K. PARAMASIVAM VS THE KARUR VYSYA BANK LTD. : CASE SUMMARY
The Supreme Court in K. Paramasivam Vs. the Karur Vysya Bank Ltd. AIR (2022) SC 4184 held that it is open for the Financial Creditor to proceed against the Corporate Guarantor without first suing the Principal Borrower.
FACTS OF THE CASE
Karur Vysya Bank Ltd (Financial Creditor ) has advanced credit facility to Maharaja Refineries (A Partnership Firm ), Sri Maharaja Industries (a proprietary concern of K. Paramasivam) , and Sri Maharaja Industries (a proprietary concern of P. Sathiyamoorthy) . Maharaja theme parks and Resorts Pvt. Ltd. stood as guarantor for loans availed by three borrowers. Borrowers failed to repay the debt.
The Financial Creditor filed Petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 seeking initiation of corporate insolvency resolution process against the corporate guarantor. It was contended by the Financial Creditor that Maharaja Theme Parks and Resorts Pvt. Ltd. was not a Corporate Debtor. Maharaja Theme Parks and Resorts Pvt. Ltd. did not owe any Financial Debt to the Financial Creditor. The NCLT admitted the Application under Section 7 vide order dated 8th April, 2024.
Being aggrieved by the order dated 8th April, 2024 , the Appellant filled an appeal before the NCLAT , which was also dismissed.
FINDINGS OF THE SUPREME COURT
The Supreme Court observed that under Section 7 of the IBC, CIRP can be initiated against corporate entity who has given a guarantee to secure the dues of non-corporate entity, in case such non-corporate entity defaults in making payment of debt.
The Supreme Court relied on Laxmipat Surana Vs. Union Bank of India & Ors (2021) 8 SCC 481 wherein it was held that Corporate Person can also become corporate debtor having offered guarantee, if and when the principal borrower (be it a corporate person or otherwise ) commits default in payment of its debt. Cause of action would enure to the financial creditor to proceed against the principal borrower, as well as the guarantor in equal measure in case of commission of default in repayment of debt acting jointly and severally.
The Supreme Court reiterated as held in Laxmi Pat Surana that liability of the guarantor is co-extensive with that of principal borrower. The Supreme Court observed that Judgment in Laxmipat Surama rendered by three judge bench is binding on this Bench. It was open for the Financial Creditor to proceed against the guarantor without first suing the Principal Borrower.
The Supreme Court did nor find any ground to interfere in the concurrent findings of the Adjudicating Authority and NCLAT and dismissed the Appeal.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.