K. PARAMASIVAM Versus THE KARUR VYSYA BANK LTD. & ANR

K. PARAMASIVAM Versus THE KARUR VYSYA BANK LTD. & ANR

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

 CIVILAPPEAL NO. 9286 OF 2019

K. PARAMASIVAM …..Appellant (s)

Versus

THE KARUR VYSYA BANK LTD. & ANR. …..Respondent (s)

J U D G M E N T

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 18th November 2019, passed by the

National Company Law Appellate Tribunal (NCLAT) dismissing the

Company Appeal (AT) (Insolvency) No.538 of 2019, against an order

dated 8th April 2019 passed by the Adjudicating Authority, admitting

the application filed by the Respondent No.1 being CP/1314/IB/2018

under Section 7 of the IBC for initiation of the Corporate Insolvency

Resolution Process (CIRP) against the Corporate Debtor, Maharaja

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Theme Parks and Resorts Private Limited, 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. The 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 availed by all the three borrowers. The borrowers failed to

repay the debts payable by them to the Financial Creditor.

4. On or about 24th October 2018, the Financial Creditor filed an

application under Section 7 of the IBC being CP/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.

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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

Private Limited, 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;”

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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

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 8th April 2019, the Adjudicating Authority

admitted the petition under Section 7 of the IBC and initiated the CIRP

against Maharaja Theme Parks and Resorts. The Respondent No.2

was appointed Interim Resolution Professional.

10. Being aggrieved by the order dated 8th April 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.

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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 Court in Laxmi Pat Surana v. Union

Bank of India and Another

1

.

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.

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 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.

***

1 (2021) 8 SCC 481

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22. The term “financial creditor” has been defined in

Section 5(7) read with expression “creditor” in Section 3(10)

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 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) 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.

23. 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

coextensive 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) 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 the amount of

debt has become due or payable and is not paid by

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the debtor or the corporate debtor, as the case may be.

24. A priori, in the context of the provisions of the Code, if

the guarantor is a corporate person [as defined in Section

3(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 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 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) IBC.

26. 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 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 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 coextensively.

27. To get over this position, much reliance was placed on

Section 5(5-A) 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 6-6-2018. 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 IBC, which amendment is

introduced by the same Amendment Act of 2018. This

change was to empower NCLT to deal with the insolvency

resolution or liquidation processes of the corporate debtor

and its corporate guarantor in the same Tribunal pertaining

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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 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.

28. Accepting the aforementioned argument of the

appellant would result in diluting or constricting the

expression “corporate debtor” occurring in Section 7 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 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)

IBC.

29. Notably, the expression “corporate guarantee” is not

defined in the Code. Whereas, expression “corporate

guarantor” is defined in Section 5(5-A) 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(5-A) came to be inserted defining expression

“corporate guarantor”]. It was also open to the legislature to

amend Section 7 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) 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.

30. 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(5-

A), applies only to Part II 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

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of the guarantee given by it in respect of loan given to a

person other than corporate person. The liability of

the guarantor is coextensive 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 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

(supra). The relevant paragraphs are set out hereinbelow: -

“21. 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 guarantee, if and when the principal

borrower/debtor (be it a corporate person or otherwise) commits

default in payment of its debt.”

***

23. 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 coextensive 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) 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 the amount of debt has become due or payable and

9

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 (supra). As held by this Court in Laxmi Pat

Surana (supra), the liability of the guarantor is co-extensive with

that of the Principal 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 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.

.……………………………,J.

 [ INDIRA BANERJEE ]

.……………………………,J.

 [ J.K. MAHESHWARI ]

NEW DELHI;

SEPTEMBER 6, 2022

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