Introduction

Provisions applicable only to the personal guarantors (PGs) to Corporate Debtors (CDs), in the Part III of the Insolvency and Bankruptcy Code, 2016 (Code) were brought into force by the Central Government of India vide its notification dated 15th of November 2019 (Notification), and with effect from 1st December, 2019. Apart from that by way of notifications, the Insolvency and Bankruptcy (Application to Adjudicating  Authority for Insolvency Resolution Process for Personal Guarantor to Corporate Debtors) Rules, 2019  (Rules) and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal  Guarantors to Corporate Debtors) Regulations, 2019 (Regulations) were also brought into force. Several petitions challenging the notifications were filled in the High Courts.

Man holds Insolvency and bankruptcy code IBC

Thereafter the Supreme Court of India invoking its writ jurisdiction under Article 32 of the Constitution of India and transferring the pending cases in the High Courts under Article 139A of the Constitution of India in the case of Lalit Kumar Jain vs Union of India, Transferred case (CIVIL) NO. 245/2020 sat to adjudicate the common issue in hand, involving the interpretation and validity of the Notification as to whether it was an exercise of excessive delegation and that the Central Government has no legislative or statutory authority to impose conditions on the enforcement of the Code.  Issues at Hand The points of law as have been raised by the petitioners can be summed as follows:

  • Whether there has been excess of the authority conferred upon the Union of India, through the Ministry of Corporate Affairs (MCA)?
  • Contention regarding Section 1(3) of the Code was put forth in this regard, stating that in lieu of the powers conferred upon the Central Government (CG) vide this Section.
  • This could not be interpreted in furtherance of allowing the government to selectively extend the provisions of the Code to the personal guarantors of corporate  debtors and to limit the application of the provisions introduced to a particular group or category.
  • Whether Section 2 (e) of the Code as introduced and to be in effect from 01.12.2019 is hit by non-application of mind?
  • Whether Section 243 of the Code would create two self-contradictory legal regimes for in solvency proceedings against personal guarantors to corporate debtors?
  • Whether the liability of a guarantor is co-extensive with that of the principal debtor with reference to Section 128 of Indian Contract Act, 1872, once a resolution plan is accepted?

Decision of the court

The Court rejected that the contention as to the CG having no authority to bring into force the provisions of the Code and in particular for the personal guarantors to corporate debtors. To come to such a conclusion, the Supreme Court perused the dates on which the various provisions of the Code had been notified, and to that observed that the CG had followed a stage-by-stage process of bringing the provisions into force, with rightful consideration of the similarities and dissimilarities of the subject matter of the provisions and the overall objective of the Code.

The Supreme Court iterated that there is sufficient indication in the Code, as can be deduced from Sections 2(e), 5(22), 60 and 179, that personal guarantors were to be dealt differently compared to other individuals.  It held that Section 2(e), which deals with the application of the Code to personal guarantors to corporate debtors, as was amended to take retrospective effect, did not suffer from any non-application of mind.

The Supreme Court recalled the report of the Working Group which recognized a nexus between a personal guarantor and a corporate debtor as opposed to individuals and partners in firms. The Parliament’s intent to treat personal guarantors differently from the other individuals due to the connection between the personal guarantors and corporate debtors and also the  possibility of having two separate processes before two different fora i.e., the National Company Law Tribunal (NCLT) and the Debt Recovery Tribunal (DRT) was also noted. In this regard the court held that, as a consequence of the non obstante clause as has been laid out under Section 238 of the Code, it has an overriding effect over other statutes and enactments for the time being in force.

Lastly, the Supreme Court held that sanction of a resolution plan and its finality with regard to Section 31 of the Code does not discharge the personal guarantor’s liability as such given that the same was a result of an involuntary act and  thus includes by operation of law, liquidation or insolvency.  The Supreme Court emphasised the case of SBI v. V. Ramakrishnan (2018) 17 SCC 394, where in it had held that the guarantor cannot escape the liability as has been laid down under Section 134 of the Indian Contract Act, 1872 since a resolution plan which has been approved may be well included in the provisions for payments to be made by the guarantor. Consequently, the approval of a resolution plan in itself does not discharge the guarantor of any liability. Further the involuntary acts of the principal debtor which leads to the loss of security does not absolve the liability of a guarantor and the  liability of the guarantor would very much continue; and the creditor can still realize the same from the guarantor in terms  of Section 128 and 134 of the Indian Contract Act, 1872 as was held in the case of Maharashtra State Electricity Board Bombay v. Official Liquidator, High Court 1982 (3) SCC 358 and Committee of Creditors of Essar Steel India Limited V Satish Kumar Gupta & Ors. (2020)8 SCC 531 The impugned Notification was held to be legal and valid by the court, and subsequently the writ petitions, transferred cases and transfer petitions in the matter were dismissed accordingly. Conclusive Analysis

The protracted debate as to the treatment of personal guarantors under the Code has been finally put to rest by the Supreme Court by way of this judgement on 21st of May, 2021; wherein this two-judge bench of the Supreme Court upheld the constitutional validity of the notification.

The observation as to the discharge of a principal borrower from the debt that is owed to its creditor, by operation of law and an involuntary process, or due to liquidation or insolvency proceeding, that it does not release the liability of the surety or guarantor is important as its hold them accountable.

The decision also comes as a relief to the creditors for whom the flood fate and possibility to acquire from the asset pool of the personal guarantors has opened under the scope of the code. On the other hand, this comes as a cause of concern for the prominent industrialists who happen to be the promoters of debt-laden companies. By this, the option to proceed simultaneously against the corporate debtor and its personal guarantor has now been made available to the creditors of a corporate debtor.

By way of acknowledging that the Code is still at a nascent stage and the Court’s intervention to pronounce the interpretation as has been laid out in the provisions of the Code, this will only be beneficial and will avoid confusion, arbitrariness, unnecessary litigation and will be a step forward to ensure that the law is authoritatively settled. All in all it can be safe to say that the instant case is in furtherance of the true spirit and purpose with IBC had been enacted and brought into force.

References:-

https://ibbi.gov.in/uploads/resources/Final-Report_of_WG_on_Indiv_Insol-Aug_2017.pdfibbi.gov.in/uploads/resources/Final-Report_of_WG_on_Indiv_Insol-Aug_2017.pdf

https://ibbi.gov.in/webadmin/pdf/order/2018/Aug/11958_2018_Judgement_14-Aug-2018_2018-08-14%2022:04:34.pdf

https://indiankanoon.org/doc/211773/

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