LAXMIPAT SURANA VS UNION BANK OF INDIA & ANR (CASE ANALYSIS)

The Supreme Court has held in Laxmipat Surana Vs. Union Bank of India & Anr. (Civil Appeal No. 2734 of 2020) that status of guarantor, who is a corporate person, metamorphoses into corporate debtor, the moment principal borrower (regardless of not being a corporate person) commits default in payment of debt which had become due and payable. As such insolvency proceedings can be initiated against Corporate Guarantor. The Supreme Court has also reiterated that Section 18 of Limitation will be applicable to the proceedings under the Insolvency and Bankruptcy Code, 2016.

FACTS

Union Bank of India has extended credit facility to M/s Mahaveer Construction a proprietary firm through two loan agreements in years 2007 and 2008 for a term loan of Rs. 9,60,00,000/- and an additional amount of Rs. 2,45,00,000/- was disbursed to Mahaveer Construction. M/s Surana Metals Ltd. had offered guarantee to the two loan accounts of the principal borrower. The loan account was declared NPA on 30.01.2010. The Financial Creditor issued recall notice on 19.02.2010 to the principal borrower as well as corporate guarantor.

ISSUES

The issues before the Supreme Court were as under:

• Whether an action under Section 7 of the Insolvency and Bankruptcy Codes, 2016 can be initiated by the Financial Creditor (Bank) against a corporate person (being a corporate debtor) concerning guarantee offered offered by it in respect of loan account  of the principal borrower, who had committed default and is not a “corporate person”.
• Whether an application under Section 7 of the Code filed after three years from the date of declaration of the loan account as Non performing Asset, being the date of default is not barred by limitation?

FINDING OF THE SUPREME COURT

Issue (i)

The Supreme Court held  that  a right or cause of action would enure to the lender (financial creditor) to proceed against the principal borrower, as well as guarantor in equal measure in case they commit default in repayment of amount of debt acting jointly and severally. It would still be case of default committed by the guarantor itself, if and when the principal borrower fails to discharge his obligation in respect of amount of debt. It was observed that the obligation of the guarantor is coextensive and coterminous with that of principal borrower to defray the debt, as predicated in Section 128 of the Contract Act.

The Supreme Court held that if a guarantor is a corporate person, it would come within purview of the Corporate debtor.

Issue (ii)

Hon’ble Supreme Court held that Section 18 of Limitation will be applicable to the proceedings under the Insolvency and Bankruptcy Code, 2016.  Section 18  of the Limitation Act gets attracted the moment acknowledgment in writing signed by the party against whom such right to initiate resolution process under Section 7 of the Code enures.  Section 18  of the Limitation Act would come into play every time when the principal borrower and/or the corporate guarantor (corporate debtor), as the case may be, acknowledge their liability to pay the debt. Such acknowledgment, however, must be before the expiration of the prescribed period of limitation including the fresh period of limitation due to acknowledgment of the debt, 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 of which the financial creditor can initiate action under Section 7 of the Code .

_________________________________________