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(2022) 20 Comp Cas-OL 1 : 2022 SCC OnLine SC 1163
1
In the Supreme Court of India
(BEFORE I NDIRA BANERJEE AND J.K. MAHESHWARI, JJ.)
K. Paramasivam … Appellant;
Versus
Karur Vysya Bank Ltd. and another … Respondent.
Civil Appeal No. 9286 of 2019
Decided on September 6, 2022
Advocates who appeared in this case :
Amitesh Chandra Mishra, P.J. Sriganesh, Ankit Chaturvedi for M/S.
Acm Legal, Advocates, for the appellant.
Nikhil Nayyar and V. Prakash, Senior Advocates (T.V.S. Raghavendra
Sreyas, Vijay Kumar, Ms. Sugandha Batra, Siddharth Vasudev and
Iyengar Shubharanjani Ananth, Advocates, with them) for the
respondents.
The judgment of the court was delivered by
MS. INDIRA BANERJEE, J.— This appeal under section 62 of the
Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the
“IBC”), is against a final judgment and order dated November 18,
2
2019 , passed by the National Company Law Appellate Tribunal
(NCLAT) dismissing the Company Appeal (AT) (Insolvency) No. 538 of
2019, against an order dated April 8, 20193 passed by the Adjudicating
Authority, admitting the application filed by respondent No. 1 being
C.P. No. 1314/IB/2018 under section 7 of the IBC for initiation of the
corporate insolvency resolution process (CIRP) against the corporate
debtor, Maharaja Theme Parks and Resorts P. Ltd., hereinafter referred
to as “Maharaja Theme Parks and Resorts”.
2. The appellant is the promoter, shareholder and
suspended/discharged director of Maharaja Theme Parks and Resorts, a
company registered under the Companies Act, 1956. Respondent No. 1,
hereinafter referred to as “financial creditor” had advanced credit
facilities to the following three entities:
(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.
Sathiyamoorthy
3. Maharaja Theme Parks and Resorts stood guarantor for the loans
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availed by all the three borrowers. The borrowers failed to repay the
debts payable by them to the financial creditor.
4. On or about October 24, 2018 the financial creditor filed an
application under section 7 of the IBC being C.P. No. 1314/IB/2018 for
initiation of CIRP against Maharaja Theme Parks and Resorts. In the
said application the financial creditor stated that Maharaja Theme Parks
and Resorts had extended corporate guarantee(s) for loans availed by
each of the borrowers. On failure of the borrowers to repay the loans,
Maharaja Theme Parks and Resorts, as guarantor, became liable to
repay the loan.
5. Maharaja Theme Parks and Resorts filed its counter statement
before the Adjudicating Authority, objecting to the jurisdiction of the
NCLT to entertain the petition under section 7 of the IBC, on the
contention that, the company, Maharaja Theme Parks and Resorts P.
Ltd., was not a corporate debtor, which is defined in section 3(8) of the
IBC to mean, “a corporate person who owes a debt to any person”.It
was contended that Maharaja Theme Parks and Resorts did not owe any
financial debt to the financial creditor.
6. The appellant contends that, Maharaja Theme Parks and Resorts
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 of guarantee to a
corporate debtor”.Mr. Mishra, appearing for the appellant, submitted
that Maharaja Theme Parks and Resorts had not guaranteed any loan
given to a corporate person.
7. Mr. Mishra referred to the definition of “corporate person” in
section 3(7) of the IBC which reads:
“3.… (7) ‘corporate person’ means a company as defined in clause
(20) of section 2 of the Companies Act, 2013 (18 of 2013), a limited
liability partnership, as defined in clause (n) of sub-section (1) of
section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009),
or any other person incorporated with limited liability under any law
for the time being in force but shall not include any financial service
provider;”
8. Mr. Mishra argued that on a conjoint reading of section 5(5A),
section 3(7) and (8) of the IBC, it is apparent that a corporate
guarantor is the surety in a contract of guarantee to a corporate debtor.
The borrowers not being corporate debtors, Maharaja Theme Parks and
Resorts is not a corporate guarantor as defined in section 5(5A) of the
IBC.
9. By an order dated April 8, 2019 the Adjudicating Authority
admitted the petition under section 7 of the IBC and initiated the CIRP
against Maharaja Theme Parks and Resorts. Respondent No. 2 was
appointed interim resolution professional.
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10. Being aggrieved by the order dated April 8, 2019 of the
Adjudicating Authority, admitting the application for CIRP, the
appellant filed an appeal. The appeal filed by the appellant, has been
dismissed by the NCLAT (Appellate Authority), by the judgment and
order impugned.
11. Mr. Amitesh Chandra Mishra appearing on behalf of the appellant
submitted that the appeal filed by the appellant under section 61 of the
IBC has been dismissed by the Appellate Authority (NCLAT) on the
ground that the company, Maharaja Theme Parks and Resorts, is a
corporate guarantor, without considering the fact that Maharaja Theme
Parks and Resorts does not fall within the ambit of the definition of
corporate guarantor, and therefore CIRP cannot be initiated against it.
12. Mr. Nikhil Nayyar, learned senior counsel appearing on behalf of
the respondent financial creditor submitted that the issue of whether an
action under section 7 of the IBC can be initiated by a financial creditor,
against a corporate person, in relation to a corporate guarantee, given
by that corporate person, in respect of a loan advanced to the principal
borrower, who is not a corporate person, has been answered by this
4
court in Laxmi Pat Surana v. Union Bank of India .
13. Under section 7 of the IBC, CIRP can be initiated against a
corporate entity who has given a guarantee to secure the dues of a non
-corporate entity as a financial debt accrues to the corporate person, in
respect of the guarantee given by it, once the borrower commits
default. The guarantor is then, the corporate debtor.
5
14. In Laxmi Pat Surana v. Union Bank of India, this court held :
“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 of corporate persons in a
time bound manner for maximisation of value of assets of such
persons, availability of credit and balance the interests of all the
stakeholders including alteration in the order of priority of payment
of Government dues and to establish an Insolvency and Bankruptcy
Board of India, and for matters connected therewith or incidental
thereto…
The term ‘financial creditor’ has been defined in section 5(7) read
with expression ‘creditor’ in section 3(10) of the IBC to mean a
person to whom a financial debt is owed and includes a person to
whom such debt has been legally assigned or transferred to. This
means that the applicant should be a person to whom a financial
debt is owed. The expression ‘financial debt’ has been defined in
section 5(8). Amongst other categories specified therein, it could be
a debt along with interest, which is disbursed against the
consideration for the time value of money and would include the
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amount of any liability in respect of any of the guarantee or
indemnity for any of the items referred to in sub-clauses (a) to (h) of
the same clause. It is so provided in sub-clause (i) of section 5(8) of
the IBC to take within its ambit a liability in relation to a guarantee
offered by the corporate person as a result of the default committed
by the principal borrower. The expression ‘debt’ has been defined
separately in the Code in section 3(11) to mean a liability or
obligation in respect of ‘a claim’ which is due from any person and
includes a financial debt and operational debt. The expression ‘claim’
would certainly cover the right of the financial creditor to proceed
against the corporate person being a guarantor due to the default
committed by the principal borrower. The expression ‘claim’ has
been defined in section 3(6), which means a right to payment,
whether or not such right is reduced to judgment, fixed, disputed,
undisputed, legal, equitable, secured or unsecured. It also means a
right to remedy for breach of contract under any law for the time
being in force, if such breach gives rise to a right to payment in
respect of specified matters.
Indubitably, a right or cause of action would enure to the lender
(financial creditor) to proceed against the principal borrower, as well
as the guarantor in equal measure in case they commit default in
repayment of the amount of debt acting jointly and severally. It
would still be a case of default committed by the guarantor itself, if
and when the principal borrower fails to discharge his obligation in
respect of amount of debt. For, the obligation of the guarantor is co-
extensive and coterminous with that of the principal borrower to
defray the debt, as predicated in section 128 of the Contract Act. As
a consequence of such default, the status of the guarantor
metamorphoses into a debtor or a corporate debtor if it happens to
be a corporate person, within the meaning of section 3(8) of the IBC.
For, as aforesaid, the expression ‘default’ has also been defined in
section 3(12) of the IBC to mean non-payment of debt when whole
or any part or instalment of the amount of debt has become due or
payable and is not paid by the debtor or the corporate debtor, as the
case may be.
A priori, in the context of the provisions of the Code, if the
guarantor is a corporate person (as defined in section 3(7) of the
IBC), it would come within the purview of the expression ‘corporate
debtor’, within the meaning of section 3(8) of the IBC.
It may be useful to also advert to the generic provision contained
in section 3(37). It postulates that the words and expressions used
and not defined in the Code, but defined in enactments referred to
therein, shall have the meanings respectively assigned to them in
those Acts. Drawing support from this provision, it must follow that
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the lender would be a financial creditor within the meaning of the
Code. The principal borrower may or may not be a corporate person,
but if a corporate person extends guarantee for the loan transaction
concerning a principal borrower not being a corporate person, it
would still be covered within the meaning of the expression
‘corporate debtor’ in section 3(8) of the IBC.
Thus understood, it is not possible to countenance the argument
of the appellant that as the principal borrower is not a corporate
person, the financial creditor could not have invoked remedy under
section 7 of the IBC against the corporate person who had merely
offered guarantee for such loan account. That action can still proceed
against the guarantor being a corporate debtor, consequent to the
default committed by the principal borrower. There is no reason to
limit the width of section 7 of the IBC despite law permitting
initiation of CIRP against the corporate debtor, if and when default is
committed by the principal borrower. For, the liability and obligation
of the guarantor to pay the outstanding dues would get triggered co-
extensively.
To get over this position, much reliance was placed on section 5
(5A) of the IBC, which defines the expression ‘corporate guarantor’
to mean a corporate person, who is the surety in a contract of
guarantee to a corporate debtor. This definition has been inserted by
way of an amendment, which has come into force on June 6, 2018.
This provision, as rightly urged by the respondents, is essentially in
the context of a corporate debtor against whom CIRP is to be
initiated in terms of the amended section 60 of the IBC, which
amendment is introduced by the same Amendment Act of 2018. This
change was to empower the NCLT to deal with the insolvency
resolution or liquidation processes of the corporate debtor and its
corporate guarantor in the same Tribunal pertaining to same
transaction, which has territorial jurisdiction over the place where
the registered office of the corporate debtor is located. That does not
mean that proceedings under section 7 of the IBC cannot be initiated
against a corporate person in respect of guarantee to the loan
amount secured by person not being a corporate person, in case of
default in payment of such a debt.
Accepting the aforementioned argument of the appellant would
result in diluting or constricting the expression ‘corporate debtor’
occurring in section 7 of the IBC, which means a corporate person,
who owes a debt to any person. The ‘debt’ of a corporate person
would mean a liability or obligation in respect of a claim which is due
from any person and includes a financial debt and operational debt.
The expression ‘debt’ in section 3(11) is wide enough to include
liability of a corporate person on account of guarantee given by it in
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relation to a loan account of any person including not being a
corporate person in the event of default committed by the latter. It
would still be a ‘financial debt’ of the corporate person, arising from
the guarantee given by it, within the meaning of section 5(8) of the
IBC.
Notably, the expression ‘corporate guarantee’ is not defined in the
Code. Whereas, expression ‘corporate guarantor’ is defined in section
5(5A) of the IBC. If the Legislature intended to exclude a corporate
person offering guarantee in respect of a loan secured by a person
not being a corporate person, from the expression ‘corporate debtor’
occurring in section 7, it would have so provided in the Code (at
least when section 5(5A) came to be inserted defining expression
‘corporate guarantor’). It was also open to the Legislature to amend
section 7 of the IBC and replace the expression ‘corporate debtor’ by
a suitable expression. It could have even amended section 3(8) to
exclude liability arising from a guarantee given for the loan account
of an entity not being a corporate person. Similarly, it could have
also amended the expression ‘financial debt’ in section 5(8) of the
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 the
contemporaneous legislative changes brought about.
The expression ‘corporate debtor’ is defined in section 3(8) which
applies to the Code as a whole. Whereas, expression ‘corporate
guarantor’ in section 5(5A), applies only to Part II of the IBC. Upon
harmonious and purposive construction of the governing provisions,
it is not possible to extricate the corporate person from the liability
(of being a corporate debtor) arising on account of the guarantee
given by it in respect of loan given to a person other than corporate
person. The liability of the guarantor is co-extensive with that of the
principal borrower. The remedy under section 7 is not for recovery of
the amount, but is for reorganisation and insolvency resolution of the
corporate debtor who is not in a position to pay its debt and commits
default in that regard. It is open to the corporate debtor to pay off
the debt, which had become due and payable and is not paid by the
principal borrower, to avoid the rigours of Chapter II of the IBC in
general and section 7 in particular.”
15. The issue of whether CIRP can be initiated against the corporate
guarantor without proceeding against the principal borrower has been
answered by this court in Laxmi Pat Surana v. Union Bank of India6. The
relevant paragraphs are set out hereinbelow:
“Section 7 is an enabling provision, which permits the financial
creditor to initiate CIRP against a corporate debtor. The corporate
debtor can be the principal borrower. It can also be a corporate
person assuming the status of corporate debtor having offered
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guarantee, if and when the principal borrower/debtor (be it a
corporate person or otherwise) commits default in payment of its
debt…
Indubitably, a right or cause of action would enure to the lender
(financial creditor) to proceed against the principal borrower, as well
as the guarantor in equal measure in case they commit default in
repayment of the amount of debt acting jointly and severally. It
would still be a case of default committed by the guarantor itself, if
and when the principal borrower fails to discharge his obligation in
respect of amount of debt. For, the obligation of the guarantor is co-
extensive and coterminous with that of the principal borrower to
defray the debt, as predicated in section 128 of the Contract Act. As
a consequence of such default, the status of the guarantor
metamorphoses into a debtor or a corporate debtor if it happens to
be a corporate person, within the meaning of section 3(8) of the IBC.
For, as aforesaid, the expression ‘default’ has also been defined in
section 3(12) of the IBC to mean non-payment of debt when whole
or any part or instalment of the amount of debt has become due or
payable and is not paid by the debtor or the corporate debtor, as the
case may be.”
16. The issues raised in this appeal are settled by this court in Laxmi
Pat Surana v. Union Bank of India. As held by this court in Laxmi Pat
7
Surana v. Union Bank of India , the liability of the guarantor is co-
extensive with that of the principal borrower. The judgment in Laxmi
Pat Surana v. Union Bank of India, 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 guarantor without first suing the principal
borrower.
17. We find no ground to interfere with the concurrent findings of
the Adjudicating Authority (NCLT) and the Appellate Authority (NCLAT).
18. The appeal is, therefore, dismissed.
———
1
(video conferencing)
2
See K. Paramasivam v. Karur Vysya Bank Ltd., (2019) 8 Comp Cas-OL 635 (NCLAT).
3
See Karur Vysya Bank Ltd. v. Maharaja Theme Parks and Resorts P. Ltd., (2019) 7 Comp
Cas-OL 99 (NCLT).
4
See (2021) 226 Comp Cas 145 (SC); (2021) 8 SCC 481.
5
See page 158 of 226 Comp Cas.
6
See (2021) 226 Comp Cas 145, 159 (SC); (2021) 8 SCC 481.
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7
See (2021) 226 Comp Cas 145 (SC); (2021) 8 SCC 481.
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