Case Number: Civil Appeal No. 9286 OF 2019

Judges Name: Hon’ble Judges. Indira Banerjee J, J.K. Maheshwari J

Order dated: 06.09.2022

CIRP can be initiated against Guarantor without first suing the Principal Borrower.

Facts of the case: 

1. The appeal is preferred by K. Paramasivam (“Appellant”) against The Karur Vysya Bank Ltd (“1st Respondent”). The Appellant is shareholder and director of Maharaja Theme Parks and Resorts Private Limited (“MTPR”). The 1st Respondent is a financial creditor who advanced loans to three entities for whom the MTPR stood as guarantor. The 1st Respondent filed an application before the Hon’ble National Company Law Tribunal, (“NCLT”) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“Code”) stating that MTPR had extended corporate guarantees for loans availed by three borrowers.
2. On failure of the borrowers to repay the loans, MTPR, as the guarantor, became liable to repay the loan. The NCLT admitted MTPR into Corporate Insolvency Resolution Process (“CIRP”). The Appellant preferred an appeal, before the Hon’ble National Company Law Appellate Tribunal (“NCLAT”). The NCLAT dismissed the appeal.
3. Aggrieved by the Hon’ble NCLAT’s order, the Appellant has approached the Hon’ble Supreme Court.

The Supreme Court observed/held as follows:

• The Appellant contended that MTPR is not a Corporate Guarantor as defined in Section 5(5A) of the Code
• The Appellant also contended that NCLAT dismissed the appeal without considering the fact that MTPR does not fall within the ambit of the definition of Corporate Guarantor and therefore, CIRP cannot be initiated against it.
• The 1st Respondent argued that the decision in the case of Laxmi Pat Surana v. Union Bank of India and Another, has settled the question of whether an action under Section 7 of the Code 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.
• The Hon’ble Court discussed the decision of Laxmi Pat Surana v. Union Bank of India and another, in detail and held that the CIRP can be initiated against the Corporate Guarantor without proceeding against the principal borrower.
• The Hon’ble Court noted that the aforementioned decision is a three-judge bench decision, which is binding on this Bench and held that the Financial Creditor can proceed against the guarantor without first suing the Principal Borrower.

The Hon’ble Supreme Court dismissed the appeal.