India: Supreme Court Reaffirms- Corporate Guarantors To ‘Non-Corporate' Debtors To Face IBC Proceedings

Introduction:

The Supreme Court ("SC") in the recent judgment of K. Paramasivam v. The Karur Vysya Bank Ltd. amp; Anr.¹, held that a Corporate Insolvency Resolution Process ("CIRP") can be initiated against a corporate guarantor, even if the principal borrower is not a 'corporate person'.

Factual Matrix and Arguments:

Maharaja Theme Parks and Resorts Private Limited ("Guarantor Company"), a private limited company registered under the provisions of the Companies Act, 1956 had guaranteed repayment of credit facilities availed by three borrowers, namely (i) Sri Maharaja Refineries, a partnership firm; (ii) Sri Maharaja Industries, a proprietary concern of the Appellant; and (iii) Sri Maharaja Enterprises, a proprietary concern (together referred to as "Principal Borrowers") from Karur Vysya Bank Ltd. ("Financial Creditor").

The Principal Borrowers defaulted in their payment of debts to the Financial Creditor. As a result, the Financial Creditor, on or about 24 October 2018, filed a Company Petition² under Section 7 of the IBC for initiation of CIRP against the Guarantor Company, in view of the co-extensive liability of the Guarantor Company.

In the Company Petition, the Guarantor Company challenged the jurisdiction of the NCLT and on the main contention that it cannot be considered as a Corporate Guarantor under Section 5(5A) of the IBC i.e., corporate person who is the surety in a contract of guarantee to a "corporate debtor", as the Principal Borrower being a non-corporate entity, does not fall under the ambit of the definition of "corporate debtor" as defined under Section 3(8) read with Section 3(7) of the IBC.

However, the Company Petition came to be admitted by the NCLT. Challenge against the admission order passed by the NCLT was dismissed by the NCLAT and hence the instant appeal was preferred before the SC.

The Guarantor Company reargued its stand taken before the NCLT and NCLAT, to contend that when the Principal Debtor itself is not a corporate person which is not liable to fall under the ambit of a 'corporate debtor', it is untenable for the Guarantor Company to be considered as a corporate guarantor under Section 5(5A) of the IBC.

The Financial Creditor heavily relied upon the judgment passed by a three-judge bench of the SC in the matter of Laxmi Pat Surana v. Union Bank of India and Anr.³ and submitted that not only can CIRP be initiated against the corporate guarantor without proceeding against the principal borrower, but also can be initiated against corporate guarantors to loans availed by non-corporate persons, as the corporate guarantor assumes the status of the corporate debtor for purposes of initiation of CIRP under the IBC.

Judgement:

The SC ruled in favour of the Financial Creditor and dismissed the Appeal. The SC opined that there was no ground to interfere with the concurrent findings of the NCLT and the NCLAT, especially in light of the ratio that has been laid down in the case of Laxmi Pat Surana, mainly the observations of the SC in the following paragraphs:

To conclude, it is now well settled that CIRP can be initiated by financial creditors against a corporate guarantor who has provided a guarantee to secure the dues of a 'corporate' or 'non-corporate' entity.

Footnotes

1. Civil Appeal No. 9286 of 2019

2. CP/1314/IB/2018

3. (2021) 8 SCC 481

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