Corporate insolvency resolution process can be initiated against corporate guarantor without initiating against Principal borrower: Supreme Court

In this recent pronouncement, the Apex Court in the matter of K. Paramasivam v. Karur Vysya Bank Ltd. & Anr. [Civil Appeal No. 9286 of 2019 Judgment dated 6th September 2022] upheld the contention of the financial creditor that it can initiate Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code 2016 against the corporate guarantor even before initiating the CIRP against the principal borrower in the first place. The Court essentially relied on its previous judgment in Laxmi Pat Surana v. Union of India (2021) 8 SCC 481 where it held the liability of the personal guarantor to be coextensive and conterminous along with the principal borrower to defray the debt.

Previously, the Court observed in Laxmi Pat Surana (supra) –
“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 case they commit default in repayment of the amount of debt acting jointly and severally. It would still be a case of default committed by the guarantor itself, if and when the principal borrower fails to discharge his obligation in respect of amount of debt. For, the obligation of the guarantor is coextensive and coterminous with that of the principal borrower to defray the debt, as predicated in Section 128 of the Contract Act. As a consequence of such default, the status of the guarantor metamorphoses into a debtor or a corporate debtor if it happens to be a corporate person, within the meaning of Section 3(8) IBC.”

On the basis of the above stance, the court rejected the argument of appellant in the present case to hold that corporate guarantor shall be regarded to fall within the ambit of the term ‘corporate debtor’ under Section 3(8) of the Code. The SC had previously held that a financial creditor can initiate proceedings under Section 7 for CIRP against a corporate entity, which has given guarantee to secure the dues of a non-corporate entity as a financial debt accruing to corporate person, in relation to the corporate guarantee given by it, once the borrower had defaulted. In such case, the court had held that the corporate guarantor will become corporate debtor.

This was reiterated in the present case, and as such the court further held that since the liability of corporate guarantor is coextensive with that of the principal borrower, CIRP can be initiated against the guarantor without initiating the same before against the principal borrower.