NATIONAL COMPANY LAW APPELLATE TRIBUNAL,

PRINCIPAL BENCH, NEW DELHI

Company Appeal (AT) (Insolvency) No.329 of 2023

[Arising out of order dated 01.03.2023 passed by the Adjudicating Authority

(National Company Law Tribunal), Mumbai Bench, Court V in C.P.
543/IB/MB/2021]

IN THE MATTER OF:

Pooja Ramesh Singh

R/o A D Tiwari Chawl, Room No.23,
Mogra Pada Near Reliance Company,
Andheri East, Mumbai – 400069.
...Appellant
Vs.

1. State Bank of India

State Bank Bhavan, Madam Cama Road,
Nariman Point, Mumbai – 400021.

2. Essel Infraprojects Ltd.

Through the Resolution Professional
Mr. Kairav Anil Trivedi,
513/A, 5th Floor, Kohinoor City, Kirol Road,
LBS Marg, Kurla Road, Mumbai - 400070.
...Respondents
Present:
For Appellant: Mr. Gaurav Mitra, Ms. Smriti Churiwal, Mr.
Jaiveer Kant and Ms. Lavanya Pathak, Advocates.

For Respondents: Mr. Krishnendu Datta, Sr. Advocate with Mr.

Manish Kr. Jha, Ms. Avni Sharma, Mr. Dhruv
Nayyar, Ms. Varsha Himatsingka, Advocates for
Respondent No.1.

JUDGMENT

ASHOK BHUSHAN, J.

This Appeal by the Suspended Director of the Corporate Debtor

(Corporate Guarantor) has been filed challenging the order dated 01.03.2023

Cont’d…/
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passed by the Adjudicating Authority (National Company Law Tribunal),

Mumbai Bench, Court V admitting Section 7 application filed by State Bank

of India. Brief facts of the case necessary to be noted for deciding this Appeal

are:

i. M/s Spanco Nagpur Discom Ltd (SND Ltd.), the borrower entered

into a Memorandum of Agreement for a term loan for sums not

exceeding Rs.80 Crores on 25.02.2013. The Corporate Guarantor

(Respondent No.2) and one Essel Utilities Distribution Company

Ltd. executed a combined Corporate Guarantee dated 25.02.2013

to secure the Term Loan. Another Memorandum of Agreement

was executed between SND Ltd. and the State Bank of India for

a working capital credit facility for amounts not exceeding

Rs.78,75,00,000/-.

ii. Combined Corporate Guarantee was executed on 01.03.2013 by

Respondent No.2 and Essel Utilities Distribution Company Ltd.

A Supplemental working capital consortium agreement was

executed.

iii. Another combined corporate guarantee was executed by

Respondent No.2 and Essel Utilities Distribution Company Ltd.

for loans sanctioned to SND Ltd. on 17.07.2018 for an amount

not exceeding Rs.185,27,00,000/-.

iv. On 17.05.2019, fresh Corporate Guarantee was executed by the

Respondent No.2 and Essel Utilities Distribution Company Ltd

with respect to facilities extended to the SND Ltd.

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v. On 05.12.2019, SND Ltd. was declared as Non-performing Asset.

vi. The consortium of banks lead by Respondent No.1 issued a notice

of recall of the loans and invocation of corporate guarantees

towards loans aggregating to a total of Rs.410,00,00,000/-

granted to SND Ltd. The Respondent No.1 granted the Corporate

Guarantor a period of 7 days to make payment i.e. by 08.10.2020.

vii. State Bank of India filed an application under Section 7 of the

I&B Code being CP(IB) No. 543 of 2021 against the Corporate

Debtor (Corporate Guarantor) on 10.05.2021 for default of an

amount of Rs.1,77,37,02,868.74/-. Corporate Debtor filed its

reply.

viii. A Company Petition under Section 7 was also filed against the

Principal Borrower – SND Ltd. which has been admitted by the

Adjudicating Authority on 29.09.2022 and the Principal Borrower

is presently undergoing Corporate Insolvency Resolution Process.

ix. The Company Petition 543/IB/MB/2021 was heard by the

Adjudicating Authority. The Corporate Debtor raised the defence

that Application under Section 7 against the Corporate Debtor

was not maintainable because the guarantee against the

Corporate Debtor invoked on 01.10.2020, which period squarely

fall under Section 10A of the Code.

x. On 01.03.2023, the Adjudicating Authority admitted the Section

7 application. The Adjudicating Authority overruled the defence

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raised by the Corporate Debtor that application is barred by

Section 10A. The Adjudicating Authority took view that the

Account of Principal Borrower became NPA on 05.12.2019,

hence, notice dated 01.10.2020 shall not change date of default

which was 05.09.2019. Challenging the impugned order this

Appeal has been filed.

2. We have heard Shri Gaurav Mitra, learned senior counsel for the

Appellant and Shri Krishnendu Datta, learned senior counsel appearing for

the Respondent Bank.

3. Learned counsel for the Appellant submits that the corporate

guarantee issued by the Corporate Guarantor was on demand guarantee and

the default on behalf of the Corporate Guarantor can take place only when

amount is demanded from the Corporate Guarantor. It is admitted fact that

notice was issued on 01.10.2020 to the Corporate Guarantor demanding the

payment within 7 days, hence, default on the part of Corporate Guarantor

shall take place only w.e.f. 08.10.2020. The date of default being covered by

Section 10A, the application was clearly barred and the application was not

maintainable for a default which took place between the period 25.03.2020 to

25.03.2021. The Adjudicating Authority committed error in holding that for

Corporate Guarantor date of default shall be 05.09.2019. It is submitted that

the Adjudicating Authority not looked into the relevant clauses of the

corporate guarantee which clearly contemplated notice of demand by the

Bank. On demand guarantee is a different nature of guarantee under which

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limitation of Guarantor shall come to play only when a demand notice is

issued.

4. Learned counsel for the Respondent Bank, Shri Krishnendu Datta

refuting the submissions of learned counsel for the Appellant contends that

the default committed by the Principal Borrower and the Corporate Guarantor

has to be same. The account was declared NPA on 05.12.2019, hence, the

default has to be treated as to have taken place three months prior i.e. on

05.09.2019 as per the RBI Circular. When the Principal Borrower committed

default on 05.09.2019, the liability of the Corporate Guarantor being

coextensive with that of the Principal Borrower, there shall be default on the

part of the Corporate Guarantor also. The default having been taken place

on 05.09.2019 i.e. before 10A period, there is no applicability of Section 10A,

in the facts of the present case. The corporate guarantee in question is not

on demand guarantee. Default having arose before insertion of Section 10A,

Section 10A is not applicable.

5. We have heard learned counsel for the parties and perused the

record. From the submission of learned counsel for the parties and materials

on record following issues arise for consideration:

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?

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II. Whether the Deed of Guarantee dated 17.05.2019 is guarantee

on demand and the limitation of Guarantor shall ensue only

when demand is made to the Guarantor?

III. Whether notice dated 01.10.2020 issued by the Bank to

Guarantor can be treated to be notice on demand as

contemplated in the guarantee and the default on the part of the

Guarantor shall be only after notice dated 01.10.2020 i.e. during

period of Section 10A?

IV. Whether the application filed by the Bank under Section 7 was

barred by Section 10A?

Issue No. I

6. 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, which provides as follows:

“PART II

Other applications

137. Any other Three When the

application for years right to
which no period of apply
limitation is accrues.
provided elsewhere
in this Division.

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7. 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;”

8. 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;”

9. 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;”

10. 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

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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”.”

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11. 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.

12. 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 the

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

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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."

13. 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

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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

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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."

14. 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.

15. 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

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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,

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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.”

16. 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.”

17. 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

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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.”

18. 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?”

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19. 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:

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“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.

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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.”

20. 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.

21. 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

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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

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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”

22. 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.

23. 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

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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.”

24. 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

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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.

Issue No. II

25. Now we come to the Deed of Guarantee dated 17.05.2019 which

has been brought on record. The relevant clauses of the Deed of Guarantee

which has been relied by learned counsel for the Appellant are clause 1, 13,

14 and 20, which are to the following effect:

“1. If at any time default shall be made by the

Borrower in payment of the principal sum (not
exceeding Rs.186,60,00,000/- (Rupees One Hundred
Eighty Six Crore Sixty Lacs Only) together with
Interest, costs, charges, expenses and/or other
monies for the time being due to the Bank in respect
of or under the aforesaid credit facilities or any of
them the Guarantors shall forthwith on demand pay
to the Bank the whole of such principal sum (not

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exceeding Rs.186,60,00,000/- (Rupees One Hundred

Eighty Six Crore Sixty Lacs Only) together with
interest, costs, charges, expenses and/or any other
monies as maybe then due to the Bank in respect of
the aforesaid credit facilities and shall indemnify and
keep indemnified the Bank against all losses of the
said principal sum, interest or other monies due and
all costs charges and expenses whatsoever which the
Bank may incur by reason of any default on the part
of the Borrower.

13. The Guarantors shall forthwith on demand

made by the Bank deposit with the Bank such sum or
security or further sum or security as the Bank may
from time to time specify as security for the due
fulfillment of their obligations under this Guarantee
and any security of deposited with the Bank may be
sold by the Bank after giving to the Guarantors a
reasonable notice of sales and the said sum or the
proceeds of sale of the securities may be appropriated
by the Bank in or towards satisfaction of the said
obligations and any liability arising out of non-
fulfillment thereof by the Guarantors.

14. The Guarantors hereby agree that

notwithstanding any variation made in the terms of
the said Agreement of loan and / or any of the said
security documents including reallocation/
interchange of the individual limits within the
principal sum variation in the rate of interest,
extension of the date for payment of the instalments,
if any, or any composition made between the Bank
and Borrower to give time to or not to sue the

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Borrower, or the Bank parting with any of the

securities given by the Borrower, the Guarantors shall
not be released or discharged of their obligation under
this Guarantee provided that in the event of any such
variation or composition or agreement the liability of
the Guarantors shall not withstanding anything
herein contained be deemed to have accrued and the
Guarantors shall be deemed to have become liable on
the date or dates on which the borrower shall become
liable to pay the amount/amounts due under the said
Agreement of Loan and/or any of the said security
documents as a result of such variation or composition
or agreement.

20. The Guarantors agree that amount due under

or in respect of the aforesaid credit facilities and
hereby guaranteed shall be payable to the Bank on
the Bank serving the Guarantors with a notice
requiring payment of the amount and such notice
shall be deemed to have been served on the
Guarantors either by actual delivery thereof to the
Guarantors or by despatch thereof by Registered Post
or Certificate of Posting to the Guarantors address
herein given or any other address in India to which,
the Guarantors may by written intimation give to the
Bank or request that communication addressed to the
Guarantors be despatched. Any notice despatched by
the Bank by Registered Post or Certificate of Posting
to the address to which it is required to be despatched
under this clause shall he deemed to have been duly
served on the Guarantors four days after the date of
posting thereof, and shall be sufficient if signed by
any officer of the Bank and in proving such service it

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shall be sufficient if it is established that the envelope

containing such notice communication or demand was
properly addressed and put into the post office.”

26. The judgment of the Hon’ble Supreme Court in “Syndicate Bank

vs. Channaveerappa Beleri & Ors.” has categorically laid down that liability

of the Guarantor depends on the terms of his contract. The relevant clauses

of the Deed of Guarantee, as noted above, clearly contemplate demand by the

Bank upon the Guarantor. Clause 1 provides that “the Guarantors shall

forthwith on demand pay to the Bank the whole of such principal sum

not exceeding Rs.186,60,00,000/- together with interest”. Similarly,

Clause 13 uses expression, “the Guarantors shall forthwith on demand

made by the Bank deposit with the Bank….”. Clause 20 again makes it

clear that what was guaranteed by the Guarantor was that amount shall be

payable to the Bank on serving the Guarantor with notice requiring payment

of the amount.

27. In view of the clear stipulation in the Deed of Guarantee, default on

the part of the Guarantor cannot be treated to be on 05.09.2019, when it is

alleged that the Principal Borrower committed default, nor the default on the

part of the Guarantor can be on date of NPA i.e. 05.12.2019 for the purpose

of present case. In the present case, admittedly, the Bank has issued notice

dated 01.10.2020 to the Principal Borrower as well as to the Guarantor - Essel

Infraprojects Ltd. Notice dated 01.10.2020 which has been brought on the

record indicate that notice is addressed to the Principal Borrower and to

Guarantors. In Para 8 of the notice following has been stated:

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“8. Our Clients states that, You Nos.2 to 4,

executed Deed of Guarantee on respective dates inter
alia agreeing to pay on demand and without demur to
our clients alongwith interest, cost, charges, expenses
and/or other money due thereon from time to time in
terms of the Agreement of Loan for overall limits,
Agreement of Hypothecation of Goods and Assets and
Supplemental Agreements.”

28. In Para 12, it is clearly stated that Bank is invoking guarantee

agreement and call upon the guarantors to make the payment within seven

days. Para 12 and 13 of the notice are as follows:

“12. We state that You No. 1 to 4, have

mischievously, intentionally, deliberately and
malafidely misrepresented before our Clients only in
order to avail the said facilities and also have
committed various defaults under the terms and
conditions of the Loan Agreements and also failed
and neglected to perform your duties and obligations
diligently under the aforesaid Agreements and other
documents, which had been duly agreed by you
thereby causing irreparable loss and damages to our
Clients and for which we are entitled to take action
against you under the various provisions of law, civil
as well as criminal. Therefore our clients hereby
invoking guarantee agreement, executed by you No.2
to 4, and call upon you to make payment to our clients
forthwith.

13. In the circumstances, we call upon You Nos.

1 to 4 to pay to our Clients within seven (7) days from

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the date of receipt of this recall cum invocation of

corporate guarantees notice, the outstanding overdue
amount alongwith with interest, additional interest,
and other charges payable under the aforesaid
Agreements and other documents,

(i) a sum of Rs. 166,40,63,441.95 (Rupees One

Hundred Sixty Six Crores Forty Lakhs Sixty
Three Thousand Four Hundred Forty One and
Ninety Five Paise only) to our client State Bank
of India as on 31.08.2020,

(ii) a sum of Rs.72,51,00,000.00 (Rupees Seventy

Two Crores and Fifty One Lakhs only) to our
client Canara Bank as on 31.08.2020,

iii) a sum of Rs.65,68,15,530.77 (Rupees Sixty

Five Crore Sixty Eight Lakh Fifteen Thousand
Five Hundred and Thirty and Seventy Seven
Paise Only) to our client IIFCL as on
31.08.2020,

(iv) a sum of Rs.33,33,64,937.16 (Rupees Thirty

Three Crores Thirty Three Lakhs Sixty Four
Thousand Nine Hundred Thirty and Sixteen
Paise only) to our client Bank of Baroda on
31.08.2020 and

(v) a sum of Rs.34,18,16,286.80 (Rupees Thirty

Four Crores Eighteen Lakhs Sixteen Thousand
Two Hundred Eighty Six and Eighty Paise only)
to our client Punjab National Bank an
31.08.2020

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together with further interest, additional interest and

other charges at the contractual rates upon the footing
of compound interest until payment/realisation
towards the loan availed by you No.1 herein, failing
which our clients will be constrained to initiate
necessary action against You no.1 to 4 at your costs,
risks and consequences including but not limited to-

i) initiating recovery proceedings against you

before the Debts Recovery Tribunal or any other
forum under Recovery of Debts and Bankruptcy
Act, 1993 or any other law,

ii) initiating insolvency proceedings against you

under the Insolvency and Bankruptcy Code,
2016 (“IBC”) or any other law,

iii) initiating criminal proceedings against directors

of the Borrower,

iv) initiating proceedings under Securitisation and

Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002;

v) informing default/breach under the Working

Capital, Cash Credit, Seasonal Limit, Term
Loan and Standby Letter of Credit/Bank
Guarantee Facility to TransUnion CIBIL,
Reserve Bank of India, information utility under
IBC or any other reporting authority/body;

vi) reporting you and/or Borrower's directors as

non-cooperative borrowers or wilful defaulters;

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vii) initiating civil and criminal proceedings against

the Personal Guarantors; and

viii) any other step under law or contract to recover

the Outstanding Amount.”

29. The notice dated 01.10.2020, thus, has been issued invoking the

grantee which expression is used in Para 12 above. When the Bank has given

time to the Guarantor to make payment on 01.10.2020, there can be no

default on part of the Guarantor on any earlier date. The default on part of

the Guarantor thus has to be subsequent to the notice dated 01.10.2020 i.e.

Non-payment within seven days as required.

30. In Part IV of the application, date of declaration of the Principal

Borrower’s account as NPA i.e. 05.12.2019 was mentioned. Part IV also

clearly mentions the invocation of guarantee by notice dated 01.10.2020.

Relevant portion of Part IV reads as follows:

“DATE OF DECLARATION OF THE BORRWER'S

ACCOUNT AS NPA: December 5, 2019.

(a) It is submitted that the Borrower failed in making

payments under the Facilities from the year 2019
onwards. Accordingly, a breach of the contractual
arrangement between the Financial Creditor and
the Borrower for the Facilities, occurred and
consequently a breach of the contractual
arrangement between the Financial Creditor and
the Corporate Debtor.

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(b) In view of the same, a Notice dated October 1,

2020, was issued by the Advocates of the
Financial Creditor. In the said Notice, the Financial
Creditor also invoked the corporate guarantees
provided by various group companies of the
Borrower, including by the Corporate Debtor
herein. A copy of the Notice is marked and
annexed hereto as Annexure-I (L).

(c) However, despite repeated reminders, the

Borrower and the Corporate Debtor has failed to
cure its default and the Facilities remain unpaid.
Thus, it is submitted that the Corporate Debtor has
become insolvent and initiation of corporate
insolvency resolution process ("CIRP") under the
Insolvency and Bankruptcy Code, 2016 ("Code")
against the Corporate Debtor, is essential, crucial
and in the interests of all stakeholders.

(d) Thus, the present Application is filed by the

Financial Creditor under Section 7 of the Code,
seeking the initiation of CIRP against the Corporate
Debtor, in accordance with the provisions of the
Code and the Rules and Regulations made
thereunder.”

31. When the notice dated 01.10.2020 is relied by the Financial

Creditor with further stipulation that the Financial Creditor has invoked the

corporate guarantee, the default of corporate guarantor has to be subsequent

to 01.10.2020.

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32. In view of the foregoing discussion, we arrive at following

conclusions:

(i) The Corporate Guarantee Deed dated 17.05.2019 is on demand

guarantee deed and the default shall arise on the part of the

Guarantor only when demand notice is issued as contemplated

in the Deed of Guarantee. When the State Bank of India invoked

the guarantee vide notice dated 01.10.2020, demand on the part

of the Corporate Guarantee shall arise only subsequent to the

notice dated 01.10.2020 i.e. non-payment of the amount within

seven days i.e. default arise on 08.10.2020.

(ii) Default on the part of the Guarantor having arisen on 08.10.2020

i.e. within the period which is covered as prohibited period under

Section 10A, application under Section 7 was clearly barred by

Section 10A. Issues No. II, III and IV are answered accordingly.

(iii) The Adjudicating Authority in the impugned order has not

adverted to the relevant clauses of the Deed of Guarantee as

noted above. The date of default on part of the Guarantor being

subsequent to 01.10.2020 when guarantee was invoked, the

application was barred by Section 10A and the Adjudicating

Authority committed error in admitting the Section 7 application.

33. In view of the foregoing discussion and conclusions, we answer

Issues No. II, III and IV in following manner:

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Issue No. II: The Deed of Guarantee dated 17.05.2019 is guarantee on

demand and the limitation of Guarantor shall ensue only

when demand is made to the Guarantor.

Issue No. III: The Notice dated 01.10.2020 issued by the State Bank of

India to Guarantor has to be treated to be notice on demand

as contemplated in the guarantee and the default on the part

of the Guarantor shall be only after notice dated 01.10.2020

i.e. during period of Section 10A.

Issue No. IV: The application filed by the Bank under Section 7 was barred

by Section 10A.

34. We, thus, are of the view that the application under Section 7 filed

by the Bank being barred by Section 10A could not have been admitted. In

result, the Appeal is allowed. The impugned order dated 01.03.2023 is set

aside.

[Justice Ashok Bhushan]

Chairperson

[Barun Mitra]
Member (Technical)
NEW DELHI

28th April, 2023

Archana

Company Appeal (AT) Insolvency No. 329 of 2023