Archana Deepak Wani Vs. Indian Bank - It is well settled that the loan agreement with the Principal Borrower and the Bank as well as Deed of Guarantee between the Bank and the Guarantor are two different transactions and the Guarantor’s liability has to be read from the Deed of Guarantee.

 NCLAT (26.04.2023) In Archana Deepak Wani Vs. Indian Bank.[Company Appeal (AT) (Insolvency) No.301 of 2023] held that;

• The liability of the guarantor being coextensive with the principal borrower under Section 128 of the Contract Act, it triggers the moment principal borrower commits default in paying the acknowledged debt. This is a legal fiction. Such liability of the guarantor would flow from the guarantee deed and memorandum of mortgage, unless it expressly provides to the contrary.

• A guarantor’s liability depends on terms of his contract. There can be default by the Principal Borrower and the Guarantor on the same date or date of default for both may be different depending on the terms of contract of guarantee.

• It is well settled that the loan agreement with the Principal Borrower and the Bank as well as Deed of Guarantee between the Bank and the Guarantor are two different transactions and the Guarantor’s liability has to be read from the Deed of Guarantee.

Excerpts of the order; 

# 7. From the submissions of the parties and material on the record following are the issues which arise for consideration in the present appeal:

• I. Whether default in payment of guaranteed amount by the Corporate Debtor is the same default as is committed by the Principal Borrower and the period of limitation for both the Principal Borrower and the Corporate Guarantor shall be same for the purposes of filing Section 7 application for the Bank?

• II. Whether in the facts of the present case, the application filed by the Bank on 17.03.2020 was barred by limitation against the Corporate Guarantor?

• III. Whether the order of the Adjudicating Authority admitting Section 7 application is unsustainable?

Issue No. I

# 8. We, in the present case, are concerned with filing of Section 7 application of the I&B Code. We need to first notice the statutory scheme under I&B Code regarding limitation when application under Section 7 is filed against a Corporate Person. Article 137 of the Limitation Act, 1963 is applicable in an application under Section 7,  . . . . 

 

# 9. As per Article 137, time from which period begins to run is “when the right to apply accrues”. Section 7 of the Code Sub-Section (1) provides that the Financial Creditor may file an application for initiating CIRP against the Corporate Debtor “when the default has occurred”. In the present case, the Corporate Debtor being a Corporate Guarantor the question is to be considered is as to when the default is occurred on the part of the Corporate Guarantor. The ‘Corporate Guarantor’ is defined under Section (5A) in following manner:

• “(5A) “corporate guarantor” means a corporate person who is the surety in a contract of guarantee to a corporate debtor;”

# 10. Section 3 of the Code is a definition clause. Section 3(11) defines ‘debt’ in following words:

• “3(11) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;”

# 11. Section 3(12) defines ‘default’:

• “3(12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be;”

# 12. When we look into the definition of ‘debt’ and ‘default’ under Section 3(11) and 3(12), it is clear that debt is a liability or obligation in respect of a claim which is due from any person and default is committed when debt which has become due and payable and is not paid by the debtor. Section 3(12) uses two additional words i.e (i) “payable”; and (ii) “is not paid by the debtor”. The expression ‘debtor’ as used in Section 3(12), in the present case, is to be read as ‘Corporate Guarantor’. The Indian Contract Act, 1972 contains provisions in Chapter VII- ‘of Indemnity and Guarantee’. Section 126 defines “Contract of guarantee, surety, principal debtor and creditor” and Section 128 deals with “Surety’s liability”, Section 129 deals with “Continuing guarantee”. Sections 126, 128 and 129 of the Indian Contract Act are as follows:

• Section: 126. “Contract of guarantee”, “surety”, “principal debtor” and “creditor”. A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.

• Section: 128. Surety’s liability. The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract.

• Section: 129. “Continuing guarantee”. A guarantee which extends to a series of transactions, is called a “continuing guarantee”.”

# 13. As per Section 128, the liability of the Surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. Law, thus, contemplates liability of the Surety i.e. Guarantor co-extensive with that of the Principal Debtor.

# 14. The question of start of period of limitation against the Guarantor when the default committed by the Guarantor in non-fulfilment of its obligation as contained in the guarantee deed has come for consideration before the Hon’ble Supreme Court in several cases. Learned counsel for both the parties have relied on judgments of Hon’ble Supreme Court in the above context, which we need to notice before proceeding any further. The judgment which has been relied by learned counsel for the Respondent Bank is “Margaret Lalita Samuel vs. Indo Commercial Bank Ltd, (1979) 2 SCC 396”. In the above case, a continuing guarantee was executed by the Appellant ‘Margaret Lalita Samuel’ in which she guaranteed to the Bank for repayment of all money which shall at any time shall be due to the Bank by the Company. Bank has filed his suit for recovery of amount by the Guarantor in which one of the defence was raised of the limitation. The Hon’ble Supreme Court in the above judgment while considering the question of limitation made following observations in Para 10:

• “10. The guarantee is seen to be a continuing guarantee and the undertaking by the defendant is to pay any amount that may be due by the company at the foot of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach, under Article 115 of the schedule to the Limitation Act, 1908. When the Bombay High Court considered the matter in the first instance and held that the suit was not barred by limitation, J. C. Shah, J., speaking for the Court said:

• “On the plain words of the letters of guarantee it is clear that the defendant undertook to pay any amount which may be due by the Company at the foot of the general balance of its account or any other account whatever ….. We are not concerned in this case with the period of limitation for the amount repayable by the Company to the bank. We are concerned with the period of limitation for enforcing the liability of the defendant under the surety bond …….. We hold that the suit to enforce the liability is governed by Article 115 and the cause of action arises when the contract of continuing guarantee is broken, and in the present case we are of the view that so long as the account remained a live account, and there was no refusal on the part of defendant to carry out her obligation, the period of limitation did not commence to run.”

# 15. The Hon’ble Supreme Court in Para 11 has further observed:

• “11. We agree with the view expressed by Shah, J. The intention and effect of a continuing guarantee such as the one with which we are  concerned in this case was considered by the Judicial Committee of the Privy Council in Wright and Anr. v. New Zealand Farmers Cooperative Association of Canterbury Ltd. The second clause of the guarantee bond in that case was in the following terms:

• “This guarantee shall be a continuing guarantee and shall apply to the balance that is now or may at any time hereafter be owing to you by the William Nosworthy and Robert Nosworthy on their current account with you for goods supplied and advances made by you as aforesaid and interest and other charges as aforesaid.”

• A contention was raised in that case that the liability of the guarantor was barred in respect of each advance made to the Nosworthys on the expiration of six years from the date of advance. The Judicial Committee of the Privy Council expressed the opinion that the matter had to be determined by the true construction of the guarantee. Proceeding to do so, the Judicial Committee observed (at p. 449):

• “It is no doubt a guarantee that the Association will be repaid by the Nosworthys advanced made and to be made to them by the Association together with interest and charges; but it specifies in col. 2 how that guarantee will operate-namely, that it will apply to (i.e. the guarantor guarantees repayment of) the balance which at any time thereafter is owing by the Nosworthys to the Association. It is difficult to see how effect can be given to this provision except by holding that the repayment of every debit balance is guaranteed as it is constituted from time to time, during the continuance of the guarantee, by the excess of the total debits over the total credits. If that be true construction of this document, as their Lordships think it is, the number of years which have expired since any individual debit was incurred is immaterial. The question of limitation could only arise in regard to the time which had elapsed since the balance guaranteed and used for had been constituted”.

Later it was again observed (at p. 450):

• “That document, in their opinion, clearly guarantees the repayment of each debit balance as constituted from time to time, during the continuance of the guarantee, by the surplus of the total debits over the total credits, and accordingly at the date of the counterclaim the Association’s claim against the plaintiff for payment of the unpaid balance due from the Nosworthys, with interest, was not statute-barred.”

# 16. The Hon’ble Supreme Court in the above case has observed that  cause of action arises when the contract of continuing guarantee is broken i.e. breach is committed by the Guarantor to the guarantee given.

# 17. The next judgment on which reliance has been placed is judgment of Hon’ble Supreme Court in “Syndicate Bank vs. Channaveerappa Beleri & Ors., (2006) 11 SCC 506”. Hon’ble Supreme Court in the above case had occasion to consider the provisions of Section 128 and 129 of the Contract Act. Hon’ble Supreme Court in the above case has laid down that the limitation of the guarantor will depend purely on the terms of the contract. In the above case, the Bank had filed suit against the guarantors for recovery of credit facilities extended to the company. The Hon’ble Supreme Court held that the guarantor’s liability depends on terms of his contract. In Para 9, 10 and 11 following was held:

• “9. A guarantor’s liability depends upon the terms of his contract. A ‘continuing guarantee’ is different from an ordinary guarantee. There is also a difference between a guarantee which stipulates that the guarantor is liable to pay only on a demand by the creditor, and a guarantee which does not contain such a condition. Further, depending on the terms of guarantee, the liability of a guarantor may be limited to a particular sum, instead of the liability being to the same extent as that of the principal debtor. The liability to pay may arise, on the principal debtor and guarantor, at the same time or at different points of time. A claim may be even time-barred against the principal debtor, but still enforceable against the guarantor. The parties may agree that the liability of a guarantor shall arise at a later point of time than that of the principal debtor. We have referred to these aspects only to underline the fact that the extent of liability under a guarantee as also the question as to when the liability of a guarantor will arise, would depend purely on the terms of the contract.

• 10. Samuel (supra), no doubt, dealt with a continuing guarantee. But the continuing guarantee considered by it, did not provide that the guarantor shall make payment on demand by the Bank. The continuing guarantee considered by it merely recited that the surety guaranteed to the Bank, the repayment of all money which shall at any time be due to the Bank from the borrower on the general balance of their accounts with the Bank, and that the guarantee shall be a continuing guarantee to an extent of Rs.10 lakhs. Interpreting the said continuing guarantee, this Court held that so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, the period of limitation could not be said to have commenced running.

• 11. But in the case on hand, the guarantee deeds specifically state that the guarantors agree to pay and satisfy the bank on demand and interest will be payable by the guarantors only from the date of demand. In a case where the guarantee is payable on demand, as held in the case of Bradford (supra) and Hartland (supra), the limitation begins to run when the demand is made and the guarantor commits breach by not complying with the demand.”

# 18. It is to be noted that in Para 10 of the above judgment, the Hon’ble Supreme Court had referred to earlier case of ‘Margaret Lalita Samuel’ and the issue of ‘Margaret Lalita Samuel’ was noticed in following words:

• “…this Court held that so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, the period of limitation could not be said to have commenced running.”

# 19. In Para 15, the Hon’ble Supreme Court further laid down following:

• “15. The respondents have tried to contend that when the operations ceased and the accounts became dormant, the very cessation of operation of accounts should be treated as a refusal to pay by the principal debtor, as also by the guarantors and, therefore the limitation would begin to run, not when there is a refusal to meet the demand, but when the accounts became dormant. By no logical process, we can hold that ceasing of operation of accounts by the borrower for some reason, would amount to a demand by the Bank on the guarantor to pay the amount due in the account or refusal by the principal debtor and guarantor to pay the amount due in the accounts.”

# 20. The judgment which has been referred by learned counsel for both the parties is the judgment of Hon’ble Supreme Court in “Laxmi Pat Surana vs. Union of India & Anr., (2021) 8 SCC 481”. In the above case the Hon’ble Supreme Court had occasion to consider the provisions of I&B Code and the question of limitation for filing application under Section 7 of the Code. The two questions which arose of consideration has been noticed in Para 1 of the judgment, which is to the following effect:

• “1. Two central issues arise for our determination in this appeal, as follows:

• 1.1 (i) Whether an action under Section 7 of the Insolvency and Bankruptcy Code 2016 (for short “the Code”) can be initiated by the financial creditor (Bank) against a corporate person (being a corporate debtor) concerning guarantee offered by it in respect of a loan account of the principal borrower, who had committed default and is not a “corporate person” within the meaning of the Code?

• 1.2 (ii) 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 (for short “NPA”), being the date of default, is not barred by limitation?”

# 21. In the above case, the Bank has extended credit facility to the Principal Borrower – M/s Surana Metals Ltd., for which  the Appellant has offered Guarantee. Loan accounts were declared NPA on 30.01.2010. The Financial Creditor issued recall notice dated 19.02.2010. The Financial Creditor thereafter filed a Section 19 application under the RDDBFI Act, 1993 against the Principal Borrower. The Principal Borrower has repeatedly assured to pay the outstanding amount. Thereafter the Bank filed an application on 13.02.2019 against the Corporate Debtor – M/s Surana Metals Ltd., which was resisted on several grounds including that the Principal Borrower is not a corporate person; and further it is barred by limitation, as the date of default was 30.01.2010 and application has been filed on 13.02.2019 i.e. beyond the period of three years, which submissions were negatived by the Adjudicating Authority. The order of the Adjudicating Authority was also affirmed in appeal. Thereafter, the Corporate Debtor i.e. Guarantor filed an appeal in the Hon’ble Supreme Court. In the above context, the Hon’ble Supreme Court has occasion to consider the scheme of IBC. The Hon’ble Supreme Court in the above context has held that the liability of the Guarantor is co-extensive with that of the Principal Borrower and the Guarantor is also a Corporate Person and the Guarantor metamorphoses into a Corporate Debtor the moment the Principal Borrower makes default in payment of debt. In Para 30, 31 and 32 following was laid down while answering question no. (i), as noted above:

“30. The expression “corporate debtor” is defined in Section 3(8) which applies to the Code as a whole. Whereas, expression “corporate guarantor” in Section 5(5A), applies only to Part II of the Code. Upon harmonious and purposive construction of the governing provisions, it is not possible to extricate the corporate person from the liability (of being a corporate debtor) arising on account of the guarantee given by it in respect of loan given to a person other than corporate person. The liability of the guarantor is coextensive with that of the principal borrower. The remedy under Section 7 is not for recovery of the amount, but is for reorganisation and insolvency resolution of the corporate debtor who is not in a position to pay its debt and commits default in that 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 principal borrower, to avoid the rigours of Chapter II of the Code in general and Section 7 in particular.

31. In law, the status of the 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. Thus, action under Section 7 of the Code could be legitimately invoked even against a (corporate) guarantor being a corporate debtor. The definition of “corporate guarantor” in Section 5(5A) of the Code needs to be so understood.

32. A priori, we find no substance in the argument advanced before us that since the loan was offered to a proprietary firm (not a corporate person), action under Section 7 of the Code cannot be initiated against the corporate person even though it had offered guarantee in respect of that transaction. Whereas, upon default committed by the principal borrower, the liability of the company (corporate person), being the guarantor, instantly triggers the right of the financial creditor to proceed against the corporate person (being a corporate debtor). Hence,  the first question stands answered against the appellant.”

# 22. The observations made by the Hon’ble Supreme Court in the above paragraphs were in reference to question no. (i) and the proceedings were initiated by the Bank treating the date of declaration of NPA as date of default for the Corporate Guarantor.

# 23. Learned counsel for both the parties have again referred to Para 43 of the judgment on which heavy reliance has been placed. In Para 43, Hon’ble Supreme Court has occasion to examine the expression ‘default’ as used in Section 7. Para 43 of the judgment is as follows:

“43. Ordinarily, upon declaration of the loan account/debt as NPA that date can be reckoned as the date of default to enable the financial creditor to initiate action under Section 7 of the Code. However, Section 7 comes into play when the corporate debtor commits “default”. Section 7, consciously uses the expression “default” — not the date of notifying the loan account of the corporate person as NPA. Further, the expression “default” has been defined in Section 3(12) to mean non­payment of “debt” when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be. In cases where the corporate person had offered guarantee in respect of loan transaction, the right of the financial creditor to initiate action against such entity being a corporate debtor (corporate guarantor), would get triggered the moment the principal borrower commits default due to non-payment of debt. Thus, when the principal borrower and/or the (corporate) guarantor admit and acknowledge their liability after declaration of NPA but before the expiration of three years therefrom including the fresh period of limitation due to (successive) acknowledgments, it is not possible to extricate them from the renewed limitation accruing due to the effect of Section 18 of the Limitation Act. 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”

# 24. It is submitted that the Hon’ble Supreme Court in the above para has held that in cases where the corporate person had given a guarantee in respect of loan transaction, the right of the financial creditor to initiate action against such entity being a corporate debtor (corporate guarantor), would get triggered the moment the principal borrower commits default due to non-payment of debt. We may notice that the above observations are founded by next stipulation i.e. thus, when the principal borrower and/or the corporate guarantor admit and acknowledge their liability after declaration of NPA but before the expiration of three years therefrom including the fresh period of limitation due to (successive) acknowledgments, it is not possible to extricate them from the renewed limitation accruing due to the effect of Section 18 of the Limitation Act. The Hon’ble Supreme Court in the above case had considered the acknowledgement given by the Principal Borrower when it undertook to make the payment. It was observed by the Hon’ble Supreme Court that acknowledgement under Section 18 shall extend the period of limitation and hence it was held that the application was not barred by limitation.

# 25. We may further notice Para 44 of the judgment in which it was held that the liability of the guarantor being coextensive with the principal borrower under Section 128 of the Contract Act, it triggers the moment principal borrower commits default in paying the acknowledged debt. This is a legal fiction. Para 44 of the judgment is as follows:

“44. In the present case, the NCLT as well as the NCLAT have adverted to the acknowledgments by the principal borrower as well as the corporate guarantor – corporate debtor after declaration of NPA from time to time and lastly on 08.12.2018. The fact that acknowledgment within the limitation period was only by the principal borrower and not the guarantor, would not absolve the guarantor of its liability flowing from the letter of guarantee and memorandum of mortgage. The liability of the guarantor being coextensive with the principal borrower under Section 128 of the Contract Act, it triggers the moment principal borrower commits default in paying the acknowledged debt. This is a legal fiction. Such liability of the guarantor would flow from the guarantee deed and memorandum of mortgage, unless it expressly provides to the contrary.”

# 26. The scheme of I&B Code clearly indicate that both the Principal Borrower and the Guarantor become liable to pay the amount when the default is committed. When default is committed by the Principal Borrower the amount becomes due not only against the Principal Borrower but also against the Corporate Guarantor, which is the scheme of the I&B Code. When we read with as is delineated by Section 3(11) of the Code, debt becomes due both on Principal Borrower and the Guarantor, as noted above. The definition of default under Section 3(12) in addition to expression ‘due’ occurring in Section 3(11) uses two additional expressions i.e “payable” and “is not paid by the debtor or corporate debtor”. The expression ‘is not paid by the debtor’ has to be given some meaning. As laid down by the Hon’ble Supreme Court in “Syndicate Bank vs. Channaveerappa Beleri & Ors.” (supra), a guarantor’s liability depends on terms of his contract. There can be default by the Principal Borrower and the Guarantor on the same date or date of default for both may be different depending on the terms of contract of guarantee. It is well settled that the loan agreement with the Principal Borrower and the Bank as well as Deed of Guarantee between the Bank and the Guarantor are two different transactions and the Guarantor’s liability has to be read from the Deed of Guarantee.

# 27. Now we need to look into the Deed of Guarantee which was executed by the Corporate Guarantor in favour of the Bank to find out as to when the default on the part of the Guarantor shall be treated to be committed in particular as per the Deed of Guarantee. Para 2 of Deed of Guarantee states that the guarantee restricted to the sum of Rs.62 Crores, which was a continuing guarantee to the Bank. Para 2 of the Deed of Guarantee is as follows:

• “2. I/We declare that my/our liability under this guarantee shall be limited and restricted to the sum of Rs. 62,00,00,000/- (Rupees. Sixty Two Crore Only) with Interest at the rate aforesaid but subject to such limit shall nevertheless be a continuing guarantee to the Bank as hereinafter specified for all sums whatsoever which may at any time be or become payable by the Principal to the Bank with Interest at the rate aforesaid till repayment together with commission Bank charges, legal and other expenses which the Bank may incur in enforcing or seeking to enforce any security for or obtaining or seeking to obtain payment for all or any part of the money hereby guaranteed or otherwise in respect of this agreement.

# 28. Para 9 of the Deed of Guarantee uses expression “continue to be enforceable”. Intent is clear that the Deed of Guarantee need to be enforced by the Bank. Para 9 is as follows:

• “9. I/We further agree and declare that this guarantee shall remain in full force and continue to be enforceable further period of twenty four months from the date preceding the day of its becoming unenforceable and/or discharged and for that purpose the lability either of the Principal and/or myself/ourselves shall remain in full force even after the extinction of liability on my/our part on account of acknowledgment of debt and/or the last part payment of principal and/or payment of interest as herein-before mentioned or otherwise and that this guarantee shall not be revoked till expiry of the said twenty four months notwithstanding the envisaged extinction of lability which may be deemed to have occurred on the aforesaid events and after the expiry of said twenty four months this guarantee shall be deemed to be discharged.”

# 29. Para 11 is also relevant where Bank is required to give effect to the guarantee. Para 11 is as follows:

• “11. In order to give effect to this guarantee I/We declare that the Bank shall be at liberty to act as though I/We were the principal and I/We hereby waive all and any of my/our rights surety/s which may at any time be inconsistent with any of the above provisions.”

# 30. Para 12 of the Deed of Guarantee contemplate ‘demand signed by Bank or its Manager’ with expression ‘sufficiently served’. Thus, the demand and served both are contemplated in Para 12. Para 12 is as follows:

• “12. A statement or demand signed by the Bank or its Manager or its any other authorised official showing that any sum is due to the Bank hereunder shall be conclusive evidence that such sum is in fact due and any demand or legal proceedings shall be sufficiently served if sent by prepaid post to my/our address last known to the Bank or stated hereon and shall be deemed to have reached me/us in course of post.”

# 31. When we look into the above clauses of Deed of Guarantee, it is clear that although the Guarantor immediately become liable on any default committed by the Principal Borrower but for initiating any action against the Guarantor, a demand is to be made. Without there being any demand to the Guarantor, it cannot be accepted that period of limitation against the Guarantor shall commence. In the present case, Section 7 application filed by the Bank has been brought on the record as Annexure A-49. When we look into the Part IV of the application, the date of NPA i.e. 31.03.2017 has been mentioned in Part IV and total amount in default as on 31.12.2019 has been computed. The Application under Section 7 thus proceeds on date of NPA. The notice dated 03.04.2017 is also on the record as Annexure A-21, which notice was issued by the Bank to the Guarantors – M/s N. Kumar Housing and Infrastructure Pvt. Ltd. and its Directors. Para 3 mentions about the Guarantee Deed dated 23.03.2011 executed by the Corporate Guarantor and in Para 7, the Corporate Guarantor was called upon to discharge the entire liabilities. Para 3 and 7 of the notice dated 03.04.2017 are as follows:

• “3. In consideration of the above loan/ credit facilities to the said borrower you have executed a guarantee agreement/ letter/ deed dated 23/03/2011 in favour of the Bank and to secure repayment of the said loan/ credit facilities you have executed various documents whereby and where under you created charge/ mortgage/ hypothecation/ assignment over your movable/ Immovable properties/ assets in favour of the Bank, details of which are given hereunder:-

• “7. By this notice you are hereby called upon to discharge the entire liabilities as on date with future Interest along with cost, charge and expenses, thereon in the above account to us as secured creditor, within 60 days from the date of this notice, failing which we shall be constrained to exercise all or any of our rights conferred under Section 13(4) and other provisions of the above Act.”

# 32. The above notice was issued to the Guarantor in reference to the Deed of Guarantee and the Corporate Guarantor was called upon to discharge their dues and the time was granted for 60 days to make the payment. We, thus, are of the view that default on the part of the Guarantor cannot be treated to be on 31.12.2016, when the Principal Borrower committed Default. It is also relevant to notice that the Corporate Debtor did not file any reply in Section 7 application despite giving opportunity by the Adjudicating Authority and right to reply was also forfeited. The Corporate Debtor, however, had filed an I.A. questioning the maintainability of the application. The application under Section 7 filed against the Principal Borrower was also noted to be pending before the Adjudicating Authority. In the facts of the present case, where the Corporate Debtor did not file any reply and also did not file application for recall of order dated 23.11.2021 forfeiting right to file reply, the Adjudicating Authority did not commit any error in admitting Section 7 application. The Adjudicating Authority also noted in the order that the disbursement of Rs.25 Crores was not even disputed.

# 33. In view of our discussion on Issue No. I, Issue Nos. II & III are answered as follows:

Issue No. II: In the facts of the present case, application filed by the Bank on 17.03.2020 was not barred by limitation.

Issue No. III: The order of the Adjudicating Authority admitting Section 7 application is sustainable.

# 34. The submission made by learned counsel for the Appellant that there has been no disbursement to the Principal Borrower as per the sanction and apart from Rs.25 Crores no amount was disbursed and the amount which was disbursed in the Escrow Account was adjusted by the Bank towards repayment and there has been no disbursement of the entire sanctioned amount, need no further consideration since disbursement to the extent of Rs.25 Crores is not disputed either in this Appeal or before the Adjudicating Authority.

# 35. The submission of the learned counsel for the Appellant is that present was a case where the Adjudicating Authority ought to have exercised its discretion in not admitting Section 7 application as per the law laid down by the Hon’ble Supreme Court in “Vidarbha Industries Power Ltd. vs. Axis Bank Ltd.” (supra). The Appellant cannot claim the assistance of “Vidarbha Industries Power Ltd.” in the present case due to the reason that the basis on which it was held that application under Section 7 need not to have been admitted for the reasons indicated in the judgment of the Hon’ble Supreme Court itself clearly distinguishes it from the present case.

# 36. We, thus, are of the view that the application filed by the Bank under Section 7 cannot be said to be barred by time and no error has been committed by the Adjudicating Authority in admitting Section 7 application. We, thus do not find any ground to interfere with the order of the Adjudicating Authority admitting Section 7 application.

# 37. In the present Appeal, we had passed an interim order staying the constitution of Committee of Creditors which order is still continuing. The Appellant before us as well as the Adjudicating Authority has made a statement that Appellant is ready to pay amount of Rs.25 Crores to the Financial Creditor which amount was received and utilised by the Corporate Debtor. In the facts of the present case, we are of the view that an opportunity be given to the Appellant to negotiate with the Financial Creditor to come to a settlement, if any, before the Committee of Creditors is constituted. We for the above purpose allow one month time to the Appellant to make efforts for settlement. The Committee of Creditors be not constituted for period of one month to enable the Appellant to take steps. In event, no settlement takes place within the period of one month from today, it shall be open for the IRP to constitute Committee of Creditors and proceed further in accordance with law. Subject to as directed above, the Appeal is dismissed.

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Prism Johnson Ltd. Vs. Doosan Power Systems India Pvt. Ltd. - In the present proceedings what we are required to see is whether dispute existed prior to issuance of Demand Notice and we have recorded our satisfaction only limited to this extent i.e., the existence of dispute.

NCLT New Delhi-II (03.03.2023) In Prism Johnson Ltd. Vs. Doosan Power Systems India Pvt. Ltd.[(IB)-474(ND)2022] held that;

• In the present proceedings what we are required to see is whether dispute existed prior to issuance of Demand Notice and we have recorded our satisfaction only limited to this extent i.e., the existence of dispute.

• The object of the IBC is to ensure that the insolvent company is put back on its feet and not to disarray a solvent and financially sound company.

• Hon’ble Apex Court clearly delineated the legal position and declared that the Adjudicating Authority should examine the expediency of initiating the CIRP after taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor.

Excerpts of the order; 

The case of the Petitioner captioned in Company Petition (IB)- 474/ND/2022 is that the Corporate Debtor/Respondent approached RMC Ready-mix (India), a division of the Operational Creditor/Petitioner for procuring ready-mix concrete qua a project namely ‘Obra C Extension Thermal Power Station’ situated in Uttar Pradesh. Resultantly, the OC and the CD entered into a Sub-Contract dated 08.07.2017 in terms of which OC agreed to carry out the terms of contract for consideration. The CD placed an order dated 25.07.2017 on OC for purchase of ready-mix concrete. The order contained the detailed terms and conditions for supply of the goods as also the description thereof. According to the OC, it discharged all the obligations in terms of the sub contract dated 08.07.2017 and purchase order dated 25.07.2017 and raised the invoice upon the CD during the period from November, 2017 to August, 2021. It is the case of the OC that it had also issued tax invoices cum delivery challans under Section 31 of the Central Goods & Service Tax Act, 2017 and the material was duly supplied to the CD, which is acknowledged without any demur and protest. As per the stand taken by the OC in the petition, it was required to supply 2,68,798 cum of the captioned material to the CD by December, 2020 but the CD made additional demand which was de hors the terms of the order and the contract (ibid). Nevertheless, the OC supplied the additional material to the CD by the month of March, 2020 i.e., much before the agreed/due date. When the CD neglected to honour the invoices raised by the OC and neglected to make the payment, the OC sent letters dated 12.07.2021, 16.07.2021, 20.07.2021, 18.08.2021, 28.08.2021 and 15.09.2021 calling upon the CD to release the outstanding amount under the invoices. The OC raised the demand under the following heads inter alia:

a. Loss in interest on account of delayed payments by the Corporate Debtor.

b. Loss in interest on account of not releasing material advance;

c. Extra Cement content in M-30 Chimney and pile concrete;

d. Cost reimbursement of sand stocking for monsoon period;

e. Extra Cement content in M-15 Grade;

f. Cost impact due to deployment of additional resources and impact of wages;

g. Fixed Cost impact due to low volume by client;

h. Building and Other Construction Workers- Deductions; and

i. Rs. 500/Cum discount.

# 2. Though the CD responded to the letters written to it by the OC, in terms of its missives dated 06.07.2021, 13.07.2021, 17.07.2021, 24.07.2021, 17.08.2021, 23.08.2021, 04.09.2021 and 15.09.2021, it never disputed its liability to make the payment towards the outstanding invoices of the OC.

# 3. The CD has acknowledged its liability vide Balance Confirmation letters inter alia dated 29.04.2020, 14.06.2021 and 02.09.2021 bearing the common seal of the CD and signature of its representative. According to the OC, the balance confirmation letter dated 28.02.2022 being issued late, in terms of the same it could be categorically admitted that an amount of Rs. 9,23,99,780.71 is payable by CD to the OC and a further sum of Rs. 81,25,299/- is payable towards retention monies by the CD. 

# 4. The further plea espoused by the OC is that despite issuance of the letter of balance confirmation as late as on 2nd September 2021, when the OC insisted for payment of the outstanding amounts, the CD for the first time, vide its letter dated 16.09.2021 made bogus claims in order to evade its admitted liability under the balance confirmation letters. The said letter dated 16.09.2021 was duly replied to by the OC, vide letter dated 17.09.2021. The CD also issued a balance confirmation in respect of monies payable by it to the OC as late as on 28.02.2022. As per the books of the OC, as on 08.03.2022, an amount of Rs.13,26,14,929.67/- comprising the principal outstanding amount of Rs.11,22,88,896.76/- and the interest amount of Rs. 2,03,26,032.91/- charged at the rate of 18% per annum as per the Contract/Order and the invoices issued thereunder has become due and payable by the CD which can also be evidenced from the ledger account of the CD in the books of OC. The CD after utilizing the Material and after acknowledging its liability, did not honor the invoices as well as its obligations stated under the said Contract and the Order, and has defaulted in making payment of the outstanding amount of Rs. 13,26,14,929.67/- under the invoices issued.

# 5. The particulars of the Operational Debt claimed including the total amount of default and date of default are mentioned in column II of Part IV of the application.

# 6. From the perusal of the Part IV of the Application, it can be seen that the OC has claimed the total outstanding amount of Rs.13,26,14,929.67/-. (Page no. 4 of Vol I) and the date of default is 30.06.2021.

# 7. It is stated by the OC that it sent a Demand Notice dated 30.12.2021 under Section 8 of IBC, 2016 at the registered office of the Respondent vide speed post as well as email, which was delivered to the Respondent on 03.01.2022. According to the Petitioner it received reply

to the demand notice on 13.01.2022.

# 9. Having heard the Counsels for the parties and perused the records, we proceed to examine the issue sans irrelevant details. As far as the plea espoused on behalf of the Respondent regarding non-filing of the affidavit, as required under Section 9 (3) (b) of the IBC, 2016 is concerned, the same is baseless and vexatious and is rejected outrightly. The required affidavit was duly filed by the Petitioner and is at page 835- 836 of the petition (paper book). The plea regarding the contract being entered into by the Respondent, not with the Petitioner but with ‘RMC Readymix (India)’ (‘RMC India’) for supply of RMC is concerned stands falsified by the Respondent itself, in terms of the pleadings canvassed in its reply. The Respondent has pleaded extensively that the Petitioner committed breach of contract and caused enormous loss to it. It is also the case of the Respondent that the Petitioner received a colossal amount of Rs.1,54,87,51,901/- under the contract. Once the Respondent has alleged enormous loss caused to it on account of breach of contract by the Petitioner as also payment of colossal amount to Petitioner under the contract, it does not lie in its mouth to plead that there being no contract with the Petitioner, the petition filed by it is not maintainable. Besides, while examining an application under Section 9 of IBC, 2016, what we need to judge is, “whether there had been any operational relationship between the Operational Creditor and Corporate Debtor. As has been defined in Section 5 (20) of the IBC, 2016, Operational Creditor means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. Thus, nothing turns on the fact that with whom the contract was entered into by the Respondent and what is material to be seen is, “whether any operational debt is owed or not”. Ergo, the plea raised on behalf of the Respondent qua the maintainability of the petition on the ground that there was no contract executed between the Petitioner and the Respondent is rejected.

# 10. In any case, as is borne out of the record, the notice of demand was issued by the Petitioner to the Respondent, only on 30.12.2021 and much before that, the Respondent had been sending missives to it (Petitioner) pointing out the infirmity in the quality of service given by the Petitioner to the Respondent. As can be seen from the letters dated 20.02.2018 (page no. 61-62), the Respondent categorically brought it to the notice of the Petitioner that with the existing status of the stock made available by it at the site the targeted work could not be completed. The Respondent also cautioned the petition regarding its liability to suffer penalty on account of non-availability of raw material as per STC Clause 16.2 between the DPSI and RMC. Such letters, pointing out deficiency in service/supply by the Petitioner were also written by the Respondent to Petitioner also on 07.01.2019, 09.03.2020 inter alia. The letters are closed at page nos. 63-65 of the reply. Even the Petitioner also accepted the deficiency in quality, in terms of its letter dated 26.07.2018 (annexure R-6). The relevant excerpts of the letter read thus: 

• “Subject- Reply against your letter OBRAC-DPSI-SITE-RNC-00024 failure in quality checks of non-approved aggregates

• Referring your letter on the above subject, we also share your concern regarding the poor quality material delivered at plant and want to assure you that RMC India will not spare any effort to maintain the quality of concrete including thorough checking of raw material delivered at plant.

• However, we wonder how we will check the quality of aggregate at the entry gate of the plant when determined supplier hides the poor quality of material inside the truck with good material spread on top of the truck. This is the breach of trust form the sole reputed vendor of aggregate to our site. We also would like to bring your notice that the quality of coarse aggregates delivered at plant mostly fail in fulfilling the IS requirement and we are forced to accept those material to complete our production volumes. Hence, we propose to have a joint visit with you to the aggregate crusher and check the quality of boulders used and understand his process to suggest him the suitable quality improvement measures. Going forward, we also suggest you as the supplier of aggregates to us to hand out a severe warning to the vendor to desist from indulging in this kind of malpractices.

• This is for your information and records.”

# 11. As could be viewed by Jaipur Bench of this Tribunal in CP No. (IB)-217/9/JPR/2020, the dispute between the parties can be inferred, even from the correspondence between the parties. Para 12-14 of the order reads thus:

• “12. We have a number of judgments showing light on the aspect of pre-existing dispute under Section 9 of the Code. Conjoint reading of Section 8 and Section 9 of the Code shows that an Operational Creditor can trigger the CIRP, when there is an undisputed debt and a default in payment thereof. In the present case, the Corporate Debtor had raised dispute with respect to deficiency in service vide the e-mails dated 10.05.2018 to 15.08.2018 to the extent of stating that if the goods are not delivered till 14.05.2018 the Corporate Debtor will not be paying for the services, which was prior to issuance of Demand Notice under Section 8 of the Code. The Applicant had knowledge of the said dispute as well which is visible from its e-mail replies. 13. In Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Pvt. Ltd., para 34, the Hon’ble Supreme Court laid down what the Adjudicating Authority has to examine in an application under Section 9. Para 34 is as follows: -

• “34. Therefore, the Adjudicating Authority, when examining an application under Section 9 of the Code will have to determine: 

• (i) Whether there is an “Operational debt” as defined exceeding Rs. 1 lakh? (See Section 4 of the Code)

• (ii) Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid? And

• (iii) Whether there is existence of a dispute between the parties or the record of the 15 Company Appeal (AT) (Insolvency) No. 256 of 2021 pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute?

• If any one of the aforesaid conditions is lacking, the application would have to be rejected. Apart from the above, the adjudicating authority must follow the mandate of Section 9, as outlined above, and in particular the mandate of Section 9(5) of the Act, and admit or reject the application, as the case may be, depending upon the factors mentioned in Section 9(5) of the Act.”

• However, the defence has to be plausible and while not examining it on merits, it must not appear as a moonshine defence.

• 14. The correspondence between the parties herein clearly shows that a dispute had already risen between the parties after the alleged services were rendered by the Applicant, which were not upto mark as mentioned by the Corporate Debtor. The exchange of e-mails between the parties is enough to show that there was pre-existing dispute with respect to the services rendered by the Applicant. Further, in view of the order of the Hon’ble Supreme Court in M/s S.S. Engineers vs. Hindustan Petroleum Corporation Ltd. & Ors. we are not inclined to commence CIRP of the Corporate Debtor.

# 12. Also, in Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Pvt. Ltd. (Civil Appeal No. 9405/2017), it could be ruled by Hon’ble Supreme Court that, “what this Adjudicating Authority needs to see is, whether a dispute truly exists in fact and is not spurious, hypothetical or illusory”. In the said judgment, the Hon’ble Apex Court amplified, “what is important is that the existence of dispute must be pre-existing i.e., it must exist before the receipt of the Demand Notice or invoice as the case may be. While examining the proposition regarding pre-existing dispute, we may usefully espouse that after the judgement of Hon’ble Supreme Court Mobilox Innovations Pvt. Ltd. (ibid), the definition of dispute has

become inclusive and would mean not only the pending suit or arbitration proceedings, but also the controversy espoused in the letters written by Corporate Debtor to Operational Creditor regarding the quality of Goods or Service. Therefore, as the Corporate Debtor had espoused the dispute by sending missives to the Operational Creditor, much before issuance of Demand Notice by Operational Creditor, in terms of Section 8 (1) of the IBC, 2016, and had also brought the existence of dispute to the notice of Operational Creditor by way of its reply under Section 8 (2) of the IBC, 2016, to the Operational Creditor, we are satisfied that preexisting dispute between the parties was there. We are also satisfied that the dispute is not spurious or hypothetical, as the Respondent had to assign the work of contract required to be performed by the Petitioner to a different contractor namely JS Mining and Constructions to whom it issued the letter of intent dated 02.02.2021. As it may, we have not commented upon the nature of dispute or the fault of the parties qua the same. In the present proceedings what we are required to see is whether dispute existed prior to issuance of Demand Notice and we have recorded our satisfaction only limited to this extent i.e., the existence of dispute. 

# 13. While examining an application under Section 9 of IBC, 2016, we may not be oblivious about the financial health of the Corporate Debtor. The object of the IBC is to ensure that the insolvent company is put back on its feet and not to disarray a solvent and financially sound company. As can be seen from the reply filed by the Respondent (Corporate Debtor), its financial health is quite commendable. The relevant excerpt of the reply reads thus:

XIII. The Respondent has approximately 1343 (One Thousand Three Hundred and Forty Three) employees, as on 31.03.2022, at various levels. Additionally, the Respondent directly/ indirectly oversees approximately 10,000 (Ten Thousand) workers at the construction sites of various current projects. Pertinently, the Respondent has been paying the remuneration of all the concerned persons, without any failures. In this regard, it is relevant to note the details of amount deposited by the Respondent owing to the provident fund requirements for the past three years (given below):

Sl. No.	Particulars	FY 2018-19 (In Rupees)	FY 2019-20 (In Rupees)	FY 2020-21 (In Rupees)
1.	Provident Fund	15,40,48,483	14,84,94,662	14,03,66,376

XIV. Further, some of the biggest financial institutions of India (namely Axis Bank, Standard Chartered Bank and Yes Bank) have shown faith in the credit rating of the Respondent, by providing it with various credit/loan facilities. The Respondent has always obliged the aforesaid institutions by timely repayment. The said is evident from the overall reducing debt for the past three years (highlighted below):

Sl.No.	Particulars	FY 2018-19 (In Millions)	FY 2019-20 (In Millions)	FY 2020-21 (In Millions)
1	. Outstanding Loan (Current Bank Over Draft & Working Capital Loans)	10732.3	8257	2468.09
2.	Outstanding Loan of Financial Institution (Non-Current-Long Term Loans)	1,250	Nil	Nil

Pertinently, the turnover of the Respondent for last three years (2020-2021) is as under:

Sr.No.	Particular	FY 2018-19 (In Millions)	FY 2019-20 (In Millions)	FY 2020-21 (In Millions)
1.	Total Turnover	30,396.53	34,119.32	29,405.39

XV. The Respondent has majorly contributed to the state exchequer, the same is evident from a cursory look at the details (Below) of Goods and Service tax deposited by the Respondent for the state of Uttar Pradesh, where the Respondent is undertaking majority of its current projects:

Sr. No	Particular	FY 2019-20 (In Rupees)	FY 2020-21 (In Rupees)	FY 2021-22 (In Rupees)	FY 2022-23 (till July 2022)
1.	GST Deposited	5,25,78,58,956	4,45,41,42,653	4,01,23,25,791	59,74,78,533

XVI. Further to all the aforementioned, the Respondent most humbly submits that the Respondent is a solvent company which is smoothly undertaking its functions and timely discharging its liabilities and debts; and it is not the objective of the Code that Corporate Insolvency Resolution Process be initiated to penalize a solvent company for certain alleged non-payment of dues. It is submitted that the scope and objective of Code is to bring about ‘resolution’ of an insolvent debtor. The present proceedings are a misconceived attempt of the Applicant to use insolvency as a substitute for the appropriate proceedings for recovery of the alleged debt.

XVII. It is pertinent to mention that as admitted in the Application itself, the Applicant has received a colossal amount of Rs. 154,87,51,909/- under the contract (Ref. Page 829 of the

Application). The Respondent has always been very cooperative with the Applicant right from the beginning, however, Applicant’s persistent defaults and breaches have caused enormous loss and hardship to the Respondent, for which the Applicant is liable as per the express provisions of the contract. The Respondent has always acted within the four corners of the contractual provisions and all its actions have been in conformity with the contract as brought out above. The Applicant on the other hand, has acted in complete disregard of its contractual obligations as well as the express provisions of the contract & has filled the present application with an ulterior motive.”

# 14. In Vidarbha Industries Power Ltd. Vs. Axis Bank 2022 SCC Online SC page 841, the Hon’ble Apex Court clearly delineated the legal position and declared that the Adjudicating Authority should examine the expediency of initiating the CIRP after taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor. The relevant excerpt of the judgment containing the discussions regarding the procedure for considering the application filed by the Financial Creditor under Section 7 of IBC is extracted hereunder for convenient reference;

• “59. There can be no doubt that the Corporate Debtor who is in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor are not extraneous matters.

• XXXXX

• 62. As pointed out by Mr. Gupta the legislature has, in its wisdom, chosen to use the expression “may” in Section 7 (5)(a) of the IBC. When an Adjudicating Authority is satisfied that a default has occurred and the application of a financial creditor is complete and there are no disciplinary proceedings against the proposed resolution professional, it may by order admit the application. Legislative intent is construed in accordance with the language used in the statute.

• 63. The meaning and intention of Section 7 (5)(a) of the IBC is to be ascertained from the phraseology of the provision in the context of the nature and design of the IBC. This Court would have to consider the effect of the provision being construed as directory or discretionary. 

• 64. Ordinarily, the word “may” is directory. The expression may admit’ confers discretion to admit. In contrast, the use of  the word “shall” postulates a mandatory requirement. The use of the word “shall” raises a presumption that a provision is imperative. However, it is well settled that the prima facie presumption about the provision being imperative may be rebutted by other considerations such as the scope of the enactment and the consequences flowing from the construction.

• 65. XXXXX

• 79. As observed above, the financial strength and nature of business of Financial Creditors and Operational Creditors being different, as also the tenor and terms of agreements/contracts with financial creditors and operational creditors, the provisions in the IBC, relating to commencement of CIRP at the behest of an Operational Creditor, whose dues are undisputed, are rigid and inflexible. If dues are admitted as against the Operational Creditor, the Corporate Debtor must pay the same. If does not, CIRP must be commenced. In the case of a financial debt, there is a little more flexibility. The Adjudicating Authority (NCLT) has been conferred the discretion to admit the application of the Financial Creditor. If facts and circumstances so warrant, the Adjudicating Authority can keep the admission in abeyance or even reject the application. Of course, in case of rejection of an application, the Financial Creditor is not denuded of the right to apply fresh for initiation of CIRP, if its dues continue to remain unpaid.”

# 15. In the wake of the discussion and finding as above, we are of the considered view that the Petition is misconceived and devoid of merits thus deserves to be rejected. Ordered accordingly. It goes without saying that nothing observed or recorded hereinabove will be construed as expression of opinion on merit of the claim of the Petitioner against the Respondent and the Petitioner would be entitled to avail appropriate remedies against the Respondent to espouse the same in accordance with law. It is also made clear that the Petitioner will not be denuded of his right to initiate fresh proceedings against the Respondent, under Section 9 of IBC, 2016 if its claim is determined and found substantiated against the Respondent in appropriate proceedings, in accordance with law. The Petition stands disposed of. No order as to cost. 

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