K. Paramasivam v. The Karur Vysya Bank Ltd. (2022)

The guarantee questions in this unit fall into three. Is the guarantor released when the principal debtor's plan is approved? Does one guarantor's moratorium protect another? And — the question here — must the creditor go against the principal borrower first? Students routinely assume a rule of sequence, because the general law of guarantee is often taught as though the surety stands behind the borrower. This case removes that assumption for proceedings under the Code.

A company stood guarantor for loans availed by three borrowers — a partnership firm and two sole proprietorships. The principal borrowers failed to repay. The financial creditor then filed an application under s. 7 for initiation of a resolution process against the guarantor, without first proceeding against the principal borrowers.

A financial creditor can proceed against the guarantor without first suing the principal borrower. Relying on its earlier decision on the point, the Court held that a resolution process can be initiated against the corporate guarantor without proceeding against the principal borrower.

The liability of a surety under Indian law is co-extensive with that of the principal debtor unless the contract provides otherwise, and it is immediate rather than contingent on exhausting remedies against the borrower. A creditor who holds a guarantee holds a present right against the guarantor the moment the borrower defaults; nothing requires him to exhaust one remedy before invoking another.

The Code takes that position and works with it. The question under s. 7 is whether there is a financial debt owed by the corporate person against whom the application is made, and whether there has been a default. A guarantee, once the borrower defaults, answers that description: the obligation in respect of the claim is due from the corporate person, and falls within the definition of financial debt. It makes no difference whether the corporate person stood guarantor to an individual or to another corporate person. On this reasoning the creditor is a financial creditor qua the guarantor in its own right, and the application stands on its own feet.

A caution belongs with the rule. A corporate guarantee can be invoked only on a default by the borrower; the guarantor's liability arises from that default and not independently of it. And where amounts have already been realised from one obligor, the liability of the other extends only to the balance, since the debt cannot be realised twice.

1. On any guarantee problem, state the rule and its basis: co-extensive liability, no rule of sequence, and a financial debt owed by the guarantor in its own right.
2. Distinguish the two guarantors. A corporate guarantor is proceeded against under Part II by an application under s. 7; a personal guarantor to a corporate debtor goes through Part III, before the same Tribunal where a process against the corporate debtor is pending.
3. Complete the sequence with the other guarantee holdings in this unit: approval of the principal debtor's plan does not per se discharge the guarantor, and one guarantor's interim moratorium does not protect a co-guarantor. Together these three propositions make the guarantor's position under the Code as exposed as it can be.
4. What it does not decide. It does not decide that a creditor may recover more than once, nor does it decide anything about the forum for a personal guarantor where no process is pending against the corporate debtor.

Section 7(5) has since been substituted, so an application against a corporate guarantor is now governed by the amended admission test: the Adjudicating Authority is to admit within fourteen days where it is satisfied that a default has occurred, the application is complete and no disciplinary proceeding is pending against the proposed resolution professional, and an Explanation provides that where those requirements are complied with no other ground shall be considered to reject the application. Section 14 has also been given an Explanation clarifying that the corporate moratorium applies where a surety seeks to initiate or continue proceedings against the corporate debtor under a contract of guarantee.