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Supreme Court: The liability of the Guarantor is co-extensive with that of the Principal Borrower


A Division Bench of the Supreme Court comprising Justices Indira Banerjee and J.K. Maheshwari was hearing an interesting Appeal, where the Supreme Court bench held that the liability of the guarantor is co-extensive with that of the Principal Borrower and It was open to the Financial Creditor to proceed against the guarantor without first suing the Principal Borrower.


The Appellant was the promoter, shareholder and suspended/ discharged director of Maharaja Theme Parks and Resorts, a company registered under the Companies Act, 1956. Respondent No.1, hereinafter referred to as “Financial Creditor” had advanced for three different credit facilities to the Corporate Debtor. Maharaja Theme Parks and Resorts stood as guarantors for the loans availed by all three borrowers.


Facts:

The borrowers failed to repay the debts payable by them to the Financial Creditor. On or about 24th October 2018, the Financial Creditor filed an application under Section 7 of the IBC 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 loans, Maharaja Theme Parks and Resorts, as Guarantor, became liable to repay the loan.


By an order dated 8th April 2019, the Adjudicating Authority admitted the petition under Section 7 of the IBC and initiated the CIRP against Maharaja Theme Parks and Resorts. Respondent No.2 was appointed Interim Resolution Professional.


Being aggrieved by the order dated 8th 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.


Appellant’s Submission:

The Counsel 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, was 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.


Respondent’s Submission:

The 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 advanced to the principal borrower, who was not a corporate person, has been answered by the Supreme Court in Laxmi Pat Surana v. Union Bank of India and Another, REED 2021 SC 03571.


Court’s Finding:

The Supreme Court bench noted that the issue of whether CIRP can be initiated against the Corporate Guarantor without proceeding against the principal borrower has been answered by this Court in the case of Laxmi Pat Surana, REED 2021 SC 03571.


The issues raised in this appeal were already settled by the Three-Judge Bench of the Supreme Court in Laxmi Pat Surana v. Union Bank of India and Another, REED 2021 SC 03571. The Three-Judge Bench held in the Laxmi Pat Surana case, that “the liability of the guarantor is co-extensive with that of the Principal Borrower.” The Supreme Court observed that the judgment in Laxmi Pat Surana, REED 2021 SC 03571, rendered by a three-Judge Bench of the Supreme Court was binding on this Bench. It was open to the Financial Creditor to proceed against the guarantor without first suing the Principal Borrower.


Thus, The Apex Court did not find any ground to interfere with the concurrent findings of the Adjudicating Authority (NCLT) and the Appellate Authority (NCLAT). The Appeal was dismissed.


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