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
1
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.
2
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;”
3
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.
4
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
5
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
6
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
7
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
8
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
10

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