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Action u/s 7 can be initiated against corporate guarantor for default by principal borrower who is not a corporate body

March 27, 2021[2021] 125 394 (SC)

IBC: An action under Section 7 can be initiated by financial creditor (Bank) against a corporate person (being a corporate debtor)concerning guarantee offered by it in respect of a loan account of principal borrower, who had committed default and is not a "corporate person" within meaning of Code. An application under section 7 filed after three years from date of declaration of loan account as Non performing Asset being date of default, is not barred by limitation if loan is acknowledged by principal borrower from time to time

• 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 commitsde fault in that regard. It is open to the corporate debtor to payoff 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.

• 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.

• Where loan was offered to a proprietary firm(not a corporate person), action under Section 7 can be initiated against corporate person if it had offered guarantee in respect of that transaction. 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).The financial creditor has not only the right to recover the outstanding dues by filing a suit, but also has a right to initiate resolution process against the corporate person (being a corporate debtor) whose liability is coextensive with that of the principal borrower and more so when it activates from the written acknowledgment of liability and failure of both to discharge that liability. a fresh period of limitation is required to be computed from the date of acknowledgment of debt by the principal borrower from time to time and in particular the (corporate) guarantor/corporate debtor.

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