The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Ashok Bhushan, Chairperson and Barun Mitra, Technical Member was hearing an Appeal on Friday and held that 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 the contract of guarantee.
In the present case, the following issues arose for Court’s consideration: (1) Whether the default in payment of the 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? (2) Whether the Deed of Guarantee dated 17.05.2019 is a guarantee on demand and the limitation of Guarantor shall ensue only when demand is made to the Guarantor? (3) Whether notice dated 01.10.2020 issued by the Bank to Guarantor can be treated to be noticed 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 the period of Section 10A? (4) Whether the application filed by the Bank under Section 7 was barred by Section 10A?
The scheme of the I&B Code clearly indicates 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 as is delineated by Section 3(11) of the Code, debt becomes due both to Principal Borrower and the Guarantor, as noted above. The definition of default under Section 3(12) in addition to the 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 v. Channaveerappa Beleri and Others, REED 2006 SC 04002, a guarantor’s liability depends on the terms of his contract. There can be a default by the Principal Borrower and the Guarantor on the same date or the date of default for both may be different depending on the terms of the contract of the guarantee. It is well settled that the loan agreement with the Principal Borrower and the Bank as well as the 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.
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 a default, nor the default on the part of the Guarantor can be on the date of NPA i.e. 05.12.2019 for the purpose of the 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. Notice dated 01.10.2020 which has been brought on the record indicates that notice is addressed to the Principal Borrower and to Guarantors. In Para 12, it was clearly stated that Bank is invoking a guarantee agreement and calling upon the guarantors to make the payment within seven days.
The notice dated 01.10.2020, thus, has been issued invoking the guarantee 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 the part of the Guarantor on any earlier date. The default on the 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. In Part IV of the application, the 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 the guarantee by notice dated 01.10.2020.
When the notice dated 01.10.2020 is relied on by the Financial Creditor with the further stipulation that the Financial Creditor has invoked the corporate guarantee, the default of the corporate guarantor has to be subsequent to 01.10.2020.
In view of the foregoing discussion, the Appellate Tribunal arrived at the following conclusions: The Corporate Guarantee Deed dated 17.05.2019 is an 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 arises on 08.10.2020. Default on the part of the Guarantor having arisen on 08.10.2020 i.e. within the period which is covered as the prohibited period under Section 10A, the application under Section 7 was clearly barred by Section 10A. Issues No. II, III and IV are answered accordingly. 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 the part of the Guarantor was subsequent to 01.10.2020 when the guarantee was invoked, the application was barred by Section 10A and the Adjudicating Authority committed an error in admitting the Section 7 application.
The Appeal was allowed.
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