A bench comprising of Hon’ble Mr. Justice Nageshwar Rao and Hon’ble Mr. Justice Ravinder Bhat (“Hon’ble Court”) vide its final Judgement and Order dated 21.05.2021 upheld the provisions of the Insolvency and Bankruptcy Code, 2016 (hereafter referred to as “the Code”) relating to the insolvency of personal guarantors, which were brought into force in 2019. The principal ground of attack in all these proceedings has been that the executive government could not have selectively brought into force the Code, and applied some of its provisions to one sub-category of individuals, i.e., personal guarantors to corporate creditors. This is a landmark move as the said issue has been a bone of contention for the entire banking sector.
The 15.11.2019 notification was initially challenged before several High Courts. The Hon’ble Supreme Court had in October 2020 transferred the petitions to itself from various High Courts.
COMMON QUESTION INVOLVED
The common question which arose in the batch of matters concerned the vires and validity of a notification dated 15.11.2019 issued by the Central Government (hereinafter referred to as “impugned notification”). The Petitioners had also challenged the validity of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 issued on 15.11.2019. Further, the validity of regulation challenged by the Insolvency and Bankruptcy Board of India on 20.11.2019 were also subject matter of challenge. However, the arguments were restricted to the validity of the impugned notification.
FACTUAL BACKGROUND
In the batch of matters, before the Hon’ble Supreme Court, challenge was mounted to the impugned notification as having been issued in excess of the authority conferred upon the Union of India (through the Ministry of Corporate Affairs). 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.
The main contentions raised on behalf of the Petitioners with respect to the validity of the impugned notification, include the following :
a. That the impugned notification is an exercise of excessive delegation. The Petitioners contended that the Central Government has no authority – legislative or statutory – to impose conditions on the enforcement of the Code. It was further contended as a corollary, that 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
b. That the power delegated under Section 1(3) is only as regards 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. Section 1 (3) of the Code is extracted hereunder:
“Section1(3) reads as under: “It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint: Provided that different dates may be appointed for different provisions of this Code and any reference in any such provision to the commencement of this Code shall be construed a reference the commencement of that provision.”
c. That the Central Government’s move to enforce Sections 78, 79, 94 to 187, etc. only in relation to personal guarantors to corporate debtors is an exercise of legislative power is wholly impermissible in law and amounts to an unconstitutional usurpation of legislative power by the executive
d. That the impugned 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. Part III of the Code governs “Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms” and that it does not contain any provision permitting initiation of the insolvency resolution process (hereafter “IRP”) against personal guarantors to corporate debtors.
e. That there is no intelligible differentia or rational basis on which personal guarantors to corporate debtors have been singled out for being covered by the impugned provisions, particularly when the provisions of the Code do not separately apply to one sub-category of individuals, i.e., personal guarantors to corporate debtors.
HELD
1. First Issue- Whether the impugned notification was constitutionally valid?
The Hon’ble Supreme Court upheld the impugned notification to be validly issued. The Hon’ble 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.
2. Second issue – Whether the impugned notification takes away the protection of the personal guarantor afforded by law under the contract of guarantee (reference was made to Sections 128, 133 and 140 of the Contract Act)?
The Hon’ble Supreme 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, 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.
In light of the above, all the batch matters and writ petitions including those transferred from different high courts, were dismissed. The Hon’ble Supreme Court, while transferring all the petitions to itself in October 2020 had stated that the Code was at a nascent stage and that it was better for the Court to take up the interpretation of the provisions of the Code so as to avoid confusion and to authoritatively settle the law. The present judgement indeed will ring loud and clear across the business communities.
Tanvi Dubey is Advocate, practising in the Supreme Court of India and associated with Shardul Amarchand Mangaldas & Co. as a Senior Associate.
