The Supreme Court on September 06, 2022 in the matter of K Paramasivam v. Karur Vysya Bank Ltd. held that Corporate Insolvency Resolution Process (“CIRP”) can be initiated against the corporate guarantor without proceeding against the principal borrower and that the liability of the Guarantor is co-extensive with that of the principal borrower.

In the instant matter an appeal was filed under Section 62 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) by the Appellant (“Promoter”) of Maharaja Theme Parks and Resorts (“Corporate Debtor”) against the order of NCLT initiating CIRP against the Corporate Debtor, which was upheld by the NCLAT as well. It was contented by the Promoter that the Corporate Debtor does not fall within the definition of ‘Corporate Guarantor’ in Section 5(5A) of the IBC, which reads ‘corporate guarantor’ means a corporate person who is the surety in a contract of guarantee to a corporate debtor” and therefore CIRP cannot be initiated against it. The Respondent (“Financial Creditor”) contented that the issue 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 the matter of Laxmi Pat Surana v. Union Bank of India where the Supreme Court held that the liability of the guarantor is co-extensive with that of the principal borrower. Thus, the issue raised before the court was whether CIRP can be initiated against the corporate guarantor without proceeding against the principal borrower?

It was observed by the Court that-

“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.”

Thus, the Court held 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 and the appeal was dismissed.