The Supreme Court ruled that the Insolvency Process Maintainable Against Corporate Guarantors even if the principal borrower is not a ‘Corporate Person’.
The respondent bank, Union Bank of India had extended two loans to M/s. Mahaveer Construction (Principal Borrower), a proprietary firm of the appellant Laxmi Pat Surana, through two loan agreements in 2007 and 2008.
M/s. Surana Metals Limited, of which the appellant is also a Promoter/Director, had offered guarantee to the two loan accounts of the Principal Borrower.
The loan accounts were declared NPA on January 30, 2010. The Financial Creditor then issued a recall notice on 19.2.2010 to the Principal Borrower, as well as, the Corporate Debtor, demanding repayment of the outstanding amount.
The Financial Creditor then filed an application under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 19936 against the Principal Borrower before the Debt Recovery Tribunal at Kolkata.
During the pendency of the same, the Principal Borrower had repeatedly assured to pay the outstanding amount, but as that commitment remained unfulfilled, the Financial Creditor eventually wrote to the Corporate Debtor on December 3, 2018 in the form of a purported notice of payment under Section 4(1) of the Code.
The Corporate Debtor replied to the said notice of demand vide letter dated December 8, 2018, inter alia, clarifying that it was not the Principal Borrower nor owed any financial debt to the financial creditor and had not committed any default in repayment of the stated outstanding amount.
The Financial Creditor then proceeded to file an application under Section 7 of the Code on February 13, 2019 for initiating Corporate Insolvency Resolution Proceeding against the Corporate Debtor, before the National Company Law Tribunal, Kolkata
The NCLT said that the Corporate Debtor had become liable to be proceeded with under Section 7 of the Code and the same decision was affirmed by the NCLAT leading to the appeal before the Supreme Court.
The three-judge Bench of Justices AM Khanwilkar, BR Gavai and Krishna Murari ruled that Action to initiate Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) can be initiated by the financial creditor (Bank) against a corporate person concerning guarantee offered by it in respect of a loan account of the principal borrower, who had committed default, even if the principal borrower is not a ‘corporate person’.
“For, the obligation of the guarantor is coextensive and coterminous with that of the principal borrower to defray the debt, as predicated in Section 128 of the Contract Act. As a consequence of such default, the status of the guarantor metamorphoses into a debtor or a corporate debtor if it happens to be a corporate person, within the meaning of Section 3(8) of the Code,” the Court noted.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan AdFree. We welcome your comments at info@taxscan.in
