Limitation & Liability of Corporate Guarantor Vs Principal Borrower

In the matter of Piyush Periwal Vs. Stressed Assets Stabilization Fund (SASF) [Company appeal (AT) (Insolvency) No. 932 of 2019] Appellate Authority (NCLAT) on 24.11.2020 held as under; - 

• “It goes without saying that in terms of Clause 11 of the Corporate Guarantee dated 16th July, 1997, the Corporate Guarantor is liable to be proceeded against by the lender or its assignee in the same manner as if it was the Principal Borrower/ Debtor.” 

Brief facts of the case; 

1.  ‘Industrial Development Bank of India’ (IDBI) advanced loan facilities to ‘National Boards Ltd.’ (NBL) – the Principal Borrower under its Project Finance Scheme for which the NPIL ‘Corporate Debtor’ stood as ‘Corporate Guarantor’. It happened on 27th March, 1997. 

2. The Principal Borrower – NBL defaulted in repayment of loan to IDBI. IDBI recalled the loan facility on 9th November, 2001 and invoked corporate guarantee of the Corporate Debtor – NPIL vide letter dated 3rd December, 2001 raising a demand of Rs.5,42,94,868/-. 

3. Subsequently, in terms of Assignment Deed dated 30th September, 2004, IDBI assigned its debts to SASF, who became the Financial Creditor as Assignee of IDBI. 

4. 4. IDBI filed OA No. 27/2002 with Debts Recovery Tribunal (DRT), Guwahati and obtained a recovery certificate dated 5th January, 2005 against the Principal Borrower – NBL and its personal guarantors. Corporate Debtor – NPIL was not a party to the said OA. 

5. A reference, in respect of ‘National Boards Ltd.’ (NBL) – the Principal Debtor, was filed before the ‘Board for Industrial and Financial Reconstruction’ (BIFR) and the said reference was pending before BIFR till 30th November, 2016 when SICA was repealed.

6. SASF initiated proceedings against NPIL (Corporate Debtor/Guarantor) in respect of the Corporate Guarantee before the Adjudicating Authority on 12th March, 2019.

Appellate Authority, excluding the period of reference of the Principal Debtor before BIFR, held that the insolvency application against the Corporate Guarantor (NPIL) under section 7 of the Code, is within the limitation. Hence rejected the appeal. 

Author's comments; The question here is whether the guarantor is liable for the actions of the principal borrower after the invocation of the continuing guarantee. On invocation of guarantee, the contract of guarantee attains the finality and the liabilities and obligations of the guarantor stands defined & fixed, as on the date of invocation of the continuing guarantee & the aspect of limitation to sue the principal borrower and / or the guarantor gets delinked & thus have to be viewed separately. 

Supreme Court of India (10.04.2006) in Syndicate Bank vs Channaveerappa Beleri & Ors. [Appeal (civil) 6894 of 1997] held as under; 

# 14. We have to, however, enter a caveat here. When the demand is made by the creditor on the guarantor, under a guarantee which requires a demand, as a condition precedent for the liability of the guarantor, such demand should be for payment of a sum which is legally due and recoverable from the principal debtor. If the debt had already become time-barred against the principal debtor, the question of creditor demanding payment thereafter, for the first time, against the guarantor would not arise. When the demand is made against the guarantor, if the claim is a live claim (that is, a claim which is not barred) against the principal debtor, limitation in respect of the guarantor will run from the date of such demand and refusal/non compliance. Where guarantor becomes liable in pursuance of a demand validly made in time, the creditor can sue the guarantor within three years, even if the claim against the principal debtor gets subsequently time-barred. To clarify the above, the following illustration may be useful :

• Let us say that a creditor makes some advances to a borrower between 10.4.1991 and 1.6.1991 and the repayment thereof is guaranteed by the guarantor undertaking to pay on demand by the creditor, under a continuing guarantee dated 1.4.1991. Let us further say a demand is made by the creditor against the guarantor for payment on 1.3.1993. Though the limitation against the principal debtor may expire on 1.6.1994, as the demand was made on 1.3.1993 when the claim was 'live' against the principal debtor, the limitation as against the guarantor would be 3 years from 1.3.1993. On the other hand, if the creditor does not make a demand at all against the guarantor till 1.6.1994 when the claims against the principal debtor get time-barred, any demand against the guarantor made thereafter say on 15.9.1994 would not be valid or enforceable. 

• Be that as it may.

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.