Summary
Karur Vysya Bank lent to three non-corporate borrowers and Maharaja Theme Parks and Resorts Pvt Ltd stood corporate guarantor for all the loans. When the borrowers defaulted, the bank filed a Section 7 IBC application against the guarantor company. Its director objected that the company was not a 'corporate guarantor' under Section 5(5A), because it had not guaranteed debts of a corporate debtor. The NCLT admitted the application and the NCLAT dismissed the appeal. The Supreme Court dismissed the further appeal (Laxmi Pat Surana). A corporate person guaranteeing a loan to a non-corporate borrower becomes a corporate debtor on the borrower's default, since its liability is a financial debt and is coextensive with the borrower's. Section 5(5A) does not narrow Section 7, and the creditor may proceed against the guarantor without first suing the borrower.
Issues
- Whether CIRP can be initiated under Section 7 of the IBC against a company that guaranteed loans to borrowers who are not corporate persons
- Whether the financial creditor must first proceed against the principal borrower before proceeding against the corporate guarantor
Provisions considered
- Sections 3(7), 3(8), 5(5A), 5(8) and 7, Insolvency and Bankruptcy Code, 2016A corporate person's liability under a guarantee is a financial debt under Section 5(8). On the principal borrower's default, the corporate guarantor becomes a corporate debtor under Section 3(8), whether or not the borrower is a corporate person. Section 5(5A), which applies to Part II proceedings with the principal debtor, does not restrict Section 7. (¶¶ 5, 6, 7, 13, 14, 16)
Held
- Following Laxmi Pat Surana, a corporate person that guarantees a loan to a principal borrower, whether or not that borrower is a corporate person, becomes a corporate debtor once the borrower defaults. Its liability under the guarantee is a financial debt, and a Section 7 application lies against it. The definition of 'corporate guarantor' in Section 5(5A) does not cut down the expression 'corporate debtor' in Section 7. (¶¶ 13, 14, 16)
- The guarantor's liability is coextensive with that of the principal borrower under Section 128 of the Contract Act, so the financial creditor may proceed against the corporate guarantor without first suing the principal borrower. The three-judge decision in Laxmi Pat Surana binds the Bench. (¶¶ 15, 16)
- There was no ground to interfere with the concurrent findings of the NCLT and NCLAT admitting the CIRP against the guarantor company. (¶ 17)
Result
Appeal dismissed. The admission of the CIRP against the corporate guarantor was upheld.