Libertatem Magazine

SC Upholds the Provisions of IBC Relating to Insolvency of Personal Guarantors 

Contents of this Page

In this case, the Honourable Supreme Court upheld the provisions of the Insolvency and Bankruptcy Code (IBC) relating to insolvency of personal guarantors that were brought into force in 2019 (Lalit Kumar Jain v. Union of India).

Brief Facts

In the present case, the apex court had transferred to itself petitions challenging a notification dated November 15, 2019, introducing certain provisions to the IBC relating to insolvency of personal guarantors. This case dealt with the proceedings under Article 32 and Article 139A of the Constitution because of the petitions involving the interpretation of the Insolvency and Bankruptcy Code, 2016. 

There was a common question that was concerned over the validity of the Central Government’s notification that was issued on 15.11.2019. Though the validity of the Insolvency and Bankruptcy and the validity of the regulations challenged by the Insolvency and Bankruptcy Board of India were also subject matters in these cases, yet the main contention of the petitioners has often limited itself to the impugned notification. 

Under these cases, the petitioners contended that apart from the already power possessed by the Union under Section 1(3) of the Code under which the personal guarantors of the corporate debtors were dealt with, the new impugned notification brought about Section 2(e), Section 78, Section 79, Section 98-114, Section 239(2)(g), (h) and Section 239(2)(m) to (zc); Section 239 (2)(n) to 2(s) and Section 249. Having attained such powers, the petitioners were served with demand notices under which the Union had proposed to start insolvency proceedings under the Code. Due to the invocation of the guarantees, insolvency resolutions were initiated against some of the petitioners. 

Petitioner’s Arguments 

The main argument contended by the petitioners in these cases was that the impugned notification was simply an exercise of excessive delegation. The petitioners argued that the Central Government had no authority, neither legislative nor statutory, to impose the conditions on the pretext of enforcement of the Code. The petitioners argued that in terms of the provision to Section 1(3) of the Code, Parliament delegated the power to enforce different provisions of the Code at different points in time to the Central Government. In addition to this, the petitioner’s argument that the point(s) in time when different provisions of the Code can be brought into effect and that it does not permit the Central Government to notify parts of provisions of the Code, or to limit the application of the provisions to certain categories of persons. The impugned notification, however, notified various provisions of the Code only in so far as they relate to personal guarantors to corporate debtors. It was, therefore, ultra vires the provisions to Section 1(3) of the Code.

The petitioners further argued that the provisions only deal with individuals and partnership firms. The petitioners also urged that it was not possible to carve out a limited application of the provisions only concerning personal guarantors to corporate debtors. Therefore, the petitioners submitted that the government trying to enforce the new Sections under the notification only concerning the personal guarantors to corporate debtors was a misuse of power and was an exercise of legislative power that wasn’t permitted by law. It also amounts to the unconstitutional usurpation of legislative power by the executive. Therefore, the petitioners urged before the court that the impugned notification was 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.

The learned senior counsel appearing on behalf of the petitioners urged that Section 1(3) of the Code authorizes or empowers the Central Government only to bring provisions of the Code into force on such date by notification in the Official Gazette. The provision to this Section categorically provides that different dates may be appointed for bringing different provisions into force. Section 1(3) is an instance of ‘conditional legislation’, where the legislature has enacted the law, and the only function assigned to the executive was to bring the law into operation at such time as it may decide. Such legislation is termed as conditional because the legislature has itself made the law in all its completeness as regards “place, person, laws, powers”, leaving nothing for an outside authority to legislate on. Therefore, no element of legislation was left open to the government, and the only function assigned to it is to bring the law into operation at such time as it might decide. The learned counsel also referred to few cases to support his arguments and contentions.

Respondent’s Arguments 

The honorable Attorney General arguing for the Union of India stated that the Code being talked about in these cases was amended in 2018. Under this amendment, the definition of debtors was split into three different types and categories. This was done to split the provisions and to define all three categories to cover three different entities. 

The honorable Attorney General argued before the court that the Parliament felt compelled to separate personal guarantors from other individuals, wherein other individuals namely being partnership firms, proprietorships, and individuals. However, after the amendment of 2018, this separation was achieved and yet it was not be realized, the whole process of insolvency would have to be dealt with independently of corporate debtors and of its promoters, managing directors, and directors who had furnished their guarantees, the same guarantees they had furnished to secure the financial debts of the corporate debtors. 

It was also argued by the learned Attorney General that any one provision of a statute at different times for different purposes can be brought into force by the executive. The honorable Attorney General relied upon two Constitutional bench cases to support his argument. The report of the Bankruptcy Law Reforms Committee (“BLRC”) was also referred to by the Attorney General, wherein he mentioned that this report was tasked with introducing a comprehensive framework for insolvency in bankruptcy.

Court’s Decision

The court after duly going through the arguments and supportive cases from both sides observed that in the court’s opinion there was sufficient legislative guidance for the Central Government before the amendment of 2018 was made effective, to distinguish and classify personal guarantors separately from other individuals. The court also observed that Parliamentary intent was to treat personal guarantors differently from other categories of individuals. The impugned notification authorizes the Central Government and the Board to frame rules and regulations on how to allow the pending actions against a personal guarantor to a corporate debtor before the Adjudicating Authority. The intent of the notification, facially, was to allow for pending proceedings to be adjudicated in terms of the Code. 

Therefore, after due consideration, the court ruled out that the impugned notification was not an instance of legislative exercise, or amounting to impermissible and selective application of provisions of the Code. It was also held that the impugned notification was issued within the power granted by Parliament and in valid exercise of it. The exercise of power in issuing the impugned notification under Section 1(3) was, therefore, not ultra vires; the notification was valid. It was held that the impugned notification was legal and valid. The honorable court also held that that approval of a resolution plan relating to a corporate debtor would not operate to discharge the liabilities of personal guarantors (to corporate debtors). With this conclusion, the writ petitions, transferred cases, and transfer petitions were accordingly dismissed.

Click here to view the judgment is now on Telegram. Follow us for regular legal updates and judgments from the Court. Follow us on Google News, Instagram, LinkedIn, Facebook & Twitter. You can also subscribe to our Weekly Email Updates. You can also contribute stories like this and help us spread awareness for a better society. Submit Your Post Now.

About the Author