NCLAT (24.11.2020) in Piyush Periwal Vs. Stressed Assets Stabilization Fund (SASF) [Company Appeal (AT) (Insolvency) No. 932 of 2019] held that; It goes without saying that in terms of Clause 11 of the Corporate Guarantee dated 16th July, 1997, the Corporate Guarantor is liable to be proceeded against by the lender or its assignee in the same manner as if it was the Principal Borrower/ Debtor.
Excerpts of the order;
This appeal has been preferred by Mr. Piyush Periwal, Promoter/ Shareholder of ‘National Plywood Industries Ltd.’ (NPIL), the Corporate Debtor, against impugned order dated 26th August, 2019 passed by the Adjudicating Authority (National Company Law Tribunal) Guwahati Bench, Guwahati by virtue whereof application of Respondent – ‘Stressed Assets Stabilization Fund’ (SASF) - Financial Creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘I&B Code’) came to be admitted with consequential directions declaring moratorium and appointment of Mr. Sandeep Khaitan as Interim Resolution Professional as a sequel to the order of admission. Aggrieved thereof, the Appellant has assailed the impugned order primarily on the ground that the application was time barred and also not maintainable under Section 7 of the I&B Code.
# 2. For a better grasp of the issues raised in this appeal a peep into the factual matrix would be inevitable. ‘Industrial Development Bank of India’ (IDBI) advanced loan facilities to ‘National Boards Ltd.’ (NBL) – the Principal Borrower under its Project Finance Scheme for which the ‘Corporate Debtor’ stood as ‘Corporate Guarantor’. It happened on 27th March, 1997. The Principal Borrower – NBL defaulted in repayment of loan to IDBI. IDBI recalled the loan facility on 9th November, 2001 and invoked corporate guarantee of the Corporate Debtor – NPIL vide letter dated 3rd December, 2001 raising a demand of Rs.5,42,94,868/-. IDBI filed OA No. 27/2002 with Debts Recovery Tribunal (DRT), Guwahati and obtained a recovery certificate dated 5th January, 2005 against the Principal Borrower – NBL and its personal guarantors. Corporate Debtor – NPIL was not a party to the said OA. A reference was filed before the ‘Board for Industrial and Financial Reconstruction’ (BIFR) and the said reference was pending before BIFR till 30th November, 2016 when SICA was repealed. Despite being armed with the recovery certificate issued by DRT Guwahati and the Principal Borrower – NBL having entered into a One Time Settlement (OTS) with IDBI, the amount in question remained unrecovered from the Principal Borrower and its Personal Guarantors. Subsequently, in terms of Assignment Deed dated 30th September, 2004, IDBI assigned its debts to SASF, who became the Financial Creditor as Assignee of IDBI and filed application under Section 7 of the I&B Code against the NPIL – the Corporate Debtor, who raised the plea of limitation, the Deed of Guarantee being legally unenforceable, effect of OTS emanating from the Principal Borrower without its consent and knowledge and the application being not maintainable for failure to prove default before the Adjudicating Authority which came to be repelled in terms of the impugned order.
# 3. …………. It is submitted that when a guarantee is invoked, there can be no question of a continuing cause of action, limitation will set in from the date of invocation of Corporate Guarantee. It is submitted that there is no acknowledgement of debt by Principal Borrower in respect of the claim made in the instant proceedings. Moreover an acknowledgement of liability by a Principal Borrower cannot be construed as acknowledgement of liability by a Guarantor who is the Corporate Debtor in the instant case. SASF invoked the Corporate Guarantee on 3rd December, 2001. The Guarantee agreement clearly provided that the question of limitation as against the Corporate Debtor will commence from the demand under the guarantee as against the Corporate Debtor. Thus, it is contended, the default in this case will start from 3rd December, 2001 when Corporate Guarantee was invoked. It is therefore contended that the insolvency petition was barred by limitation. It is further contended that the SASF discharged the Corporate Debtor from all liabilities during the period when CD was in BIFR. No dues certificate was issued by SASF when the Principal Borrower was already in default. Thus, the Corporate Guarantor was absolved from all liabilities under the Corporate Guarantee and SASF is deemed to have waived, surrendered, and abandoned all its claims against the Corporate Debtor.
# 6. Section 238 A of the I&B Code extends the provisions of Limitation Act, 1963, as far as may be, to proceedings before the Adjudicating Authority. It is well settled by now that where periods of limitation have been laid down in the Code, same will apply notwithstanding anything to the contrary in the Limitation Act. In para 42 of the judgment rendered by the Hon’ble Apex Court in “B. K. Educational Services Private Limited Vs. Parag Gupta and Associates”, reported in (2019)11 SCC 633, it was held:-
“42. It is thus clear that since the Limitation Act is applicable to applications filed under Section 7 and 9 of the Code from the inception of the Code. Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.”
This preposition of law was again reiterated in “Sagar Sharma & Anr. Vs. Phoenix ARC Pvt. Ltd. & Anr.”, reported in (2019) 10 SCC 353. The Hon’ble Apex Court observed that since application(s) under Section 7 of the I&B Code are petition(s) which are filed under the Code, it is Article 137 of the Limitation Act which will apply to such applications
# 7. Now adverting to the facts of instant case be it seen that the original lender - IDBI which had advanced Term Loan of Rs.32 million to the Principal Borrower – ‘NBL’ in respect whereof ‘NPIL’ had executed Corporate Guarantee dated 16th July, 1997, recalled the entire outstanding amount of the loan vide letter dated 9th November, 2001. This factual position emerges from the communication dated 3rd December, 2001 forming Annexure A-3 to the appeal paper book. The Financial Creditor invoked Personal Guarantees of Shri Madanlal Periwal and Shri Piyush Periwal (Appellant) vide letter dated 19th November, 2001 as the dues remained unpaid. The Financial Creditor also invoked Corporate Guarantee of NPIL vide letter dated 3rd December, 2001. This emerges from Part–V of Form-1 (Application by Financial Creditor to initiate Corporate Insolvency Resolution Process under the I&B Code) at page 75 of the appeal paper book. It is in this background that the issue of limitation has to be examined keeping in view the fact that proceedings were pending before BIFR under SICA. It emerges from record that the first reference was made on 2nd March, 2001 and upon its dismissal 2nd Reference was made on 21st February, 2003. This is the admitted factual position and not controverted or disputed at the hearing. The second reference under Section 15(1) of SIC (SP) Act, 1985 dated 21st February, 2003 was registered as Case No. 259/2003 as reflected in the communication dated 1st July, 2003 from Registrar of BIFR forming Annexure A-4 to the appeal paper book at page 61. There is no controversy as regards registration of second reference as borne out by the aforesaid communication. In so far as first reference being Case No. 160/2001 before BIFR is concerned, same appears to be have been taken up by BIFR for consideration on 25th June, 2002 and dismissed as being time barred on account of delay of over six months in filing the reference. BIFR observed in its order that it did not have any powers for condonation of delay in filing the reference. This is reflected in the order of BIFR dated 25th June, 2002 forming page no. 42 to 45 of the reply filed by the Respondent. It is manifestly clear that the reference was declined to be registered, same being barred by limitation and BIFR being not vested with powers to condone delay. The first reference would therefore have to be excluded while computing limitation, in terms of provisions of Section 22 of SICA, depending on the date of commencement of enquiry taking effect from the date of registration. Learned counsel of Appellant has vehemently argued that a reference declined to be registered will be deemed to not have been made. It is submitted that since the first reference was dismissed, Respondent cannot derive any benefit from it. The question for consideration is whether the first reference can be taken into consideration for purposes of exclusion of time within the ambit of Section 22 on account of suspension of legal proceedings pending enquiry under Section 16 of SICA. Section 16 of SICA vests jurisdiction in BIFR for determining whether any industrial company has become a sick industrial company. Cognizance can be taken by BIFR upon receipt of a reference under Section 15 or upon information received. BIFR is also empowered to commence enquiry upon its own knowledge as to the financial condition of the company. Regulation 19(7) of BIFR Regulation dealing with references under Section 15 of the SICA provides that a reference declined to be registered shall be deemed not to have been made. In this regard it would be apposite to refer to the judgment of the Hon’ble Apex Court in “Real Value Appliances Vs. Canara Bank and Ors.”, reported in (1998) 5 SCC 554, wherein the Hon’ble Apex Court after analyzing various provisions of SICA and taking note of views expressed by various High Courts held:-
“30. ………….., once the reference is registered and when once it is mandatory simultaneously to call for information/documents form the informant and such a direction is given, then inquiry under Section 16 (1) must – for the purposes of Section 22 – be deemed to have commenced. Section 22 and the prohibitions contained in it shall immediately come into play”
The first reference was dismissed for being barred by limitation and BIFR expressed its inability to condone delay for want of jurisdiction. The question is whether dismissal of such reference in the given circumstances would attract Regulation 19(7) of BIFR Regulations to hold that such reference was never made for having been declined to be registered. The answer lies in Regulation 19 itself. Regulation 19(3) provides that a reference may be filed either by delivering it at the office of the Board or by sending it by registered post. Regulation 19(4) provides that on receipt of a reference the Secretary/ Registrar shall cause to be endorsed on each reference the date on which it is filed or received in the office of the Board. Regulation 19(5) provides that if on scrutiny, the reference is found to be in order, it shall be registered, assigned a serial number and submitted to the Chairman for assigning it to a Bench. Regulation 19(6) provides that if on scrutiny, the reference is not found to be in order, the Secretary/Registrar may by order decline to register the reference. In the instant case the first reference was, after its receipt, registered and assigned case number 160/2001. It was placed before the Bench, which took up the reference on 25th June, 2002 for consideration so as to determine the status of company’s sickness. However, the reference came to be dismissed as being time barred. It is therefore manifestly clear that the reference was registered and came to be dismissed on consideration. Therefore, Regulation 19(7) would not come into play and the period from filing of reference with BIFR under Section 15(1) of SICA on 2nd March, 2001 till its dismissal on 25th June, 2002 will have to be excluded within the purview of Section 22 of SICA providing for suspension of legal proceedings including institution of suits for recovery of money or for enforcement of security against the industrial company or any guarantee in respect of any loans or advances granted to the industrial company.
# 8. It is not disputed that the original lender IDBI invoked the Corporate Guarantee on 3rd December, 2001. Subsequently, the debt came to be assigned to Respondent – SASF, who was not a party before DRT Guwahati in OA No. 27/2002 as also in Case No. 259/2003 before BIFR. It is not in dispute that SASF initiated proceedings against NPIL (Corporate Debtor) in respect of the Corporate Guarantee before the Adjudicating Authority on 12th March, 2019. Therefore, the period from 3rd December, 2001 (date of invocation of Corporate Guarantee) till 25th June, 2002 (date of dismissal of first reference case before BIFR) has to be excluded in terms of section 22(1) of SICA while computing the period of limitation. Admittedly, the second reference case was filed on 21st February, 2003 before BIFR, therefore period from 25th June, 2002 till 21st February, 2003 (calculated at 241 days) has to be counted towards the limitation period. From 21st February, 2003 till 1st December, 2016 second reference case of the Corporate Debtor was pending consideration before BIFR and on 1st December, 2016, with enforcement of I&B Code, the SICA, 1985 was repealed. Thus, the period of limitation for triggering of CIRP at the instance of Assignee – SASF against the Corporate Debtor would commence from 1st December, 2016 till application under Section 7 was filed on 12th March, 2019. This is rightly calculated by Responded at 831 days. Thus, we find that the period counting for limitation will be 241 days + 831 days = 1072 days i.e. 35 months and 12 days. It is abundantly clear that the application under Section 7 at the instance of SASF against the Corporate Debtor came to be filed well within three years from the date of invocation of corporate guarantee on 3rd December, 2001. It is indisputable that the Corporate Guarantee executed by the Corporate Debtor for securing the loan advanced to the Principal Borrower, by its very nature continues to run in favour of SASF – the assignee of original lender IDBI and does not extinguish until satisfaction of its terms by the Corporate Guarantor. The cause of action survives till discharge of liability and satisfaction of its terms. It is also settled law of the land that the period of limitation does not commence until the account is live i.e. not duly settled by payment of outstanding dues and/or there is no refusal from the Guarantor towards its obligations. Reference in this regard may be made to the judgment of Hon’ble Apex Court in “Margaret Lalita Samuel vs Indo Commercial Bank Ltd.”, reported in (1979) 2 SCC 396.
# 10. The liability of the Guarantor being coextensive to the liability of the Principal Borrower and the acknowledgment of liability by the Principal Borrower, in terms of letter dated 20th December, 2016 forming Annexure R-7 to the Reply affidavit (page 64), is binding on the Guarantor and he cannot wriggle out of its liability to discharge its obligations towards SASF. It goes without saying that in terms of Clause 11 of the Corporate Guarantee dated 16th July, 1997, the Corporate Guarantor is liable to be proceeded against by the lender or its assignee in the same manner as if it was the Principal Borrower/ Debtor.
# 11. For the foregoing discussion, we are of the considered opinion that the application filed by the Respondent under Section 7 of I&B Code for triggering CIRP against Respondent – Corporate Guarantor on 12th March, 2019 was not barred by limitation. Contention raised by the Appellant as regards plea of limitation and other contention in regard to discharge of obligation of Appellant – Corporate Guarantor towards SASF are accordingly repelled.
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Author's comments; The question here is whether the guarantor is liable for the actions of the principal borrower after the invocation of the continuing guarantee. On invocation of guarantee, the contract of guarantee attains the finality and the liabilities and obligations of the guarantor stands defined & fixed, as on the date of invocation of the continuing guarantee & the aspect of limitation to sue the principal borrower and / or the guarantor gets delinked & thus have to be viewed separately.
Supreme Court of India (10.04.2006) in Syndicate Bank vs Channaveerappa Beleri & Ors. [Appeal (civil) 6894 of 1997] held as under;
# 14. We have to, however, enter a caveat here. When the demand is made by the creditor on the guarantor, under a guarantee which requires a demand, as a condition precedent for the liability of the guarantor, such demand should be for payment of a sum which is legally due and recoverable from the principal debtor. If the debt had already become time-barred against the principal debtor, the question of creditor demanding payment thereafter, for the first time, against the guarantor would not arise. When the demand is made against the guarantor, if the claim is a live claim (that is, a claim which is not barred) against the principal debtor, limitation in respect of the guarantor will run from the date of such demand and refusal/non compliance. Where guarantor becomes liable in pursuance of a demand validly made in time, the creditor can sue the guarantor within three years, even if the claim against the principal debtor gets subsequently time-barred. To clarify the above, the following illustration may be useful :
Let us say that a creditor makes some advances to a borrower between 10.4.1991 and 1.6.1991 and the repayment thereof is guaranteed by the guarantor undertaking to pay on demand by the creditor, under a continuing guarantee dated 1.4.1991. Let us further say a demand is made by the creditor against the guarantor for payment on 1.3.1993. Though the limitation against the principal debtor may expire on 1.6.1994, as the demand was made on 1.3.1993 when the claim was 'live' against the principal debtor, the limitation as against the guarantor would be 3 years from 1.3.1993. On the other hand, if the creditor does not make a demand at all against the guarantor till 1.6.1994 when the claims against the principal debtor get time-barred, any demand against the guarantor made thereafter say on 15.9.1994 would not be valid or enforceable.
Be that as it may.
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