K. Paramasivam v. the Karur Vysya Bank Ltd. & Anr.

INDIRA BANERJEE, J. This appeal under Section 62 of the Insolvency and Bankruptcy Code, 2016, hereinafter referred to as the “IBC”, is ag ainst a final judgment and order dated 18th November 2019, passed by the National Company Law Appellate Tribunal (NCLAT) dismissing the Company Appeal (AT) (Insolvency) No.538 of 2019, against an order dat ed 8 th April 2019 passed by the Adjudicating Authority, admitting the application filed by the Respondent No.1 being CP/1314/IB/2018 under Section 7 of the IBC for initiation of the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, Maharaja Theme Parks and Resorts Private Limited, hereinafter referred to as “Mahar aja Theme Parks and Resorts”. 2. The Appellant is the promoter, shareholder and suspended/ discharged director of Maharaja Theme Parks and Resorts, a company registered under the Companies Act, 1956. The Respondent No.1, hereinafter referred to as “Financial Creditor” had ad vanced credit facilities to the following three entities:- K. PARAMASIVAM v. THE KARUR VYSYA BANK LTD. (i) Sri Maharaja Refineries, a Partnership Firm; (ii) Sri Maharaja Industries, a proprietary concern of K. Paramasivam; and (iii) Sri Maharaja Enterprises, a proprietary conce rn of P. Sathiyamoorthy 3. Maharaja Theme Parks and Resorts stood guarantor for the loans availed by all the three borrowers. The borrowers failed to repay the debts payable by them to the Financial Creditor. 4. On or about 24th October 2018, the Financial Creditor filed an application under Section 7 of the IBC being CP/1314/IB/20 18 for initiation of CIRP against Maharaja Theme Parks and Resorts. In the said application the Financial Creditor stated that Maharaja Theme Parks and Resorts had extended corporate guarantee(s) for loans availed by each of the borrowers. On failure of the borrowers to repay the lo ans, Maharaja Theme Parks and Resorts, as Guarantor, became liabl e to repay the loan. 5. Maharaja Theme Parks and Resorts filed its counter statement before the Adjudicating Authority, objecting to the jurisdiction of the NCLT to entertain the petition under Section 7 of the IBC, on the conte ntion that, the company, Maharaja Theme Parks and Resorts Private Limited, was not a Corporate Debtor, which is defined in Section 3(8) of the IBC to mean, “a corporate person who owes a debt to any person.” It was contended that Maharaja Theme Parks and Resorts did not owe any financial debt to the Financial Creditor. 6. The Appellant contends that, Maharaja Theme Park s and Resorts does not also 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 con tract of guarantee to a corporate debtor.” Mr. Mishra, appearing for the Appellant, submitted that Maharaja Theme Parks and Resor ts had not guaranteed any loan given to a corporate person. 7. Mr. Mishra referred to the definition of ‘Corporate Person’ in Section 3(7) of the IBC which reads: - “3. … (7) “corporate person” means a company as defined i n clause (20) of section 2 of the Companies Act, 2013 (18 of 103 2013), a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the L imited Liability Partnership Act, 2008 (6 of 2009), or any other person incorporated with limited liability under any law for the time being in force but shall not include any f inancial service provider;” 8. Mr. Mishra argued that on a conjoint reading of Section 5(5A), Section 3(7) and Section 3(8) of the IBC, it is apparent that a Corporate Guarantor is the surety in a contract of guarantee to a Corporate Debtor. The borrowers not being Corporate Debtors, Maharaja Theme Parks and Resorts is not a Corporate Guarantor as defined in Section 5(5A) of the IBC. 9. By an order dated 8 th April 2019, the Adjudicating Authority admitted the petition under Section 7 of the IBC and initiated the CIRP against Maharaja Theme Parks and Resorts. The Respondent No.2 was appointed Interim Resolution Professional. 10. Being aggrieved by the order dated 8 th April 2019 of the Adjudicating Authority, admitting the application for CIRP, the Appellant filed an appeal. The appeal filed by the Appellant, has been dismissed by the NCLAT (Appellate Authority), by the judgment and order impugned. 11. Mr. Amitesh Chandra Mishra appearing on behalf of the Appellant submitted that the appeal filed by the Appellant under Section 61 of the IBC has been dismissed by the Appellate Authority (NCLAT) on the ground that the company, Maharaja Theme Parks and Resorts, is a Corporate Guarantor, without considering the fact that Maharaja Theme Parks and Resorts does not fall within the ambit of the definition of Corporate Guarantor, and therefore CIRP cannot be initiated against it. 12. Mr. Nikhil Nayyar, learned Senior Counsel appearing on behalf of the Respondent Financial Creditor submitted that the issue of 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 advance d to the principal borrower, who is not a corporate person, has been a nswered by this Court in Laxmi Pat Surana v. Union Bank of India and Another1. 1 (2021) 8 SCC 481 K. PARAMASIVAM v. THE KARUR VYSYA BANK LTD. [INDIRA BANERJEE, J.] 13. Under Section 7 of the IBC, CIRP can be initiated agai nst a Corporate entity who has given a guarantee to secure the dues of a non- corporate entity as a financial debt accrues to the corpora te person, in respect of the guarantee given by it, once the borrower commits default. The guarantor is then, the Corporate Debtor. 14. In Laxmi Pat Surana (supra), this Court held: - “19. It is no more res integra that the Code is a complete code — provisioning for actions and proceedings relating to, amongst others, reorganisation and insolvency resolut ion of corporate persons in a time bound manner for maximisati on of value of assets of such persons, availability of credit and balance the interests of all the stakeholders inclu ding alteration in the order of priority of payment of govern ment dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or in cidental thereto. *** 22. The term “financial creditor” has been defined in Section 5(7) read with expression “creditor” in Section 3(10) IBC to mean a person to whom a financial debt is owed and includes a person to whom such debt has been legally assigne d or transferred to. This means that the applicant shoul d be a person to whom a financial debt is owed. The expres sion “financial debt” has been defined in Section 5(8). Amo ngst other categories specified therein, it could be a d ebt along with interest, which is disbursed against the consi deration for the time value of money and would include the amount of any liability in respect of any of the guarantee or inde mnity for any of the items referred to in sub-clauses (a) to (h ) of the same clause. It is so provided in sub-clause (i) of Sect ion 5(8) IBC to take within its ambit a liability in relation to a guarantee offered by the corporate person as a result of the default committed by the principal borrower. The expression “d ebt” has been defined separately in the Code in Section 3(11 ) to mean a liability or obligation in respect of “a claim” whic h is due from any person and includes a financial debt a nd operational debt. The expression “claim” would cert ainly 105 cover the right of the financial creditor to procee d against the corporate person being a guarantor due to the d efault committed by the principal borrower. The expression “claim” has been defined in Section 3(6), which means a rig ht to payment, whether or not such right is reduced to judg ment, fixed, disputed, undisputed, legal, equitable, secu red or unsecured. It also means a right to remedy for brea ch of contract under any law for the time being in force, if such breach gives rise to a right to payment in respect of s pecified matters. 23. Indubitably, a right or cause of action would enure to the lender (financial creditor) to proceed against the principal borrower, as well as the guarantor in equal measure in ca se they commit default in repayment of the amount of debt act ing jointly and severally. It would still be a case of default committed by the guarantor itself, if and when the pri ncipal borrower fails to discharge his obligation in respect of amo unt of debt. For, the obligation of the guarantor is co extensive and coterminous with that of the principal borrower to def ray the debt, as predicated in Section 128 of the Contract Act. As a consequence of such default, the status of the gu arantor metamorphoses into a debtor or a corporate debtor i f it happens to be a corporate person, within the meanin g of Section 3(8) IBC. For, as aforesaid, the expression “default” has also been defined in Section 3(12) IBC to mean non- payment of debt when whole or any part or instalment of the amount of debt has become due or payable and is not paid by the debtor or the corporate debtor, as the case may be. 24. A priori, in the context of the provisions of the Code , if the guarantor is a corporate person [as defined in Section 3(7) IBC], it would come within the purview of the expres sion “corporate debtor”, within the meaning of Section 3(8) IBC. 25. It may be useful to also advert to the generic provis ion contained in Section 3(37). It postulates that the w ords and expressions used and not defined in the Code, but defined in enactments referred to therein, shall have the mean ings respectively assigned to them in those Acts. Drawing suppor t from this provision, it must follow that the lender would be a K. PARAMASIVAM v. THE KARUR VYSYA BANK LTD. [INDIRA BANERJEE, J.] financial creditor within the meaning of the Code. The principal borrower may or may not be a corporate pers on, but if a corporate person extends guarantee for the loan transaction concerning a principal borrower not bei ng a corporate person, it would still be covered within the meanin g of the expression “corporate debtor” in Section 3(8) IB C. 26. Thus understood, it is not possible to countenance the argument of the appellant that as the principal borro wer is not a corporate person, the financial creditor could not have invoked remedy under Section 7 IBC against the corp orate person who had merely offered guarantee for such lo an account. That action can still proceed against the guar antor being a corporate debtor, consequent to the default committed by the principal borrower. There is no reason to limit the width of Section 7 IBC despite law permitting initiation of CIRP against the corporate debtor, if and when default is committed by the principal borrower. For, the liability and obligation of the guarantor to pay the outstanding dues would get trigger ed coextensively. 27. To get over this position, much reliance was place d on Section 5(5-A) IBC, which defines the expression “corpor ate guarantor” to mean a corporate person, who is the surety in a contract of guarantee to a corporate debtor. This definition has been inserted by way of an amendment, which has come into force on 6-6-2018. This provision, as rightly urged by the respondents, is essentially in the context of a corporate debtor against whom CIRP is to be initiated in terms of the amended Section 60 IBC, which amendment is introduced by the same Amendment Act of 2018. This change was to empower NCLT to deal with the insolvency resolution or liqu idation processes of the corporate debtor and its corporate guarantor in the same Tribunal pertaining to same transaction , which has territorial jurisdiction over the place where the reg istered office of the corporate debtor is located. That does not mean that proceedings under Section 7 IBC cannot be init iated against a corporate person in respect of guarantee to the loan amount secured by person not being a corporate person, in case of default in payment of such a debt. 107 28. Accepting the aforementioned argument of the appel lant would result in diluting or constricting the expres sion “corporate debtor” occurring in Section 7 IBC, which means a corporate person, who owes a debt to any person. The “debt” of a corporate person would mean a liability or obligation in respect of a claim which is due from any per son and includes a financial debt and operational debt. The expression “debt” in Section 3(11) is wide enough to include liability of a corporate person on account of guarantee given by it in relation to a loan account of any person including not being a corporate person in the event of default co mmitted by the latter. It would still be a “financial debt” of the corporate person, arising from the guarantee given by it, within the meaning of Section 5(8) IBC. 29. Notably, the expression “corporate guarantee” is n ot defined in the Code. Whereas, expression “corporate guarantor” is defined in Section 5(5-A) IBC. If the legislatur e intended to exclude a corporate person offering guarant ee in respect of a loan secured by a person not being a cor porate person, from the expression “corporate debtor” occu rring in Section 7, it would have so provided in the Code [at least when Section 5(5-A) came to be inserted defining exp ression “corporate guarantor”]. It was also open to the leg islature to amend Section 7 IBC and replace the expression “corporate debtor” by a suitable expression. It could have e ven amended Section 3(8) to exclude liability arising f rom a guarantee given for the loan account of an entity not being a corporate person. Similarly, it could have also a mended the expression “financial debt” in Section 5(8) IBC, “claim ” in Section 3(6), “debt” in Section 3(11) and “defau lt” in Section 3(12). There is no indication to that ef fect in the contemporaneous legislative changes brought about. 30. The expression “corporate debtor” is defined in Secti on 3(8) which applies to the Code as a whole. Whereas, expression “corporate guarantor” in Section 5(5-A), a pplies only to Part II IBC. Upon harmonious and purposive construction of the governing provisions, it is not possibl e to extricate the corporate person from the liability (of being a K. PARAMASIVAM v. THE KARUR VYSYA BANK LTD. [INDIRA BANERJEE, J.] corporate debtor) arising on account of the guarantee give n by it in respect of loan given to a person other than corporate person. The liability of the guarantor is coextensive w ith that of the principal borrower. The remedy under Section 7 is no t for recovery of the amount, but is for reorganisati on and insolvency resolution of the corporate debtor who is not in a position to pay its debt and commits default in that regard. It is open to the corporate debtor to pay off the debt , which had become due and payable and is not paid by the principal borrower, to avoid the rigours of Chapter II IBC in g eneral and Section 7 in particular.” 15. The issue of whether CIRP can be initiated again st the Corporate Guarantor without proceeding against the principal borrower has been answered by this Court in Laxmi Pat Surana (supra). The relevant paragraphs are set out hereinbelow: - “21. Section 7 is an enabling provision, which permits the financial creditor to initiate CIRP against a corporate de btor. The corporate debtor can be the principal borrower. It can also be a corporate person assuming the status of cor porate debtor having offered guarantee, if and when the pr incipal borrower/debtor (be it a corporate person or otherw ise) commits default in payment of its debt.” *** 23. Indubitably, a right or cause of action would enure to the lender (financial creditor) to proceed against the p rincipal borrower, as well as the guarantor in equal measure in ca se they commit default in repayment of the amount of debt act ing jointly and severally. It would still be a case of default committed by the guarantor itself, if and when the pri ncipal borrower fails to discharge his obligation in respect of amo unt of debt. For, the obligation of the guarantor is co extensive and coterminous with that of the principal borrower to def ray the debt, as predicated in Section 128 of the Contract Act. As a consequence of such default, the status of the gu arantor metamorphoses into a debtor or a corporate debtor if it happens to be a corporate person, within the meaning of Section 3(8) IBC. For, as aforesaid, the expression 109 “default” has also been defined in Section 3(12) IBC to me an non-payment of debt when whole or any part or instalment of the amount of debt has become due or payable an d is not paid by the debtor or the corporate debtor, as the c ase may be. 16. The issues raised in this appeal are settled by this C ourt in Laxmi Pat Surana (supra). As held by this Court in Laxmi Pat Surana (supra), the liability of the guarantor is co-extensive w ith 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. 17. We find no ground to interfere with the concurrent findings of the Adjudicating Authority (NCLT) and the Appellate Authority (NCLAT). 18. The appeal is, therefore, dismissed. K. PARAMASIVAM v. THE KARUR VYSYA BANK LTD. [INDIRA BANERJEE, J.] Nidhi Jain and Anurag Bhaskar Appeal dismissed. (Assisted by : Rahul Kumar, LCRA)