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Laxmi Pat Surana v. Union Bank of India & Anr.

Civil Appeal · 2021 INSC 220Decided 26 Mar 2021
Civil Appeal No. 2734 of 2020
Justice A.M. Khanwilkar · Justice B.R. Gavai · Justice Krishna Murari

Background

Union Bank of India had extended loans to a proprietary firm (the principal borrower), for which a company, Surana Metals Limited (of which the appellant was a promoter/director), had furnished a corporate guarantee. The loan accounts were declared NPA in 2010, but the bank only initiated insolvency proceedings against the corporate guarantor (Surana Metals) under Section 7 of the IBC in 2019, more than three years after the default, relying on later communications in which the principal borrower and guarantor had acknowledged the debt. The guarantor challenged the insolvency application on two grounds: that Section 7 could not be invoked against a guarantor of a non-corporate (proprietorship) borrower at all, and that the claim was time-barred since it was filed more than three years after the original 2010 default. Both the NCLT and NCLAT rejected these objections, leading to the appeal before the Supreme Court.

Decision Breakdown

The Supreme Court held that a corporate person who provides a guarantee for a loan taken by a non-corporate principal borrower (such as a proprietorship) is still a "corporate debtor" under the IBC once it fails to honour that guarantee, because its liability as guarantor is independent and coextensive with that of the principal borrower: the identity of the principal borrower does not control whether the guarantor can be proceeded against under the Code. On limitation, the Court held that the guarantor's own written communication acknowledging the loan and guarantee (even though sent "without prejudice") amounted to an acknowledgment of liability under Section 18 of the Limitation Act, which restarts a fresh three-year limitation period; since the insolvency application was filed within three years of that acknowledgment, it was not time-barred. The appeal was accordingly dismissed, leaving other issues to be decided by the NCLT.

Lesson Learnt

A company that stands as guarantor for someone else's loan can be pushed into insolvency proceedings in its own right once it defaults on that guarantee, and any written acknowledgment of a debt, even one marked "without prejudice", can restart the limitation clock, so acknowledging a liability casually is not risk-free.

Official source (sci.gov.in)View Judgment (PDF)

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