Indian Contract Act, 1872[18]. This legal position is well-established by now (see –Bank of Bihar Ltd. vs. Dr. Damodar PrasadE& Anr.[19]). Section 7 of the Code enables the financial creditor to initiateCIRP against the principal borrower if it is a corporate person, includingagainst the corporate person being a guarantor in respect of loans obtainedby an entity not being a corporate person. The Financial Creditor besidesplacing reliance on Section 7, would also rely on definition of expressions“corporate debtor” in Section 3(8), “debt” in Section 3(11), “financialFcreditor” in Section 5(7) and “financial debt” in Section 5(8) of the Code.It is urged that upon conjoint reading of these provisions, it is crystalclear that a “financial debt” includes the amount of any liability in respectof any guarantee or indemnity for any money borrowed against interest.Resultantly, the money borrowed by sole proprietorship of the appellantG13 (2019) 15 SCC 20914 (2019) 11 SCC 63315 (2019) 10 SCC 57216 (2019) 9 SCC 15817 (2019) 10 SCC 35318 for short, “the Contract Act”H19 (1969) 1 SCR 620

against payment of interest for which the Corporate Debtor stoodguarantee or indemnity, was also a “financial debt” of the CorporateDebtor and for that reason, the Financial Creditor - respondent No. 1,could proceed under Section 7 of the Code. It is further urged that thedefinition of “corporate guarantor” introduced by way of amendment of2018 is to define a corporate guarantor in relation to a corporate debtoragainst whom any CIRP is to be initiated, in reference to Section 60 ofthe Code. The objection regarding maintainability of the application againsta corporate guarantor, is, therefore, devoid of merit and needs to berejected.

13. As regards the second issue of application being barred bylimitation, it is contended that this Court had issued limited notice in thepresent appeal only to examine the question noted in the order dated28.7.2020. Hence, the second objection of limitation need not beexamined. It is then urged that in any case, there is no substance even inthis objection. Referring to the decisions relied upon by the appellant, itis urged that it was open to the Financial Creditor to maintain theapplication even after three years from the declaration of accounts asNPA because of the acknowledgment of debt including by the CorporateDebtor from time to time and lastly on 8.12.2018, whereby it admittedthe initial loan granted by the Financial Creditor in favour of the PrincipalBorrower and also of having provided collateral security to secure theliability of the Principal Borrower. The Adjudicating Authority, as wellas, the NCLAT had justly taken due cognizance of the said admission toconclude that fresh period of limitation commenced because of suchacknowledgment by the Corporate Debtor. Further, the default committedby the Corporate Debtor is a continuing one. It is urged that the Courtmust look behind the veil of corporate entity M/s. Surana Metals Limited,being the alter ego of the appellant herein. The Code is a special enactmentfor resolution of a financial debt and it is in larger public interest thatfinancial debts are recovered and the debts of corporate person arerestructured to revive the failing corporate entity. Thus understood, theprocess is not for recovery as such, but for resolution of the insolvencyof the corporate person. It is further urged that there is no need to relegatethe parties before the Adjudicating Authority on the question of limitation.It is not a mixed question of fact and law as contended, but on the factsdiscerned from the communication and as stated in the subject application,it is obvious that the Corporate Debtor had admitted the liability videcommunication dated 8.12.2018, for which reason the application filed AB

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Aon 13.2.2019 was within limitation. The Financial Creditor-respondentNo. 1 pressed for dismissal of the appeal.

14. We have heard Mr. Abhijit Sinha, learned counsel for theappellant and Mr. O.P. Gaggar, learned counsel for respondent No. 1.

15. It is no more res integra that the Code is a complete code —Bprovisioning for actions and proceedings relating to, amongst others,reorganisation and insolvency resolution of corporate persons in a timebound manner for maximisation of value of assets of such persons,availability of credit and balance the interests of all the stakeholdersincluding alteration in the order of priority of payment of GovernmentCdues and to establish an Insolvency and Bankruptcy Board of India, andfor matters connected therewith or incidental thereto.

ISSUE (i):

16. Section 7 of the Code propounds the manner in which corporateinsolvency resolution process (CIRP) may be initiated by the “financialDcreditor” against a “corporate person being the corporate debtor”. Itpredicates that a financial creditor either by itself or jointly with otherfinancial creditors or any other person on behalf of the financial creditor,as may be notified by the Central Government, may file an applicationfor initiating CIRP against a corporate debtor before the AdjudicatingEAuthority when a default is committed by it. The expression “default” isexpounded in Section 3(12) to mean non-payment of debt which hadbecome due and payable and is not paid by the debtor or the corporatedebtor, as the case may be.

17. Section 7 is an enabling provision, which permits the financialFcreditor to initiate CIRP against a corporate debtor. The corporate debtorcan be the principal borrower. It can also be a corporate person assumingthe status of corporate debtor having offered guarantee, if and when theprincipal borrower/debtor (be it a corporate person or otherwise) commitsdefault in payment of its debt.

18. The term “financial creditor” has been defined in Section 5(7)Gread with expression “Creditor” in Section 3(10) of the Code to mean aperson to whom a financial debt is owed and includes a person to whomsuch debt has been legally assigned or transferred to. This means thatthe applicant should be a person to whom a financial debt is owed. Theexpression “financial debt” has been defined in Section 5(8). AmongstHother categories specified therein, it could be a debt along with interest, which is disbursed against the consideration for the time value of moneyand would include the amount of any liability in respect of any of theguarantee or indemnity for any of the items referred to in sub-clauses(a) to (h) of the same clause. It is so provided in sub-clause (i) of Section5(8) of the Code to take within its ambit a liability in relation to a guaranteeoffered by the corporate person as a result of the default committed bythe principal borrower. The expression “debt” has been defined separatelyin the Code 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 debtand operational debt. The expression “claim” would certainly cover theright of the financial creditor to proceed against the corporate personbeing a guarantor due to the default committed by the principal borrower.The expression “claim” has been defined in Section 3(6), which meansa right to payment, whether or not such right is reduced to judgment,fixed, disputed, undisputed, legal, equitable, secured or unsecured. It alsomeans a right to remedy for breach of contract under any law for thetime being in force, if such breach gives rise to a right to payment inrespect of specified matters.

19. Indubitably, a right or cause of action would enure to the lender(financial creditor) to proceed against the principal borrower, as well asthe guarantor in equal measure in case they commit default in repaymentof the amount of debt acting jointly and severally. It would still be a caseof default committed by the guarantor itself, if and when the principalborrower fails to discharge his obligation in respect of amount of debt.For, the obligation of the guarantor is coextensive and coterminous withthat of the principal borrower to defray the debt, as predicated in Section128 of the Contract Act. As a consequence of such default, the status of the guarantor metamorphoses into a debtor or a corporate debtor if ithappens to be a corporate person, within the meaning of Section 3(8) ofthe Code. For, as aforesaid, expression “default” has also been definedin Section 3(12) of the Code to mean non-payment of debt when wholeor any part or instalment of the amount of debt has become due orpayable and is not paid by the debtor or the corporate debtor, as the casemay be.

20. A priori, in the context of the provisions of the Code, if theguarantor is a corporate person (as defined in Section 3(7) of the Code),it would come within the purview of expression “corporate debtor”, withinthe meaning of Section 3(8) of the Code.

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A21. It may be useful to also advert to the generic provision containedin Section 3(37). It postulates that the words and expressions used andnot 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 wouldbe a financial creditor within the meaning of the Code. The principalBborrower may or may not be a corporate person, but if a corporateperson extends guarantee for the loan transaction concerning a principalborrower not being a corporate person, it would still be covered withinthe meaning of expression “corporate debtor” in Section 3(8) of theCode.C

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22. Thus understood, it is not possible to countenance the argumentof the appellant that as the principal borrower is not a corporate person,the financial creditor could not have invoked remedy under Section 7 ofthe Code against the corporate person who had merely offered guaranteefor such loan account. That action can still proceed against the guarantorDbeing a corporate debtor, consequent to the default committed by theprincipal borrower. There is no reason to limit the width of Section 7 ofthe Code despite law permitting initiation of CIRP against the corporatedebtor, if and when default is committed by the principal borrower. For,the liability and obligation of the guarantor to pay the outstanding dueswould get triggered coextensively.E

23. To get over this position, much reliance was placed on Section5(5A) of the Code, which defines the expression “corporate guarantor”to mean a corporate person, who is the surety in a contract of guaranteeto a Corporate debtor. This definition has been inserted by way of anamendment, which has come into force on 6.6.2018. This provision, asFrightly urged by the respondents, is essentially in the context of a corporatedebtor against whom CIRP is to be initiated in terms of the amendedSection 60 of the Code, which amendment is introduced by the sameAmendment Act of 2018. This change was to empower NCLT to dealwith the insolvency resolution or liquidation processes of the corporateGdebtor and its corporate guarantor in the same Tribunal pertaining tosame transaction, which has territorial jurisdiction over the place wherethe registered office of the corporate debtor is located. That does notmean that proceedings under Section 7 of the Code cannot be initiatedagainst a corporate person in respect of guarantee to the loan amountsecured by person not being a corporate person, in case of default inHpayment of such a debt.

24. Accepting the aforementioned argument of the appellant wouldresult in diluting or constricting the expression “corporate debtor” occurringin Section 7 of the Code, which means a corporate person, who owes adebt to any person. The “debt” of a corporate person would mean aliability or obligation in respect of a claim which is due from any personand includes a financial debt and operational debt. The expression “debt”in Section 3(11) is wide enough to include liability of a corporate personon account of guarantee given by it in relation to a loan account of anyperson including not being a corporate person in the event of defaultcommitted by the latter. It would still be a “financial debt” of the corporateperson, arising from the guarantee given by it, within the meaning ofSection 5(8) of the Code.

25. Notably, the expression “corporate guarantee” is not definedin the Code. Whereas, expression “corporate guarantor” is defined inSection 5(5A) of the Code. If the legislature intended to exclude acorporate person offering guarantee in respect of a loan secured by aperson not being a corporate person, from the expression “corporatedebtor” occurring in Section 7, it would have so provided in the Code (atleast when Section 5(5A) came to be inserted defining expression“corporate guarantor”). It was also open to the legislature to amendSection 7 of the Code and replace the expression “corporate debtor” bya suitable expression. It could have even amended Section 3(8) to excludeliability arising from a guarantee given for the loan account of an entitynot being a corporate person. Similarly, it could have also amendedexpression “financial debt” in Section 5(8) of the Code, “claim” in Section3(6), “debt” in Section 3(11) and “default” in Section 3(12). There is noindication to that effect in the contemporaneous legislative changes broughtabout.

26. The expression “corporate debtor” is defined in Section 3(8)which applies to the Code as a whole. Whereas, expression “corporateguarantor” in Section 5(5A), applies only to Part II of the Code. Uponharmonious and purposive construction of the governing provisions, it isnot possible to extricate the corporate person from the liability (of beinga corporate debtor) arising on account of the guarantee given by it inrespect of loan given to a person other than corporate person. The liabilityof the guarantor is coextensive with that of the principal borrower. Theremedy under Section 7 is not for recovery of the amount, but is forreorganisation and insolvency resolution of the corporate debtor who isnot in a position to pay its debt and commits default in that regard. It is A

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Aopen to the corporate debtor to pay off the debt, which had become dueand payable and is not paid by the principal borrower, to avoid the rigoursof Chapter II of the Code in general and Section 7 in particular.

27. In law, the status of the guarantor, who is a corporate person,metamorphoses into corporate debtor, the moment principal borrowerB(regardless of not being a corporate person) commits default in paymentof debt which had become due and payable. Thus, action under Section7 of the Code could be legitimately invoked even against a (corporate)guarantor being a corporate debtor. The definition of “corporateguarantor” in Section 5(5A) of the Code needs to be so understood.

28. A priori, we find no substance in the argument advancedCbefore us that since the loan was offered to a proprietary firm (not acorporate person), action under Section 7 of the Code cannot be initiatedagainst the corporate person even though it had offered guarantee inrespect of that transaction. Whereas, upon default committed by theprincipal borrower, the liability of the company (corporate person), beingDthe guarantor, instantly triggers the right of the financial creditor to proceedagainst the corporate person (being a corporate debtor). Hence, the firstquestion stands answered against the appellant.

ISSUE (ii):

ISSUE (ii):

29. As noted earlier, this Court while entertaining the present appealEin its order dated 28.07.2020 had adverted to only one contention - whichalready stands answered against the appellant. However, the appellantwould contend that the other plea taken by him and having been dealtwith by the NCLT as well as the NCLAT, the appellant ought to beallowed to pursue that plea — regarding the maintainability of applicationunder Section 7 of the Code, on the ground of being barred by limitation.FInasmuch as, if this ground is answered in favour of the appellant, itwould go to the root of the matter touching upon the jurisdiction of theNCLT to entertain the subject application under Section 7 of the Code.Hence, despite the objection of the respondent (financial creditor) not topermit the appellant to canvas this ground, in our opinion, it is necessaryto answer this ground as well in the interest of justice; and also, becauseGit is the duty of the court under Section 3 of the Limitation Act, to answerthe stated issue at the threshold or at appropriate stage, as the case maybe, even if it is not expressly raised by the opposite party.

30. The objection regarding limitation has been negatived by theNCLT vide judgment dated 06.12.2019. It observed in paragraph 7 of itsHjudgment as follows:

“7. It is seen from the evidence on record that not only theoriginal borrower but also the Corporate Debtor admittedand acknowledged the debt time and again on 27.05.2015(exhibit J-1) and 08.12.2018 (exhibit K). The CorporateDebtor replied the notice issued by the Bank clearlyadmitting the debt. We have gone through his reply to the notice.We hold that his reply is in form of admission of debt and nothingelse. The Corporate Debtor contended that recovery proceedingis pending in Debt Recovery Tribunal, Kolkata against theCorporate Debtor. It cannot be said that debt become due andpayable. We hold that it is admission of debt and his onlydefense is that it is yet to become due and payable. In thiscase, by virtue of guarantee in favour of the Bank, theCorporate Debtor undertook to clear loan of the originalborrower in case original borrower commit default and it isduty of the Corporate Debtor to clear the outstanding. Hisdefence is that debt is yet to become due is not sustainable.”

31. After so observing, the NCLT proceeded to advert to thedecision in Gaurav Hargovindbhai Dave (supra) and distinguished thesame on the ground that in that case the original borrower and thecorporate debtor had not admitted or acknowledged the debt after thedate of default, which had occurred three years before the filing of theapplication. In the present case, however, the principal borrower as wellas the corporate debtor had acknowledged the debt time and again after30.01.2010 and lastly on 08.12.2018, which was the basis of filing ofsubject application under Section 7 of the Code on 13.02.2019.

32. Even the NCLAT noted this ground urged by the appellant inparagraph 21 of the impugned judgment as follows:

“21. In the instant case the Corporate Debtor (M/s Surana MetalsLtd.) had duly executed the Letter of Guarantor dated 2.2.2007,17.2.2007 and 3.8.2008 for the Loan facilities Sanctioned by theBank to M/s Mahaveer Construction also that the CorporateDebtor had acknowledged its debt on 16.9.2010, 3.3.2012,27.5.2015, 24.10.2016, and executed by the Appellant (VidePage. No.196, 197, 140, 198) and on 8.12.2018 executedby the (M/s Surana Metals Ltd.) page no.141 respectivelyagainst the execution of the Letters of Guarantee.

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ASignificantly, the Corporate Debtor in its Reply dated 8.12.2018had tacitly admitted the execution of Guarantors Agreement dated2.2.2007, 17.2.2007, 3.8.2008 in and by which the CorporateDebtor had agreed to pay Rs.12,05,00,000/- crore and interest onsuch sum.”

B

Finally, in paragraph 30 of the impugned judgment, the NCLATafter analysing the relevant decisions relied upon by the parties in B.K.Educational Services Private Limited (supra), Jignesh Shah andAnr. vs. Union of India and Anr.[20]and Gaurav Hargovindbhai DaveC(supra), concluded as follows:

“30. In the light of detailed qualitative and quantitative discussionsaforesaid and also this Tribunal keeping in mind the present factsand circumstances of the instant case in an integral fashion, whichfloat on the surface case comes to an inescapable conclusion thatDthere is an acknowledgment of ‘Debt’ on various dates like 2.2.07,17.2.07, 3.8.07 for the loan facilities availed by MahaveerConstruction the Letters of Guarantee Acknowledged bythe Corporate Debtor (M/s Surana Metals Ltd.) on16.9.10, 3.3.12, 27.5.15, 24.10.16 executed by the Appellantand on 8.12.18 by the Surana Metals Ltd. etc. This apart,Ehere is an acknowledgment of Debt by the PrincipalBorrower but also the Corporate Debtor on 27.5.15 &8.12.18 respectively. The object of specifying time limit forlimitation is undoubtedly based on ‘Public Policy’. The applicationprojected before the Adjudicating Authority (NCLT) KolkataFBench, on 13.2.19 is well within limitation and not barred byLimitation. Looking at from any angle, the present Appeal sansmerits and the same is dismissed without costs. …”

33. We may straight away advert to the decision of this Court inGBabulal Vardharji Gurjar vs. Veer Gurjar Aluminium IndustriesPrivate Limited & Anr. (II)[21] wherein after analysing the earlierdecisions of this Court, the Court summed up the position in the followingwords:

20 (2019) 10 SCC 750H21 (2020) 15 SCC 1

“32. When Section 238-A of the Code is read with the abovenoted consistent decisions of this Court in InnoventiveIndustries[22], B.K. Educational Services[23], Swiss Ribbons[24], K.Sashidhar[25], Jignesh Shah[26], Vashdeo R. Bhojwani[27], GauravHargovindbhai Dave[28] and Sagar Sharma[29] respectively, thefollowing basics undoubtedly come to the fore:

(a) that the Code is a beneficial legislation intended to putthe corporate debtor back on its feet and is not a mere moneyrecovery legislation; (b) that CIRP is not intended to be adversarial to thecorporate debtor but is aimed at protecting the interests of thecorporate debtor;

(c) that intention of the Code is not to give a new lease oflife to debts which are time-barred; (d) that the period of limitation for an application seekinginitiation of CIRP under Section 7 of the Code is governed byArticle 137 of the Limitation Act and is, therefore, three yearsfrom the date when right to apply accrues; (e) that the trigger for initiation of CIRP by a financialcreditor is default on the part of the corporate debtor, that is tosay, that the right to apply under the Code accrues on the datewhen default occurs; (f) that default referred to in the Code is that of actual non-payment by the corporate debtor when a debt has become dueand payable; and (g) that if default had occurred over three years prior tothe date of filing of the application, the application would be time-barred save and except in those cases where, on facts, the delayin filing may be condoned; and 22 Innoventive Industries Ltd. vs. ICICI Bank, (2018) 1 SCC 407

23 supra at footnote 14

24 Swiss Ribbons (P) Ltd. vs. Union of India, (2019) 4 SCC 17

25 K. Sashidhar vs. Indian Overseas Bank, (2019) 12 SCC 150

26 supra at footnote 20

27 supra at footnote 16

28 supra at footnote 15

29 supra at footnote 17

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A(h) an application under Section 7 of the Code is not forenforcement of mortgage liability and Article 62 of the LimitationAct does not apply to this application.”

34. In the earlier part of this reported decision, the Court did advertto the exposition in Jignesh Shah (supra). In that decision, the CourtBhad analysed the provisions of the Code by first adverting to the decisionin B.K. Educational Services Private Limited (supra) in which Section238A of the Code was referred to. Paragraphs 7 and 8 of the decision inJignesh Shah (supra) read thus:

“7. Having heard the learned Senior Counsel for the parties, it isCimportant to first advert to this Court’s decision in B.K.Educational Services (P) Ltd.[30] in which Section 238-A of theCode was referred to, which states as follows:

“238-A. Limitation.—The provisions of the LimitationAct, 1963 (36 of 1963) shall, as far as may be, apply toDthe proceedings or appeals before the Adjudicating Authority,the National Company Law Appellate Tribunal, the DebtsRecovery Tribunal or the Debts Recovery Appellate Tribunal,as the case may be.”

8. In para 7 of the said judgment, the Report of the InsolvencyELaw Committee of March 2018 was referred to as follows: (B.K.Educational Services case, SCC pp. 644-45, para 11)

“11. Having heard the learned counsel for both sides, it isimportant to first set out the reason for the introduction ofSection 238-A into the Code. This is to be found in the Reportof the Insolvency Law Committee of March 2018, as follows:

F

‘28. Application of Limitation Act, 1963

28.1. The question of applicability of the Limitation Act,1963 (“the Limitation Act”) to the Code has been deliberatedupon in several judgments of NCLT and Nclat. The existingjurisprudence on this subject indicates that if a law is acomplete code, then an express or necessary exclusion ofthe Limitation Act should be respected.[31]In light of theconfusion in this regard, the Committee deliberated on G

30 supra at footnote 14H31 Ravula Subba Rao vs. CIT, AIR 1956 SC 604

the issue and unanimously agreed that the intent of theCode could not have been to give a new lease of life todebts which are time-barred. It is settled law that when adebt is barred by time, the right to a remedy is time-barred.[32]This requires being read with the definition of “debt” and“claim” in the Code. Further, debts in winding-upproceedings cannot be time-barred[33], and there appears tobe no rationale to exclude the extension of this principle oflaw to the Code.

28.2. Further, non-application of the law on limitation createsthe following problems: first, it re-opens the right of financialand operational creditors holding time-barred debts underthe Limitation Act to file for CIRP, the trigger for which isdefault on a debt above INR one lakh. The purpose of thelaw of limitation is ‘to prevent disturbance or deprivationof what may have been acquired in equity and justiceby long enjoyment or what may have been lost by aparty’s own inaction, negligence or laches’ [34]. Thoughthe Code is not a debt recovery law, the trigger being“default in payment of debt” renders the exclusion ofthe law of limitation counter-intuitive. Second, it re-opens the right of claimants (pursuant to issuance of a publicnotice) to file time-barred claims with the IRP/RP, whichmay potentially be a part of the resolution plan. Such aresolution plan restructuring time-barred debts and claimsmay not be in compliance with the existing laws for thetime being in force as per Section 30(4) of the Code.

28.3. Given that the intent was not to package the Codeas a fresh opportunity for creditors and claimants whodid not exercise their remedy under existing laws withinthe prescribed limitation period, the Committee thoughtit fit to insert a specific section applying the LimitationAct to the Code. The relevant entry under theLimitation Act may be on a case-to-case basis. It was 32 Punjab National Bank vs. Surendra Prasad Sinha, 1993 Supp (1) SCC 499

33 Interactive Media and Communication Solution (P) Ltd. vs. GO Airlines Ltd., 2013SCC OnLine Del 445

34 Rajender Singh vs. Santa Singh, (1973) 2 SCC 705

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further noted that the Limitation Act may not apply toapplications of corporate applicants, as these are initiatedby the applicant for its own debts for the purpose of CIRPand are not in the form of a creditor’s remedy.’”

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(emphasis in original and supplied)”

B

In paragraph 21 after analysing the decisions on the point, theCourt noted as follows:

“21. The aforesaid judgments correctly hold that a suit for recoverybased upon a cause of action that is within limitation cannot in anyCmanner impact the separate and independent remedy of a winding-up proceeding. In law, when time begins to run, it can onlybe extended in the manner provided in the Limitation Act.For example, an acknowledgment of liability under Section18 of the Limitation Act would certainly extend theDlimitation period, but a suit for recovery, which is a separateand independent proceeding distinct from the remedy ofwinding up would, in no manner, impact the limitation withinwhich the winding-up proceeding is to be filed, by somehowkeeping the debt alive for the purpose of the winding-upproceeding.”E

35. The purport of such observation has been dealt with in thecase of Babulal Vardharji Gurjar (II) (supra). Suffice it to observethat this Court had not ruled out the application of Section 18 of theFLimitation Act to the proceedings under the Code, if the fact situation ofthe case so warrants. Considering that the purport of Section 238A ofthe Code, as enacted, is clarificatory in nature and being a procedurallaw had been given retrospective effect; which included application ofthe provisions of the Limitation Act on case-to-case basis. Indeed, thepurport of amendment in the Code was not to reopen or revive the timeGbarred debts under the Limitation Act. At the same time, accrual offresh period of limitation in terms of Section 18 of the Limitation Act ison its own under that Act. It will not be a case of giving new lease totime barred debts under the existing law (Limitation Act) as such.

36. Notably, the provisions of Limitation Act have been madeHapplicable to the proceedings under the Code, as far as may be applicable.

For, Section 238A predicates that the provisions of Limitation Act shall,as far as may be, apply to the proceedings or appeals before theAdjudicating Authority, the NCLAT, the DRT or the Debt RecoveryAppellate Tribunal, as the case may be. After enactment of Section238A of the Code on 06.06.2018, validity whereof has been upheld bythis Court, it is not open to contend that the limitation for filing applicationunder Section 7 of the Code would be limited to Article 137 of theLimitation Act and extension of prescribed period in certain cases couldbe only under Section 5 of the Limitation Act. There is no reason toexclude the effect of Section 18 of the Limitation Act to the proceedingsinitiated under the Code. Section 18 of the Limitation Act reads thus:

“18. Effect of acknowledgment in writing.—(1) Where, beforethe expiration of the prescribed period for a suit or application inrespect of any property or right, an acknowledgment of liability inrespect of such property or right has been made in writing signedby the party against whom such property or right is claimed, or byany person through whom he derives his title or liability, a freshperiod of limitation shall be computed from the time when theacknowledgment was so signed.

(2) Where the writing containing the acknowledgment is undated,oral evidence may be given of the time when it was signed; butsubject to the provisions of the Indian Evidence Act, 1872 (1 of1872), oral evidence of its contents shall not be received.

Explanation.—For the purposes of this section,—

(a) an acknowledgment may be sufficient though it omits tospecify the exact nature of the property or right, or aversthat the time for payment, delivery, performance orenjoyment has not yet come or is accompanied by a refusalto pay, deliver, perform or permit to enjoy, or is coupledwith a claim to set off, or is addressed to a person otherthan a person entitled to the property or right; (b)the word “signed” means signed either personally or by anagent duly authorised in this behalf; and

(c) an application for the execution of a decree or order shallnot be deemed to be an application in respect of any propertyor right.”

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A37. Ordinarily, upon declaration of the loan account/debt as NPAthat date can be reckoned as the date of default to enable the financialcreditor to initiate action under Section 7 of the Code. However, Section7 comes into play when the corporate debtor commits “default”. Section7, consciously uses the expression “default” — not the date of notifyingthe loan account of the corporate person as NPA. Further, the expressionB“default” has been defined in Section 3(12) to mean non-payment of“debt” when whole or any part or instalment of the amount of debt hasbecome due and payable and is not paid by the debtor or the corporatedebtor, as the case may be. In cases where the corporate person hadoffered guarantee in respect of loan transaction, the right of the financialCcreditor to initiate action against such entity being a corporate debtor(corporate guarantor), would get triggered the moment the principalborrower commits default due to non-payment of debt. Thus, when theprincipal borrower and/or the (corporate) guarantor admit andacknowledge their liability after declaration of NPA but before theexpiration of three years therefrom including the fresh period of limitationDdue to (successive) acknowledgments, it is not possible to extricate themfrom the renewed limitation accruing due to the effect of Section 18 ofthe Limitation Act. Section 18 of the Limitation Act gets attracted themoment acknowledgment in writing signed by the party against whomsuch right to initiate resolution process under Section 7 of the CodeEenures. Section 18 of the Limitation Act would come into play everytime when the principal borrower and/or the corporate guarantor(corporate debtor), as the case may be, acknowledge their liability topay the debt. Such acknowledgment, however, must be before theexpiration of the prescribed period of limitation including the fresh periodof limitation due to acknowledgment of the debt, from time to time, forFinstitution of the proceedings under Section 7 of the Code. Further, theacknowledgment must be of a liability in respect of which the financialcreditor can initiate action under Section 7 of the Code.

38. In the present case, the NCLT as well as the NCLAT haveadverted to the acknowledgments by the principal borrower as well asGthe corporate guarantor - corporate debtor after declaration of NPAfrom time to time and lastly on 08.12.2018. The fact that acknowledgmentwithin the limitation period was only by the principal borrower and notthe guarantor, would not absolve the guarantor of its liability flowingfrom the letter of guarantee and memorandum of mortgage. The liabilityHof the guarantor being coextensive with the principal borrower under LAXMI PAT SURANA v. UNION BANK OF INDIA[A. M. KHANWILKAR, J.]

Section 128 of the Contract Act, it triggers the moment principal borrowercommits default in paying the acknowledged debt. This is a legal fiction.Such liability of the guarantor would flow from the guarantee deed andmemorandum of mortgage, unless it expressly provides to the contrary.

39. In the application under Section 7 of the Code filed by thefinancial creditor on 13.02.2019, in Part IV thereof, it has been clearlystated that the corporate debtor duly secured the credit facilities fromtime to time. The relevant portion of paragraph 1 of Part IV of theapplication and paragraph 2 of the same Part reinforces this position.The same reads thus:

“PART IV

PARTICULARS OF FINANCIAL DEBT

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SUPREME COURT REPORTS

[2021] 2 S.C.R.

LAXMI PAT SURANA v. UNION BANK OF INDIA957[A. M. KHANWILKAR, J.]COMPUTATION OF However, since the Principal Borrower as well as its AAMOUNT AND DAYS Corporate Guarantor being the Corporate Debtor herein OF DEFAULT IN had defaulted to pay any part or portion of the outstanding TABULAR FORM) amount to UNION BANK OF INDIA the Financial Creditor thereafter the Financial Creditor on 14[th] July, 2010 filed an application Under Section 19 of the RDDB Act, 1993 before the Debts Recovery Tribunal-3, Kolkata being O.A. No.130 of 2010 which is still pending for final Badjudication and in that proceeding the said Principal Borrower as well as Corporate Debtor are appearing and several interim orders have been passed from time to time related to collection of rents from the sub-Licensee.” (emphasis supplied in italics)Again, in Part V specifying about the particulars of financial debtC

Again, in Part V specifying about the particulars of financial debtin paragraphs 5 and 8, it is mentioned as follows:

“PART V

PARTICULARS OF FINANCIAL DEBT

…..5.THE LATEST AND Attached to this application. COMPLETE COPY OF Sanction letters dated 19.01.2007 and 25.08.2008 and Letter THE FINANCIAL dated 08.12.2018 written by the Corporate Debtor CONTRACT acknowledging their liability towards Financial Creditor-REFLECTING ALL Union Bank of India. AMENDMENTS AND WAIVERS TO DATE (ATTACH A COPY)8.LIST OF OTHER Letter dated 08.12.2018 written by the Corporate Debtor DOCUMENTS acknowledging their liability towards Financial Creditor-ATTACHED TO THIS Union Bank of India.” APPLICATION IN ORDER TO PROVE THE EXISTENCE OF FINANCIAL DEBT, THE AMOUNT AND DATE OF DEFAULT.(emphasis supplied)

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40. Besides the clear assertion made in the application about thelast acknowledgment on 08.12.2018 resulting in fresh period of limitation,the Tribunal adverted to the correspondence exchanged between theprincipal borrower, corporate guarantor (corporate debtor) and thefinancial creditor (Bank) during the relevant period after 30.01.2010 untilfiling of application under Section 7 of the Code on 13.02.2019. The lastsuch acknowledgement by the (corporate) guarantor/corporate debtortaken note of by the NCLT as also the NCLAT reads thus:

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“SURANA METALS LIMITED

12, BONFIELD LANE, KOLKATA-700001

CIN:L27209WB1983PLC36141

SML/SB/2/18-19/08

December 08, 2018WITHOUT PREJUDICE

The Chief Manager,Union Bank of India,Asset Recovery Branch, Kolkata,15, India Exchange Place,KOLKATA-700 001.

Sir,

SUB:Notice regarding initiation of proceedings underthe Insolvency and Bankruptcy Code, 2016.

We acknowledge the receipt of your Notice beingNo.ARB:KOL:198:18-19 dated 03.12.2018 issued under Section4(1) of The Insolvency and Bankruptcy Code, 2016 and are reallysurprised to note its contents. We deny each and every allegationcontained therein including the nature of loan and quantum ofclaim and wish to inform you as under:

1. No Term Loan was sanctioned by you to M/s. MahaveerConstruction, 12, Bonfield Lane, Kolkata for a sum ofRs.9,45,00,000/- and Rs.2,45,00,000/- as alleged by youin your above stated letter. We understand that a loan forRs.945 lacs and Rs.245 lacs was sanction by you to M/sMahaveer Construction of No.12, Bonfield Lane, Kolkata-700001 under “rent securitization” i.e. against future rentreceivables from M/s Pantaloon Retail (India) Ltd. (nowknown as Future Retail Ltd.) for the development of acommercial complex at Kharagpur, on a government land,on the basis of securities provided by them of which youare fully aware of. We also understand that M/s MahaveerConstruction has executed a power of attorney in yourfavour authorizing you to collect the future rent receivablesfrom M/s Pantaloon Retail (India) Ltd. and you have beencollecting the rent from them directly and/or through aReceiver appointed by the Ld. DRT-III, Kolkata, without any intimation to M/s Mahaveer Construction. As suchM/s Mahaveer Construction is a lawful borrower and theguarantee for repayment has been provided to you by M/s Pantaloon Retail (India) Ltd. which was unconditionallyaccepted by you. We are not the borrowers and/or thecorporate debtor as claimed by you in your aforesaidnotice.

2. We have, at the request of M/s MahaveerConstruction, provided you a collateral security onlyin the form of a premises being No.17, UltadangaMain Road, Kolkata by way of creation of a paripassucharge with Syndicate Bank, of which we are aLessee only. It is a Debutter Trust Estate. Ourcorporate guarantee was issued in accordance withthe provisions of The Companies Act, 1956 only.

3. You have initiated legal proceedings for recovery of yourloan against Mahaveer Construction in the Learned DebtRecovery Tribunal -III, at Kolkata treating them asdefaulters and the said proceeding is awaiting adjudication.We have not committed any default as alleged by youand therefore cannot be termed as a defaulter, far less tospeak of corporate defaulter, by any stretch of imagination.You are, therefore, not authorized legally to initiate furtherproceedings for the self same cause under the pretext ofThe Insolvency and Bankruptcy Code, 2016.

4. Until the recovery proceedings initiated by youagainst M/s Mahaveer Construction in the LearnedCourt of Debt Recovery Tribunal -III at Kolkataattains finality you are, under the provisions of law,not authorized to further threaten us and/or initiateany proceedings against us for recovery of loangranted to M/s Mahaveer Construction.

5. The Insolvency and Bankruptcy Code, 2016 proceeds tosecure the benefits of all creditors, dealing with the assetsof the debtor in The Insolvency and Bankruptcy Code,2016. Therefore before proceeding under The Insolvencyand Bankruptcy Code, 2016 you have to surrender all thesecurities for the benefit of all the creditors (COC). That A

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Awould also include the assets involved in SARFAESI Actand RDBA, 1973 proceedings. Thus the Bank has tochoose before proceeding under The Insolvency andBankruptcy Code, 2016 whether to surrender the securityor to exclusively deal with the same as a secured creditor.If you choose to deal with the property as secured creditorByou cannot proceed under The Insolvency and BankruptcyCode, 2016. O.A. and S.A. are the remedies. Per contraif the Bank chooses to offer and/or surrender its securitythen it has to waive its right over the secured asset andproceed under The Insolvency and Bankruptcy Code,C2016 but not OA and SA.

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6. You have not made demand against the PrincipalBorrower – Mahaveer Construction. Thus withoutany demand being made against/from the PrincipalBorrower the issuance of deemed notice upon theDCorporate Guarantor is bad in law.

7. The IBC cannot be made as a tool to recover debt.Issuance of the purported notice is nothing but athreat to recover debt. We are commercially solventand the alleged debt is disputed since O.A. No.310 ofE2010 and is pending adjudication before the Learned DebtRecovery Tribunal -III at Kolkata, and therefore the debtis not yet crystallized, wherein you have unequivocallystated that Pantaloon Retail (India) Ltd. is liable to repaythe loan granted to Mahaveer Construction under rentFsecuritization. Thus the Bank cannot proceed under TheInsolvency and Bankruptcy Code, 2016.

8. There is no mis-match between the asset and liability. Infact asset held as security is for more valuable thanliability. Thus venturing upon the provisions of TheGInsolvency and Bankruptcy Code, 2016 is unfounded/untenable in law.

9. This letter is issued reserving our rights to add furtherpoints of law and/or to act further as may be advised inthe matter.

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Under the circumstances it is most humbly requested torefrain from taking any action against us for the reasons statedabove as otherwise it will only be an abuse of the process of lawand you would be doing so at your own peril and cost.

Please acknowledge the receipt of this letter.

Thanking you,

Yours faithfully,

For Surana Metals Limited.

Sd/-

SURANA METALS LIMITED12, BONFIELD LANE,KOLKATA-700 001"

Indeed, this communication has been sent without prejudice bythe corporate guarantor (corporate debtor). Nevertheless, it doesacknowledge the liability of M/s. Mahaveer Construction (principalborrower); and of corporate guarantee having been offered by thecorporate debtor in that behalf. As aforesaid, the liability of the corporateguarantor (corporate debtor) is coextensive with that of the principalborrower and it gets triggered the moment the principal borrower commitsdefault in paying the debt when it had become due and payable. Theliability of the corporate debtor (corporate guarantor) also triggers whenthe principal borrower acknowledges its liability in writing within theexpiration of prescribed period of limitation, to pay such outstanding duesand fails to pay the acknowledged debt. Correspondingly, right to initiateaction within three years from such acknowledgment of debt accrues tothe financial creditor. That however, needs to be exercised within threeyears when the right to sue/apply accrues, as per Article 137 of theLimitation Act. This is the effect of Section 18 of the Limitation Act. Inthat, a fresh period of limitation is required to be computed from the timewhen the acknowledgment was so signed by the principal borrower orthe corporate guarantor (corporate debtor), as the case may be, providedthe acknowledgment is before expiration of the prescribed period oflimitation. Thus, the conclusion reached by the NCLT and affirmed bythe NCLAT on the basis of the asservation in the application under Section A

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A7 of the Code, read with the relevant undisputed correspondence, is apossible view.

41. The appellant was at pains to persuade us that the intentionbehind the communication dated 08.12.2018 sent to the financial creditorby the corporate guarantor (corporate debtor) is a triable matter, as itBwas sent without prejudice. We are not impressed by this submission.The fact that the principal borrower had availed of credit/loan andcommitted default and that the (corporate) guarantor/corporate debtorhad offered guarantee in respect of the loan account is not disputed.What is urged by the appellant is that the acknowledgment of liability topay the amount in question was by the principal borrower and thatCacknowledgment cannot be the basis to proceed against the corporateguarantor (corporate debtor). Section 18 of the Limitation Act, however,posits that a fresh period of limitation shall be computed from the timewhen the party against whom the right is claimed acknowledges itsliability. The financial creditor has not only the right to recover theDoutstanding dues by filing a suit, but also has a right to initiate resolutionprocess against the corporate person (being a corporate debtor) whoseliability is coextensive with that of the principal borrower and more sowhen it activates from the written acknowledgment of liability and failureof both to discharge that liability.

E42. Suffice it to conclude that there is no substance even in thesecond ground urged by the appellant regarding the maintainability ofthe application filed by the respondent-financial creditor under Section 7of the Code on the ground of being barred by limitation. Instead, weaffirm the view taken by the NCLT and which commended to the NCLAT— that a fresh period of limitation is required to be computed from theFdate of acknowledgment of debt by the principal borrower from time totime and in particular the (corporate) guarantor/corporate debtor videlast communication dated 08.12.2018. Thus, the application under Section7 of the Code filed on 13.02.2019 is within limitation.

43. As no other issue arises for our consideration — except theGtwo grounds urged by the appellant regarding the maintainability of theapplication for initiating CIRP by the financial creditor (Bank) underSection 7 of the Code, we dispose of this appeal leaving all “othergrounds” and contentions available to both the sides open to be decidedin the pending proceedings before the NCLT. The same be decided H

uninfluenced by any observation(s) made in the impugned judgment orin the present judgment.

44. Accordingly, this appeal is disposed of in the above terms withno order as to costs. Pending applications, if any, also stand disposed of.

Nidhi Jain

Appeal disposed of.

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