CONTINUOUS INTERNAL ASSESSMENT I – LAW OF BANKRUPTCY AND

INSOLVENCY

CASE ANALYSIS: “LAXMI PAT SURANA VS. UNION BANK OF INDIA &
ANR”

Submitted To: Submitted By:

Mr. AMITESH DESHMUKH KIRTI SHARMA

Assistant Professor Roll No. 81, Section-C

Faculty of Law of Bankruptcy and Insolvency Semester: VIII

ID: 1920192095

“HIDAYATULLAH NATIONAL LAW

UNIVERSITYNAYA RAIPUR, CHHATTISGARH”

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 DECLARATION OF ORIGINALITY
I, Kirti Sharma, hereby undertake that this work titled “Case Analysis: Laxmi Pat Surana
vs. Union Bank of India & Anr” has been carried out by me independently and this is my
original work. I certify to its originality.

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 TABLE OF CONTENTS

S. NO. CHAPTERIZATION PAGE NO.

1. INTRODUCTION 4

2. UNDERSTANDING THE FACTS OF THE CASE 4-5

3. ISSUES DEALT BY THE SUPREME COURT 5

COMPREHENDING THE JUDGEMENT OF THE

4. 5-6
SUPREME COURT

Rationale behind the sustainability of the case under

4.1 5-6
Section 7 of the Code

4.2 Sustainability of the case alleged to be barred by limitation 6

5. CONCLUSION 10

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 INTRODUCTION

The Supreme Court of India recently made a ruling in the case of “Laxmi Pat Surana vs. Union
Bank of India & Anr1”. In this ruling, the Court stated that in the case of a company, acting as
a guarantor for a borrower, has insolvency process under the “Insolvency and Bankruptcy
Code, 2016” (hereinafter referred to as “Code”) to be initiated against it, the borrower himself
does not mandatorily has to be a “corporate person”. The judgment basically focuses and
throws light on the assurity that a legal action can be sustained in court under Section 7 of the
Code against a corporate guarantor is important to maintain its long-term viability.

The article dwells into the above-mentioned case with respect to its facts, judgement
pronounced by the Supreme Court and the analysis of the judgement.

UNDERSTANDING THE FACTS OF THE CASE

1. In this case, a bank (“financial creditor”) provided a credit facility to a company called
“M/s Mahaveer Construction’ (“principal borrower”).
2. The loan accounts were guaranteed by another company called M/s. Surana Metals Limited
(“corporate guarantor”).
3. However, in 2010, the loan accounts were acknowledged as Non-Performing Assets. A
recall notice was formulated against both the “principal borrower” and the “corporate
guarantor”, with respect to the repayment of the amount.
4. The bank later sent a notice to the “corporate guarantor” in December 2018 under the Code
claiming payment. The “corporate guarantor” denied any liability and clarified that it was
not the “principal borrower” and had not defaulted on any payments.
5. Subsequently, an application was filed before the Kolkata bench of NCLT by the “creditor”
against the “corporate guarantor” to initiate “Corporate Insolvency Resolution Process
(CIRP)”.
6. The contentions of the opposite party in defying the application were diverse. The primary
rationale was that as the “principal borrower” cannot be brought under the umbrella of
being a “corporate person”, the application cannot be sustained. Moreover, as the
prerequisite of adhering to the period of filing was not taken care of (the default date was

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“Laxmi Pat Surana vs. Union Bank of India & Anr., Civil Appeal No. 2734 of 2020”

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 1st January, 2010 and the filing date was 13th February, 2019), the application must be
rejected.
7. The verdict of the Tribunal (NCLT) was in favour of the “financial creditor”. It was
promulgated that liability of non-payment of the “corporate guarantor” is co-extensive to
that of the “principal borrower”, the failure to not clear off the debt even after the issuance
of recall notice, brings the former under the umbrella of liability as per “Section 7 of the
Code”.
8. Being aggrieved by the said order, the Appellant, Mr Laxmi Pat Surana, went before the
Appellate Tribunal, which too rejected the appeal. Consequently, the matter was filed
before the Supreme Court.2

“ISSUES DEALT BY THE SUPREME COURT”

1. “Whether an action under Section 7 of the Code can be initiated by the financial creditor
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”?

2. “Whether an application under Section 7 of the Code filed after three years from the
date of declaration of the loan amount as a NPA, being the date of default, is not barred
by limitation”?

COMPREHENDING THE JUDGEMENT OF THE SUPREME COURT

I. Rationale behind the sustainability of the case under “Section 7 of the Code”

The court has noted that Section 7 allows a “financial creditor” to commence insolvency
proceedings against a “corporate debtor”, who may be the primary borrower or a corporate
entity providing a guarantee, if they fail to repay their debt. If the primary borrower defaults
on their debt, the “financial creditor” can take action against both the borrower and the
guarantor, who are jointly and severally liable. Although it is the borrower who has failed to
clear off the debt, still the guarantor can be imposed with the liability as his own.

2
“Ashima Obhan, Bambi Bhalla, Supreme Court on Maintainability of Action under Section 7 of IBC Against a
Corporate Guarantor, Obhan&Associates, 2021.”

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Even if the primary borrower is not a corporate entity, if a corporate entity provides a
guarantee, they are still considered a corporate debtor under the Code. Thus, phrases such as
“co-extensive” or “coterminous” can be used in this regard, with respect to the interpretation
of Section 128 of the Indian Contract Act.

The Court emphasised on the point that importance must be given to the real purpose of such
insolvency proceedings and the underlying remedies. The sections under the “Code” aim at the
“reorganisation” and “insolvency resolution” of the debtor and not the mere recovery of the
outstanding amount.

II. Sustainability of the case alleged to be barred by limitation

The court acknowledged the fact that the latest admittance of the unpaid amount by the
“corporate debtor” and the “principal borrower” was on 8th December, 2018. The creditor has
filed the application before the Tribunal after taking into consideration the following dates.
Thus, the application it is maintainable.

Usually, the date when a loan account or debt is declared as a Non-Performing Asset (NPA) is
considered as the date of default to commence CIRP under “Section 7 of the Code”. The court
makes it clear that Section 7 is only applicable in cases where the corporate debtor has
defaulted, and not necessarily when the loan account has been declared as a non-performing
asset (NPA).

According to Section 18 of the Limitation Act (“LA”), 1963, which deals with the “effect of
acknowledgement in writing”, in case any borrower or debtor admits its unpaid debt even after
declaring loan account to be NPAs, but prior to the expiry of time-span of limitation (inclusive
of the new time-span of limitation due to repeated acceptances of the unpaid amount
concerned), the liability imposed on them cannot be terminated.

Further, as per Section 137 of LA, 1963, the act of borrower to acknowledge the unpaid debt
in writing and the subsequent failure to do so also stimulates the liability of the guarantor. Such
a right of the creditor is in addition to extensive right of commencing CIRP against the
guarantor.3

3
Ibid

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 ANALYSIS AND CONCLUSION

The take of the Supreme Court in the above-discussed judgement takes an interesting turn as
the reach of “Section 7 of the Code” has been broadened by way of accepting CIPR applications
even when the borrower is not a “corporate person”. The extensive liability of a surety under a
contract of guarantee is an obvious rule of law known to all. But the extension of the same
reasoning in the insolvency law paves the way for the growth of the Code.

Moreover, it also widens the scope of many other firms and corporations going under the
process of insolvency, despite the fact that their borrower might not be “corporate person”. The
inability of any guarantor to pay any outstanding amount reflects the fact that it is in itself not
capable of surviving in the market at large and someday in the future might be unable to resolve
its own amounts overdue. The scrutinization of the same is a must as the predicted insolvent
stage of any such guarantor would affect its own creditors. For the betterment of the economy
at large, such corporates must also be assessed in terms of their financial viability. Hence, the
verdict of the Supreme Court stands reasonable.