The NCLT, Amravati Bench observed that as per Section 135 of the Indian Contract Act of 1872, a surety is discharged if the creditor and principal debtor enters a contract by which a composition or promise is arrived at unless surety assents to such contract.
It was noted that the Personal Guarantor was not a party to the said OTS proposal and it was not even signed by the Personal Guarantor. Therefore, the OTS cannot be construed as an acknowledgement on part of the Personal Guarantor.
Brief Facts:
The Petitioner, who is a Financial Creditor, has preferred the present company petition to seek initiation of the Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”) against the Personal Guarantor of the Corporate Debtor (hereinafter referred to as “CD”).
Background of the Case:
A working capital facilities loan was sanctioned by the Financial Creditor in favour of the CD. The Respondent stood as a guarantor for the said loan and subsequently a deed of guarantee was executed. The guarantee was continuing in nature and therefore, the Guarantor was liable for all the subsequent loans granted to the CD.
Sometime in 2016, the account of CD was declared as Non-Performing Assets. The CD failed to repay the loan despite multiple reminders. An Original Application before the Debt Recovery Tribunal was preferred by the Financial Creditor against the CD which is pending.
In 2018, the CD requested for settlement under the compromise. But the CD failed to pay as per that also and hence, the Financial Creditor cancelled the OTS in 2019.
In 2021, a company petition was filed against CD seeking CIRP and it was admitted by the tribunal. The present application is preferred as the Personal Guarantor did not discharge the debt.
At the stage of appointing a Resolution Professional, since the Respondent does not have the right to the audience, no opportunity to file a counter was given. The Resolution Profession submitted a report stating that a default has been committed by the Guarantor. Therefore, the present petition is preferred.
Contentions of the Respondent (Personal Guarantor):
It was submitted that the Respondent is the shareholder of CD and that he did not sign in his personal capacity. Due to the grant of OTS, the Respondent is discharged from his liabilities following Section 135 of the Indian Contract Act, 1872. It was argued that the cause of action is barred by time as the default occurred in 2016 when the account was declared as Non-Performing Assets.
Contentions of the Petitioner (Financial Creditor):
It was contended that Respondent was aware of all the events and therefore cannot deny signing a document that is a part of the series of contracts. The Respondent consciously signed documents in the capacity of the Personal Guarantor.
Observations of the Tribunal:
It was observed that as per Section 135 of the Indian Contract Act of 1872, a surety is discharged if the creditor and principal debtor enters a contract by which a composition or promise is arrived at unless surety assents to such contract.
It was noted that the Personal Guarantor was not a party to the said OTS proposal, and it was not even signed by the Personal Guarantor. Therefore, the OTS cannot be construed as an acknowledgment on part of the Personal Guarantor.
Further, acknowledgment of debt was done in 2016, and Section 18 of the Limitation Act, 1963 applies to the proceedings under the Insolvency and Bankruptcy Code, 2016. Hence the period of limitation expired in 2019 whereas the present petition is filed in 2022, which would be barred by the period of limitation.
The decision of the Tribunal:
Therefore, based on the abovementioned reasons, the company petition was held to be not maintainable and accordingly, dismissed.
Case Title: State Bank of India v. P. Raja Rao (Personal Guarantor of M/s Prathyusha Resources & Infra Private Limited)
Coram: Justice Telaprolu Rajani (Judicial Member)
Case No: CP(IB) No. 78/95/2022
Advocates for Petitioner (Financial Creditor): Advs. Mr. P.B.A. Srinivasan, Ms. Srishti Bansal
Advocate for Respondent (Personal Guarantor): Adv. Mr. T.V.L. Narasimha Rao
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