K. PARAMASIVAM versus THE KARUR VYSYA BANK LTD. & ANR. on 6 September 2022

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[2022] 18 S.C.R. 100

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[2022] 18 S.C.R.

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K. PARAMASIVAM

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THE KARUR VYSYA BANK LTD. & ANR.

B(Civil Appeal No. 9286 of 2019)

SEPTEMBER 06, 2022

[INDIRA BANERJEE AND J. K. MAHESHWARI, JJ.]

Insolvency and Bankruptcy Code, 2016: ss. 3(7), 3(8), 5(5A),C7, 62 – Initiation of Corporate Insolvency Resolution Process-CIRP– Borrowers failed to repay the debts to financial creditor –Application u/s. 7 by the financial creditor for initiating CIRP againstcorporate debtor; and that corporate guarantor liable to re-payloan having extended guarantee for the loans availed by borrowers– Guarantor’s case that they were not corporate debtors –DApplication admitted by NCLT and upheld by NCLAT – On appeal,held: Liability of the guarantor is co-extensive with that of theprincipal borrower – It was open to the financial creditor to proceedagainst the guarantor without first suing the principal borrower, inrespect of the guarantee given by it, once the borrower commitedEdefault – Guarantor is then, the corporate debtor.

Dismissing the appeal, the Court

HELD: Under Section 7 of the Insolvency and BankruptcyCode, 2016, CIRP can be initiated against a corporate entity whohas given a guarantee to secure the dues of a non-corporate entityFas a financial debt accrues to the corporate person, in respect ofthe guarantee given by it, once the borrower commits default.The guarantor is then, the Corporate Debtor. Liability of theguarantor is co-extensive with that of the Principal Borrower. Itwas open to the Financial Creditor to proceed against theGguarantor without first suing the Principal Borrower. There is noground to interfere with the concurrent findings of the AdjudicatingAuthority (NCLT) and the Appellate Authority (NCLAT).[Para 13, 16, 17][104-A-B; 109-B, C]

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Laxmi Pat Surana v. Union Bank of India and Another(2021) 8 SCC 481: [2021] 2 SCR 924 – relied on.

Case Law Reference

[2021] 2 SCR 924relied onPara 12

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 9286of 2019.

From the Judgment and Order dated 18.11.2019 of the NationalCompany Law Appellate Tribunal, New Delhi in Company Appeal (AT)(Ins) No.538 of 2019.

Amitesh Chandra Mishra, P. J. Sriganesh, Ankit Chaturvedi forM/s ACM Legal, Advs. for the Appellant.

Nikhil Nayyar, V. Prakash, Sr. Advs., T. V. S. Raghavendra Sreyas,Vijay Kumar, Ms. Sugandha Batra, Siddharth Vasudev, IyengarShubharanjani Ananth, Adarsh Mohandas, Ms. R. Sowmya, Advs. forthe Respondents.

The Judgment of the Court was delivered by INDIRA BANERJEE, J.

This appeal under Section 62 of the Insolvency and BankruptcyCode, 2016, hereinafter referred to as the “IBC”, is against a finaljudgment and order dated 18[th] November 2019, passed by the NationalCompany Law Appellate Tribunal (NCLAT) dismissing the CompanyAppeal (AT) (Insolvency) No.538 of 2019, against an order dated 8[th]April 2019 passed by the Adjudicating Authority, admitting the applicationfiled by the Respondent No.1 being CP/1314/IB/2018 under Section 7of the IBC for initiation of the Corporate Insolvency Resolution Process(CIRP) against the Corporate Debtor, Maharaja Theme Parks andResorts Private Limited, hereinafter referred to as “Maharaja ThemeParks and Resorts”.

2. The Appellant is the promoter, shareholder and suspended/discharged director of Maharaja Theme Parks and Resorts, a companyregistered under the Companies Act, 1956. The Respondent No.1,hereinafter referred to as “Financial Creditor” had advanced creditfacilities to the following three entities:- A

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A(i) Sri Maharaja Refineries, a Partnership Firm;

(ii) Sri Maharaja Industries, a proprietary concern of K.Paramasivam; and

(iii) Sri Maharaja Enterprises, a proprietary concern of P.SathiyamoorthyB3. Maharaja Theme Parks and Resorts stood guarantor for theloans availed by all the three borrowers. The borrowers failed to repaythe debts payable by them to the Financial Creditor.

4. On or about 24[th] October 2018, the Financial Creditor filed anCapplication under Section 7 of the IBC being CP/1314/IB/2018 forinitiation of CIRP against Maharaja Theme Parks and Resorts. In thesaid application the Financial Creditor stated that Maharaja Theme Parksand Resorts had extended corporate guarantee(s) for loans availed byeach of the borrowers. On failure of the borrowers to repay the loans,Maharaja Theme Parks and Resorts, as Guarantor, became liable toDrepay the loan.

5. Maharaja Theme Parks and Resorts filed its counter statementbefore the Adjudicating Authority, objecting to the jurisdiction of the NCLTto entertain the petition under Section 7 of the IBC, on the contentionthat, the company, Maharaja Theme Parks and Resorts Private Limited,Ewas not a Corporate Debtor, which is defined in Section 3(8) of the IBCto mean, “a corporate person who owes a debt to any person.” Itwas contended that Maharaja Theme Parks and Resorts did not oweany financial debt to the Financial Creditor.

6. The Appellant contends that, Maharaja Theme Parks andFResorts does not also fall within the definition of ‘Corporate Guarantor’in Section 5(5A) of the IBC, which reads “ ‘corporate guarantor’means a corporate person who is the surety in a contract ofguarantee to a corporate debtor.” Mr. Mishra, appearing for theAppellant, submitted that Maharaja Theme Parks and Resorts had notguaranteed any loan given to a corporate person.G

7. Mr. Mishra referred to the definition of ‘Corporate Person’ inSection 3(7) of the IBC which reads: - “3. …

(7) “corporate person” means a company as defined inHclause (20) of section 2 of the Companies Act, 2013 (18 of

2013), a limited liability partnership, as defined inclause (n) of sub-section (1) of section 2 of the LimitedLiability Partnership Act, 2008 (6 of 2009), or any otherperson incorporated with limited liability under any law forthe time being in force but shall not include any financialservice provider;”

8. Mr. Mishra argued that on a conjoint reading of Section 5(5A),Section 3(7) and Section 3(8) of the IBC, it is apparent that a CorporateGuarantor is the surety in a contract of guarantee to a Corporate Debtor.The borrowers not being Corporate Debtors, Maharaja Theme Parksand Resorts is not a Corporate Guarantor as defined in Section 5(5A) ofthe IBC.

9. By an order dated 8[th] April 2019, the Adjudicating Authorityadmitted the petition under Section 7 of the IBC and initiated the CIRPagainst Maharaja Theme Parks and Resorts. The Respondent No.2was appointed Interim Resolution Professional.

10. Being aggrieved by the order dated 8[th] April 2019 of theAdjudicating Authority, admitting the application for CIRP, the Appellantfiled an appeal. The appeal filed by the Appellant, has been dismissed bythe NCLAT (Appellate Authority), by the judgment and order impugned.

11. Mr. Amitesh Chandra Mishra appearing on behalf of theAppellant submitted that the appeal filed by the Appellant under Section61 of the IBC has been dismissed by the Appellate Authority (NCLAT)on the ground that the company, Maharaja Theme Parks and Resorts, isa Corporate Guarantor, without considering the fact that Maharaja ThemeParks and Resorts does not fall within the ambit of the definition ofCorporate Guarantor, and therefore CIRP cannot be initiated against it.

12. Mr. Nikhil Nayyar, learned Senior Counsel appearing on behalfof the Respondent Financial Creditor submitted that the issue of whetheran action under Section 7 of the IBC can be initiated by a FinancialCreditor, against a corporate person, in relation to a corporate guarantee,given by that corporate person, in respect of a loan advanced to theprincipal borrower, who is not a corporate person, has been answeredby this Court in Laxmi Pat Surana v. Union Bank of India andAnother[1].

1 (2021) 8 SCC 481

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13. Under Section 7 of the IBC, CIRP can be initiated against aCorporate entity who has given a guarantee to secure the dues of a non-corporate entity as a financial debt accrues to the corporate person, inrespect of the guarantee given by it, once the borrower commits default.The guarantor is then, the Corporate Debtor.

14. In Laxmi Pat Surana (supra), this Court held: - “19. It is no more res integra that the Code is a complete code— provisioning for actions and proceedings relating to,amongst others, reorganisation and insolvency resolution ofcorporate persons in a time bound manner for maximisationof value of assets of such persons, availability of credit andbalance the interests of all the stakeholders includingalteration in the order of priority of payment of governmentdues and to establish an Insolvency and Bankruptcy Boardof India, and for matters connected therewith or incidentalthereto.

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22. The term “financial creditor” has been defined in Section5(7) read with expression “creditor” in Section 3(10) IBC tomean a person to whom a financial debt is owed and includesa person to whom such debt has been legally assigned ortransferred to. This means that the applicant should be aperson to whom a financial debt is owed. The expression“financial debt” has been defined in Section 5(8). Amongstother categories specified therein, it could be a debt alongwith interest, which is disbursed against the considerationfor the time value of money and would include the amount ofany liability in respect of any of the guarantee or indemnityfor any of the items referred to in sub-clauses (a) to (h) of thesame clause. It is so provided in sub-clause (i) of Section 5(8)IBC to take within its ambit a liability in relation to a guaranteeoffered by the corporate person as a result of the defaultcommitted by the principal borrower. The expression “debt”has been defined separately in the Code in Section 3(11) tomean a liability or obligation in respect of “a claim” which isdue from any person and includes a financial debt andoperational debt. The expression “claim” would certainly

cover the right of the financial creditor to proceed againstthe corporate person being a guarantor due to the defaultcommitted by the principal borrower. The expression “claim”has been defined in Section 3(6), which means a right topayment, whether or not such right is reduced to judgment,fixed, disputed, undisputed, legal, equitable, secured orunsecured. It also means a right to remedy for breach ofcontract under any law for the time being in force, if suchbreach gives rise to a right to payment in respect of specifiedmatters.

23. Indubitably, a right or cause of action would enure to thelender (financial creditor) to proceed against the principalborrower, as well as the guarantor in equal measure in casethey commit default in repayment of the amount of debt actingjointly and severally. It would still be a case of defaultcommitted by the guarantor itself, if and when the principalborrower fails to discharge his obligation in respect of amountof debt. For, the obligation of the guarantor is coextensiveand coterminous with that of the principal borrower to defraythe debt, as predicated in Section 128 of the Contract Act. Asa consequence of such default, the status of the guarantormetamorphoses into a debtor or a corporate debtor if ithappens to be a corporate person, within the meaning ofSection 3(8) IBC. For, as aforesaid, the expression “default”has also been defined in Section 3(12) IBC to mean non-payment of debt when whole or any part or instalment of theamount of debt has become due or payable and is not paid bythe debtor or the corporate debtor, as the case may be.

24. A priori, in the context of the provisions of the Code, ifthe guarantor is a corporate person [as defined in Section3(7) IBC], it would come within the purview of the expression“corporate debtor”, within the meaning of Section 3(8) IBC.

25. It may be useful to also advert to the generic provisioncontained in Section 3(37). It postulates that the words andexpressions used and not defined in the Code, but defined inenactments referred to therein, shall have the meaningsrespectively assigned to them in those Acts. Drawing supportfrom this provision, it must follow that the lender would be a AB

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financial creditor within the meaning of the Code. Theprincipal borrower may or may not be a corporate person,but if a corporate person extends guarantee for the loantransaction concerning a principal borrower not being acorporate person, it would still be covered within the meaningof the expression “corporate debtor” in Section 3(8) IBC.

26. Thus understood, it is not possible to countenance theargument of the appellant that as the principal borrower isnot a corporate person, the financial creditor could not haveinvoked remedy under Section 7 IBC against the corporateperson who had merely offered guarantee for such loanaccount. That action can still proceed against the guarantorbeing a corporate debtor, consequent to the default committedby the principal borrower. There is no reason to limit the widthof Section 7 IBC despite law permitting initiation of CIRPagainst the corporate debtor, if and when default is committedby the principal borrower. For, the liability and obligation ofthe guarantor to pay the outstanding dues would get triggeredcoextensively.

27. To get over this position, much reliance was placed onSection 5(5-A) IBC, which defines the expression “corporateguarantor” to mean a corporate person, who is the surety ina contract of guarantee to a corporate debtor. This definitionhas been inserted by way of an amendment, which has comeinto force on 6-6-2018. This provision, as rightly urged bythe respondents, is essentially in the context of a corporatedebtor against whom CIRP is to be initiated in terms of theamended Section 60 IBC, which amendment is introduced bythe same Amendment Act of 2018. This change was to empowerNCLT to deal with the insolvency resolution or liquidationprocesses of the corporate debtor and its corporate guarantorin the same Tribunal pertaining to same transaction, whichhas territorial jurisdiction over the place where the registeredoffice of the corporate debtor is located. That does not meanthat proceedings under Section 7 IBC cannot be initiatedagainst a corporate person in respect of guarantee to theloan amount secured by person not being a corporate person,in case of default in payment of such a debt.

28. Accepting the aforementioned argument of the appellantwould result in diluting or constricting the expression“corporate debtor” occurring in Section 7 IBC, which meansa corporate person, who owes a debt to any person. The“debt” of a corporate person would mean a liability orobligation in respect of a claim which is due from any personand includes a financial debt and operational debt. Theexpression “debt” in Section 3(11) is wide enough to includeliability of a corporate person on account of guarantee givenby it in relation to a loan account of any person including notbeing a corporate person in the event of default committedby the latter. It would still be a “financial debt” of thecorporate person, arising from the guarantee given by it,within the meaning of Section 5(8) IBC.

29. Notably, the expression “corporate guarantee” is notdefined in the Code. Whereas, expression “corporateguarantor” is defined in Section 5(5-A) IBC. If the legislatureintended to exclude a corporate person offering guarantee inrespect of a loan secured by a person not being a corporateperson, from the expression “corporate debtor” occurringin Section 7, it would have so provided in the Code [at leastwhen Section 5(5-A) came to be inserted defining expression“corporate guarantor”]. It was also open to the legislatureto amend Section 7 IBC and replace the expression “corporatedebtor” by a suitable expression. It could have evenamended Section 3(8) to exclude liability arising froma guarantee given for the loan account of an entity not beinga corporate person. Similarly, it could have also amendedthe expression “financial debt” in Section 5(8) IBC, “claim”in Section 3(6), “debt” in Section 3(11) and “default”in Section 3(12). There is no indication to that effect in thecontemporaneous legislative changes brought about.

30. The expression “corporate debtor” is defined in Section3(8) which applies to the Code as a whole. Whereas,expression “corporate guarantor” in Section 5(5-A), appliesonly to Part II IBC. Upon harmonious and purposiveconstruction of the governing provisions, it is not possible toextricate the corporate person from the liability (of being a AB

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Acorporate debtor) arising on account of the guarantee givenby it in respect of loan given to a person other than corporateperson. The liability of the guarantor is coextensive with thatof the principal borrower. The remedy under Section 7 is notfor recovery of the amount, but is for reorganisation andinsolvency resolution of the corporate debtor who is not in aBposition to pay its debt and commits default in that regard. Itis open to the corporate debtor to pay off the debt, whichhad become due and payable and is not paid by the principalborrower, to avoid the rigours of Chapter II IBC in generaland Section 7 in particular.”

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15. The issue of whether CIRP can be initiated against theCorporate Guarantor without proceeding against the principal borrowerhas been answered by this Court in Laxmi Pat Surana (supra).Therelevant paragraphs are set out hereinbelow: - “21. Section 7 is an enabling provision, which permits thefinancial creditor to initiate CIRP against a corporate debtor.The corporate debtor can be the principal borrower. It canalso be a corporate person assuming the status of corporatedebtor having offered guarantee, if and when the principalborrower/debtor (be it a corporate person or otherwise)commits default in payment of its debt.”

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23. Indubitably, a right or cause of action would enure to thelender (financial creditor) to proceed against the principalborrower, as well as the guarantor in equal measure in caseFthey commit default in repayment of the amount of debt actingjointly and severally.It would still be a case of defaultcommitted by the guarantor itself, if and when the principalborrower fails to discharge his obligation in respect of amountof debt. For, the obligation of the guarantor is coextensiveGand coterminous with that of the principal borrower to defraythe debt, as predicated in Section 128 of the Contract Act. Asa consequence of such default, the status of the guarantormetamorphoses into a debtor or a corporate debtorif it happens to be a corporate person, within themeaning of Section 3(8) IBC. For, as aforesaid, the expression H

“default” has also been defined in Section 3(12) IBC to meannon-payment of debt when whole or any part or instalmentof the amount of debt has become due or payable andis not paid by the debtor or the corporate debtor, as the casemay be.

16. The issues raised in this appeal are settled by this Court inLaxmi Pat Surana (supra). As held by this Court in Laxmi Pat Surana (supra), the liability of the guarantor is co-extensive with that of thePrincipal Borrower. The judgment in Laxmi Pat Surana (supra),rendered by a three-Judge Bench of this Court is binding on this Bench.It was open to the Financial Creditor to proceed against the guarantorwithout first suing the Principal Borrower.

17. We find no ground to interfere with the concurrent findings ofthe Adjudicating Authority (NCLT) and the Appellate Authority (NCLAT).

18. The appeal is, therefore, dismissed.

Nidhi Jain and Anurag Bhaskar

Appeal dismissed.

(Assisted by : Rahul Kumar, LCRA)

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