NCLAT (27.01.2022) in Mr. Sabbas Winifred Joseph Vs. IDBI Bank Limited & Anr., [Company Appeal (AT) Ins. No. 411 of 2021] had expressively discussed Section 126 of the Indian Contract Act, 1872 and the liability of the ‘Principal Borrower’ and ‘Guarantor’ and observed as under:
Even if a discharge, a Principal Debtor gets by operation of law in Bankruptcy or in Liquidation proceeds in respect of a Company, the same does not absolve the surety of its liability in the considered of this ‘Tribunal’.
It is crystal clear that a “financial debt” includes the amount of any liability in respect of any guarantee or indemnity for any money borrowed against interest.
Resultantly the money borrowed by sole proprietorship of the appellant against payment of interest for which the Corporate Debtor stood guarantee or indemnity, was also a “financial debt” of the Corporate Debtor and for that reason, the Financial Creditor- Respondent No. could proceed under Section 7 of the Code.
Indubitably a right or cause of action would enure to the lender (financial creditor) to proceed against the principal borrow, as well as the guarantor in equal measure in case they commit default in repayment of the amount of debt acting jointly and severally.
It would still be a 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.
For, the obligation of the guarantor is coextensive and coterminous with that of the principal borrower to defray the debit, 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. For, as aforesaid, express “default” has also been defined in Section 3(12) of the Code to mean nonpayment of debt when whose or any part or instalment of the amount of debt has become due or payable and is not paid by the debtor or the corporate debtor, as the case may be.”
A ‘Financial Creditor’ is entitled to initiate ‘CIRP’ against a ‘Guarantor’ or ‘Surety’ although the Creditor holds enough security over the assets. A Surety has no right to dictate terms to the ‘Creditor’ as to how he ought to make a ‘recovery’ and pursue his remedies against the ‘Principal Debtor’ at his instance.
The ‘Financial Creditor’ has the option of commencing the ‘Insolvency’ proceeding against the ‘Corporate Guarantor’ only without even resorting to any legal proceeding against the ‘Corporate Debtor’.”
Excerpts of the Order;
“INDIAN CONTRACT ACT, 1872
# 80. Be it noted, that Section 126 of the Indian Contract Act, 1872 deals with ‘Contract of ‘Guarantee’, ‘surety’, ‘Principal Debtor and Creditor’. Section 127 of the Act pertains to ‘Consideration for Guarantee’. Section 128 of the Act pertains to ‘Surety’s liability’. Section 129 of the Act refers to ‘Continuing Guarantee’. Section 135 of the Act is concerned with ‘Discharge of Surety when Creditor compounds with, gives time to, or agrees not to sue, principal debtor’. Section 140 of the Act provides for the ‘Rights of Surety on Payment or Performance’. Section 146 of the Indian Contract Act, 1872 deals with ‘Co-Sureties’ liable to contribute equally.
SUING SURETY
# 81. It is to be pointed out that a ‘Creditor’ can sue the ‘surety’ directly without suing the ‘Principal Debtor’. In reality, ‘surety’ provides ‘Guarantee’ only when requested by the ‘Principal Debtor’ in a ‘Contract Of Guarantee’. In Law, in a ‘Contract of Guarantee’ there is an existing liability for ‘Debt’ and ‘Surety’ guarantees the performance of such liability.
SURETY’S RIGHT
# 82. A ‘Surety’ is eligible to proceed against the ‘Principal Debtor’ on payment of ‘Debt’, in case ‘Principal Debtor’ fails to pay the same. A ‘Creditor’ can sue their surety directly without proceeding against the Principal Debtor. As per Law, the ‘surety’ does not have the right to dictate terms to the creditor as to how he should make the recovery and pursue its remedy against the ‘Principal Debtor’ at his instance.
FINANCIAL DEBT AND DEFAULT UNDER IBC.
# 83. It is to be pointed out that a ‘Financial Debt’ includes Debt owed to the Creditor by both the ‘Principal’ and the ‘Guarantor’. Failure by the ‘Guarantor’ to pay the ‘Financial Creditor’ when the ‘Principal Debt’ amount is demanded will amount to a ‘Default’ as per Section 3(12) of the Code. A Financial Creditor who has a ‘Guarantee’ on the debt due can initiate proceedings under Section 7 of the I&B Code, 2016 against the ‘Guarantor’ for failure to repay the amount borrowed by the ‘Principal Borrower’.
…….
# 111. No absolvement of surety
Even if a discharge, a Principal Debtor gets by operation of law in Bankruptcy or in Liquidation proceeds in respect of a Company, the same does not absolve the surety of its liability in the considered of this ‘Tribunal’.
HON’BLE SUPREME COURT DECISION
# 112. In the Judgement of Hon’ble Supreme Court dated 26.03.2021 in Laxmipat Surana V. Union of India (vide Civil Appeal No.2734 of 2020) wherein at paragraph 12 and 13 it is observed as under:-
12. “The Finance Creditor has refused the plea regarding maintainability of the application against the Corporate Debtor. According to the Financial Creditor, the liability of the Principal Borrower and of the Guarantor is coextensive or coterminous, as predicated in Section 128 of the Indian Contract Act, 1872. This legal position is well-established by now (see- Bank of Bihar Ltd Vs. Dr Damodar Prasad & Anr). Section 7 of the Code enables the financial creditor to initiate CIRP against the principal borrower if it is a corporate person, including against the corporate person being a guarantor in respect of loans obtained by an entity not being a corporate person. The Financial Creditor besides placing reliance on Section 7, would also rely on definition of expressions “corporate debtor” in Section 3(8), “debt” in Section 3(11), and financial creditor 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 crystal clear that a “financial debt” includes the amount of any liability in respect of any guarantee or indemnity for any money borrowed against interest. Resultantly, the money borrowed against interest. Resultantly the money borrowed by sole proprietorship of the appellant against payment of interest for which the Corporate Debtor stood guarantee or indemnity, was also a “financial debt” of the Corporate Debtor and for that reason, the Financial Creditor- Respondent No. could proceed under Section 7 of the Code. It is further urged that the definition of “corporate guarantor” introduced by way of amendment of 2018 is to define a corporate guarantor in relation to a corporate debtor against whom any CIRP is to be initiated, in reference to Section 60 of the Code. The objection regarding maintainability of the application against a corporate guarantor, if, therefore, devoid of merit and needs to be rejected.
13……….The Code is a special enactment for resolution of a financial debt and it is in larger public interest that financial debts are recovered and the debts of corporate person are restructured to revive the failing corporate entity.
19.Indubitably a right or cause of action would enure to the lender (financial creditor) to proceed against the principal borrow, as well as the guarantor in equal measure in case they commit default in repayment of the amount of debt acting jointly and severally. It would still be a 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. For, the obligation of the guarantor is coextensive and coterminous with that of the principal borrower to defray the debit, 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. For, as aforesaid, express “default” has also been defined in Section 3(12) of the Code to mean nonpayment of debt when whose or any part or instalment of the amount of debt has become due or payable and is not paid by the debtor or the corporate debtor, as the case may be.” (Emphasis Supplied)
CIRP INITIATION
# 113. A ‘Financial Creditor’ is entitled to initiate ‘CIRP’ against a ‘Guarantor’ or ‘Surety’ although the Creditor holds enough security over the assets. A Surety has no right to dictate terms to the ‘Creditor’ as to how he ought to make a ‘recovery’ and pursue his remedies against the ‘Principal Debtor’ at his instance.
APPELLATE TRIBUNAL DECISION:
# 114. In the judgment of this ‘Tribunal’ in ‘Ferro Alloys Corporation Ltd V. Rural Electrification Corporation Ltd. (vide Comp. App. (AT)(Ins) 921/2017, it is held that the
‘Insolvency’ proceedings against the ‘Corporate Debtor’ may be undertaken without initiating prior proceedings gains the ‘Principal Debtor’ under I & B Code. In fact, requiring/asking the ‘Financial Creditor’/’Operational Creditor’ to postpone in availing its remedy against the ‘Corporate Debtor’ will undoubtedly defeat the purpose of obtaining ‘Guarantee’ as that would result in restricting the rights of a ‘Creditor’.
# 115. The ‘Financial Creditor’ has the option of commencing the ‘Insolvency’ proceeding against the ‘Corporate Grantor’ only without even resorting to any legal proceeding against the ‘Corporate Debtor’.” (Emphasis Supplied)
----------------------------------------------
No comments:
Post a Comment