FACTUAL BACKGROUND OF CASE
The Hon’ble Apex Court upheld the provisions of the Insolvency and Bankruptcy Code relating to insolvency of personal guarantors that were brought into force in 2019.
Further the notification has been issued by MCA on 15.11.2019 which has notified the provision of IBC w.r.t. to personal guarantors. However, validity of the same has been challenged by IBBI on 20.11.2019 which is confined to impugned notification.
The petitioners have furnished guarantees in the capacity of directors, promoters, chairman and managing directors of the companies to the banks and financial institutions and the guarantees are invoked and the proceedings are pending against the companies to which they are associated with. The cases which are pending, at different stages such as initiation of insolvency, finalization of resolution plan or non-approval of resolution plan.
Once the impugned notification published many demand notices has been served to petitioner for proposing insolvency proceedings under IB, Code and recovery proceedings initiated after the invocation of guarantees under part-III of Code. (Refer para 2 and 3 of the judgement)
The Petitioners contended that the power conferred upon the Union under Section 1(3) of the Code could not have been resorted to in the manner as to extend the provisions of the Code only as far as they relate to personal guarantors of corporate debtors. The impugned notification brought into force Section 2(e), Section 78 (except with regard to fresh start process), Sections 79, 94-187 (both inclusive); Section 239(2)(g), (h) & (i); Section 239(2)(m) to (zc); Section 239 (2) (zn) to (zs) and Section 249.(Refer para 4 of the judgement)
ARGUMENTS BY PETITIONER
1. The Central Government has acted more than the powers vested in it under Section 1(3) of the IBC. (Refer para 4 of judgement)
2. The impugned notification is an exercise of excessive delegation and the enforcement of Sections 78, 79, 94-187 etc. in terms of the impugned notification of the Code only in relation to personal guarantors is ultra vires the powers granted to the Central Government. As The notification is ultra vires, the provisions of the Code in so far as it notifies provisions of Part III of the Code only in respect of personal guarantors to corporate debtors. (Refer para 5,7,16 and 19 of the judgement)
3. The petitioners argue that the impugned notification, to the extent it brings into force Section 2 (e) of the Code with effect from 01.12.2019 is hit by non-application of mind. It is argued that Section 2(e) of the Code, as amended by Act 8 of 2018, came into force with retrospective effect from 23.11.2017. This is duly noted by this court in the case of State Bank of India V. Ramakrishnan, which observed that:
“Though the original Section 2(e) did not come into force at all, the substituted Section 2(e) has come into force w.e.f. 23.11.2017.”
(Refer para 8 of the judgement)
4. The part III of the Code does not apply to personal guarantors to corporate debtors at all and metes out similar treatment to both financial and the operational creditor. The petitioners rely on Swiss Ribbons (P.) Ltd. v. Union of India, where this court upheld the difference in procedure for operational creditors and financial creditors (Refer para 11,12,13,17 of the judgement)
5. The impugned notification it is ultra vires to the objects and purpose of the Code that the object of the Code is to ensure a company’s revival and continuation by protecting from its management and, as far as feasible, to save it from liquidation, thereby maximizing its value. The petitioner relied upon Swiss Ribbons (P.) Ltd. v. Union of India & Ors.and Babulal Vardharji Gurjar v. Veer Gurjar Aluminum Industries Pvt. Ltd. & Anr for this purpose (Refer para 23,27 of the judgement)
6. The Notification overlooks the co-extensive nature of the liability of the personal guarantor. Therefore, the petitioners’ liability as guarantors under the personal guarantee would stand completely discharged and relied on the judgment of the Punjab and Haryana High Court in Kundanlal Dabriwala v. Haryana Financial Corporation , which ruled that:
“on a fair reading of the provisions of the Contract Act, I am inclined to hold that as the liability of the surety is co-extensive with that of the principal debtor, if the latter’s liability is scale down in an amended decree, or otherwise extinguished in whole or in part by statute, the liability of the surety also is pro tanto reduced or extinguished.” (Refer para 14,28,29 of the judgement)
ARGUMENTS BY UNION AND RESPONDENTS
1. The amendment by Section 60(2) is to achieve a unified adjudication through the same forum for resolution of issues and disputes concerning corporate resolution processes, as well as bankruptcy and insolvency processes in relation to personal guarantors to corporate debtors. Therefore, urged that Section 2(e) being complete and distinct is a provision within the meaning of Section 1(3), and the Central government acted intra vires to bring it into force, as well as certain provisions in Part III of the code (Refer para 31,32,33,34 and 39 of the judgement)
2. The liability of a guarantor is coextensive, joint and several the principal borrower unless the contrary is provided by the contract. Hence, until the debt is paid off to the creditor in entirety, the guarantor is not absolved of its joint and several liability to make payment of the amounts outstanding in favour of the creditor. The rights of a creditor against a guarantor continue even in the event of bankruptcy or liquidation and relied on Maharashtra State Electricity Board Bombay v. Official Liquidator, High Court, Ernakulum & Anr. Therefore, by way of approval of a resolution plan, any release/discharge secured by the principal borrower or entering into a composition with the principal borrower (reference to Section 135 of the Contract Act) cannot discharge the guarantor in any manner whatsoever and relied on the judgement of State Bank of India v. V. Ramakrishnan & Ors (Refer para 43,44,45 of the judgement)
3. Further R. has relied on many judgements in order to challenge to the validity of legislative provisions on the ground of excessive delegation of legislative power;
i) In re Delhi Laws
ii) Raghubar Swarup v. State of U.P
iii) Tulsipur Sugar Company
iv) Bangalore Woollen, Cotton and Silk Mills v. Bangalore Corporation
v) ITC Bhadrachalam Vs Mandal Revenue Officer
(Refer para 48)
QUESTION OF LAW INVOLVED IN THE CASE
1. The position of law in Insolvency and Bankruptcy Code relating to insolvency of personal guarantors
2. The Hon’ble Apex Court upheld the liability of the personal guarantors to the corporate debtors , the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) upheld
3. The liability of personal guarantor to the corporate debtor in case resolution plan is approved.
HELD BY HON’BLE APEX COURT
1. The Court upheld the impugned notification to be validly issued. The Court observed that the impugned notification is not an instance of excessive legislative exercise since there is no compulsion in the Code for it to be applicable in its entirety to all individuals at the same time. The exercise of power in issuing the impugned notification under Section 1(3) is therefore, not ultra vires. The Hon’ble Court also stated that there was an “intrinsic” connection between the personal guarantors and their corporate debtors. (Refer para 101 of the judgment)
2. However, this court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability. In Maharashtra State Electricity Board (supra) the liability of the guarantor (in a case where liability of the principal debtor was discharged under the insolvency law or the company law), was considered. It was held that in view of the unequivocal guarantee, such liability of the guarantor continues and the creditor can realize the same from the guarantor in the view of Section 128 of the Contract Act as there is no discharge under Section 134 of that Act. (Refer para 108 of the judgment)
3. The Hon’ble Apex Court held that the resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor’s liability. That the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract. (Refer para 111 of the judgment)
4. It is held that the impugned notification is legal and valid. It is also held that approval of a resolution plan relating to a corporate debtor does not operate to discharge the liabilities of personal guarantors (to corporate debtors). The writ petitions transferred cases and transfer petitions are accordingly dismissed in the above terms, without order on cost. The court dismissed the petition challenging notification dated 15.11.2019 and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019. (Refer para 112 of the judgement)
CONCLUDING REMARKS
1. Hence in the present case Hon’ble Apex Court settled the principal of law relating to insolvency of personal guarantors and held that;
i) The Court upheld the impugned notification to be validly issued and exercise of power in issuing the impugned notification under Section 1(3) is therefore, not ultra vires.
ii) The release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability.
iii) The court dismissed the petition challenging notification dated 15.11.2019 and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019.
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