CIRP Can Be Initiated Against Corporate Guarantor Without Proceeding Against Principal Borrower: Supreme Court

The Supreme Court held that Corporate Insolvency Resolution Process (CIRP) can be initiated against the Corporate Guarantor without proceeding against the principal borrower.

The liability of the guarantor is co-extensive with that of the Principal Borrower, the bench comprising Justices Indira Banerjee and JK Maheshwari observed.

In this case, the Adjudicating Authority (NCLT) admitted the petition under Section 7 of the IBC and initiated the CIRP against Maharaja Theme Parks and Resorts. The NCLAT (Appellate Authority) upheld the order passed by NCLT. 

Before the Apex Court, Advocate Amitesh Chandra Mishra appearing on behalf of the Appellant Maharaja Theme Parks and Resorts, submitted that it is a Corporate Guarantor and thus it does not fall within the ambit of the definition of Corporate Guarantor, and therefore CIRP cannot be initiated against it. Senior Advocate Nikhil Nayyar 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 in Laxmi Pat Surana v. Union Bank of India (2021) 8 SCC 481.

The issue raised in the appeal was whether CIRP can be initiated against the Corporate Guarantor without proceeding against the principal borrower?

The court noted that, 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 and the guarantor is then, the Corporate Debtor. While dismissing the appeal, the bench observed:

...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."

Case details

K Paramasivam vs Karur Vysya Bank Ltd | 2022 LiveLaw (SC) 742 | CA 9286 OF 2019 | 6 September 2022 | Justices Indira Banerjee and JK Maheshwari

Headnotes

Insolvency and Bankruptcy Code,, 2016 ; Section 7 - CIRP can be initiated against the Corporate Guarantor without proceeding against the principal borrower - The liability of the guarantor is co-extensive with that of the Principal Borrower - Referred to Laxmi Pat Surana v. Union Bank of India and Another (2021) 8 SCC 481. (Para 13-16)

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