The division judge bench of the apex court in the case of K. Paramsivam V. The Karur Vysya Bank Ltd & Anr held that CIRP can be initiated against a Corporate entity that 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
BRIEF FACTS
The factual matrix of the case is that the Maharaja Theme Parks and resorts stood as the guarantor for the loans availed by the three borrowers. The borrowers failed to repay the debt to the financial creditor. Thereafter, the financial creditor filed an application for the initiation of CIRP under section 7 of the IBC. However, the Maharaja Theme Parks and resorts filed a counter-statement in order to challenge that the Maharaja Theme Parks and Resorts Private Limited, was not a Corporate Debtor, which is defined in Section 3(8) of the IBC.
The learned counsel appearing on behalf of the appellant has contended that the Maharaja Theme Parks and Resorts had not guaranteed any loan given to a corporate person. It was further submitted that on the conjoint reading of Section 5(5A), Section 3(7), and Section 3(8) of the IBC, it is apparent that a Corporate Guarantor is a surety in a contract of guarantee to a Corporate Debtor.
COURT’S OBSERVATION
The hon’ble court relied upon the judgment titled Laxmi Pat Surana v. Union Bank of India and Another in which it was held that
“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."
“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 the debtor or the corporate debtor, as the case may be.”
The hon’ble court held that 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.
CASE NAME- K. Paramsivam V. The Karur Vysya Bank Ltd & Anr
CITATION- CIVILAPPEAL NO. 9286 OF 2019
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