LAWS RELATED TO BOUNCING OF CHEQUES: AS IT EVOLVED

 

LAWs RELATED TO BOUNCING OF CHEQUES: As it evolved

Requisites of filing complaint u/s 138 of Negotiable Instruments Act

Anil K Khaware

Advocate

The increased pace of commercial transactions over the years has placed transaction by cheques in pivotal place, as regards mode of payment, being bill of exchange as per section 5 of Negotiable Instruments Act 1881 as amended and up to date. The mode of payment in recent years, though,  have undergone changes in big way like RTGS/NEFT transactions and other mode of instant payment through Amazon, Google, Paytm etc. However, instant payment has multiple options. The cheques are not encashed instantly, in as much as the same shall have to be formally presented in the banker of the drawer and the payment advice is to be sent for by the banker of payee and the same has to be encashed by the banker of the drawer/payer. No doubt, even this aspect has also underwent a sea change, in as much as, the cheques as an instruments are payable at par in the same bank across the nation, thereby saving time. However, the cheques are integral part of commercial transaction, as ready money may not be available and cheques are handed over to payee with a view to comfort them to have bill of exchange, with the payee and it is generally assured by the payer that the same shall be encashed on presentation. Still further, the debtor hands over the cheque to the creditor and put a later date on it or request the payment of the cheque on some later date. These are nuances of commercial transactions and practice of payment by cheques are therefore, in vogue.

However, it has several pitfalls. The courts are flooded with cases of dishonoured cheques, since, the cheques are often handed over, when no sufficient amounts are found in the account of payer. Some time accounts are closed and even signature on the cheques may be found different and does not tally with the specimen signature of payers and the cheques are dishonoured due to these reasons. Quite often, the change of signature and closing the account is also with a view to block the payment. Yet another aspect is “stop payment advice” tendered to bank for flimsy reason and buy time.  The section 138 of Negotiable Instruments Act 1881 is brought in statute book in 1988 with a view to infuse confidence in commercial transaction, and should the cheques stands dishonoured , the punitive measures could be unveiled in terms of the provisions u/s 138 of Negotiable Instruments Act( In short “NI Act”) . The sections 139-142 of the Act shall also be relevant as the discussion is unveiled further.

PRESCRIPTION OF SECTION 138

Before adverting to details, it may be apt to reproduce the contents of Section 138 of Negotiable Instruments Act 1881, which was made part of the Act vide Amendment Act of 1988 insertion as Chapter XVII w.e.f  01.04.1989, thereby bouncing of cheques was made a penal provision entailing punishment.

138: Dishonour of cheques for insufficiency etc of funds in the accounts:  Where any cheque drawn by a person on a account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an  agreement made with the bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for [ * a term which may be extended to two years] or with fine which may extend to twice the amount of cheque or with both     

PROVIDED that nothing contained in this section shall apply, unless-

(a) The cheque has been presented to the bank within a period of Six **(6) months from the date on which it is drawn or within the period of its validity whichever is earlier.

(b) The payee or holder in due course of the case, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, ***[within Thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid, and

(c)  The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

*The terms of imprisonment was enhanced from 1 to 2 years vide Amendment act of 2002.

** The period of six month reduced to Three month vide RBI Notification No. RBI/2011-12/251,DBDO AML BC No. 47/14.01.001/2011-12, w.e.f  01.04.2012

***Substituted for “within fifteen days” by Amendment act 2002 w.e.f 06.02.2003.

The bare perusal of the aforesaid provisions shall highlight the stipulations of the Section and prescription of penal provision. The bouncing of a cheque is reckoned as “Dishonour of a cheque” which is the cheque returned by the bank without encashment in view of “insufficiency of funds” “exceeds arrangement” or such other reasons. The “Bank Memo” issued by the bank narrates the reason of dishonor. The section 138 of the Negotiable Instruments Act, 1881 stipulates that if a drawer of the cheque is held guilty of the offence under the section, he/she if liable to be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both. Of course, the cheating complaint u/s 420 of Indian Penal Code by way of police complaint converting it to F.I.R or before a Magistrate a case of cheating u/s 420 of IPC as a summoning case could also be filed.

To set the discussion in perspective, the present write up is confined only as regards the pre-requisites of maintaining the complaint under section 138 of NI Act i.e till the time a proper complaint is prepared for filing. The ingredients of a complaint under section 138 of Negotiable Instruments Act is clearly inbuilt in the provision as narrated above, still, the same shall be delineated further to amplify the horizon, besides, the steps or stipulations including the modalities that the complaint need to conform to, at the time of filing it before the court of Chief Metropolitan Magistrate (In Metropolitan Cities) or before Chief Judicial Magistrate (In other Cities/Towns) as the case may be.      

The complaint should be the creditor, service provider, seller or claimant of such other description and in lieu of services or sale of products or services provided, as the case may be and should have in his possession the originals of dishonoured cheque with original bank memo testifying the reasons of return of the cheque. The cheque/s handed over to such creditor, on presentation to the banker of the payee/credit, if stands dishonoured for any reason whatsoever, the cause is available to the payee for suing the payer. However, it may be noted that dishonor of the cheque is one constituent of a composite cause of action and not a complete cause of action in itself. The ingredients of Section 138 of the Negotiable Instruments  (NI) Act has been analysed by the Hon’ble Supreme Court  in Kusum Ingots & Alloys Ltd Vs Pennar Peterson Securities Ltd , (2000) 2 SCC 745 : 2000 SCC (Cri) 546 : AIR 2000 SC 954]. The following ingredients are required to be satisfied for making out a case under Section 138 of the NI Act:

"(i) a person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person from out of that account for the discharge of any debt or other liability;

(ii) that cheque has been presented to the bank within a period of six months* from the date on which it is drawn or within the period of its validity, whichever is earlier;

(iii) that cheque is returned by the bank unpaid, either because the amount of money standing to the credit of the account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with the bank;

(iv) the payee or the holder in due course of the cheque makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within 15 days ( Now 30 days after amendment in the NI Act) of the receipt of information by him from the bank regarding the return of the cheque as unpaid;

(v) the drawer of such cheque fails to make payment of the said amount of money to the payee or the holder in due course of the cheque within 15 days of the receipt of the said notice."

What is further more important is that the cheque/s issued should be in lieu of consideration. That the presumption of liability is otherwise in built u/s 139 of Negotiable Instruments Act.

*The validity period of cheque is now Three (3) months.

STOP PAYMENT ADVICE IS NO DEFENCE

The return of cheque due to “insufficient funds” or “exceeds arrangement” attracts the punitive measures under section 138 of Negotiable Instruments Act. However, even if the “stop payment” advice is the reason for dishonor of cheque or “signature differ” or such other reasons, then too, by operation of law and judicial precedents the complaint u/s 138 of Negotiable Instruments act shall be maintainable.

In Moodi Cements Vs Kuchil Kumar Nandi, AIR 1998 SC 1057 the hon’ble Supreme Court in a landmark judgment on the law relating to “Stoppage of payment under the Negotiable Instruments Act. 1881 has laid down that once a cheque is issued by drawer, a presumption under Section 139 of Negotiable Instruments Act, in favour of holder must follow and merely because the drawer issues notice to drawee or to Bank for stoppage of payment, it will not preclude action for dishonour of cheque under Section 138, Negotiable Instruments Act, by drawee or holder of cheque in due course.

It may be noted that whereas criminal action u/s 138 of Negotiable Instruments act could be set in motion upon dishonour of cheques and at the same time the civil rights to sue also arises in favour of the payee and as such both civil and criminal; case can go together.

 

Blank signed cheque in its effect

The cheques duly signed if handed over presumes liability. The defence that the cheques was handed over, but not for liability and the amount is allegedly filled in by the payee, shall not come to aid the prospective accused. If the signed cheque is handed over to the payee, the presumption shall be inbuilt. Similarly, the signature was different, though account had sufficient funds shall be no defence. Even closure of account shall not rescue the payer.   

SECTION 140-142 of Negotiable Instruments Act

Section 140 entails that when cheque is handed over to the payee, the payer cannot raise a plea that the drawer had no reason to believe that the cheque/s may be dishonoured on presentation.

Section 141 provides that in case the drawer of the cheque is a company, then by operation of law every person in charge of the company at the time of committing offence shall be responsible for the conduct of the business of the company, as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. It is a settled proposition of law that the company is a separate juristic entity and can sue or be sued through a natural person.  Only, if any person or in-charge is able to prove that the offence was committed without his knowledge and that he had exercised all due diligence to prevent the commission of offence, that he may have defence and that too while adducing evidence and not before.

The nominee Director of Government who is nominated as Director by virtue of his employment in Government, central or state or that of a Financial Corporation  shall not be liable.

The fall out of the section clearly relates to the fact that under section 141 (2) of the NI Act, all such persons, if it is proved that the offence is committed by the company with the consent or connivance or attributable to or any neglect on the part of any Director, Manager, Secretary or other officer shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. 

Section 142 of NI Act stipulates that the courts shall take cognizance of offence , only, if a complaint is made in writing made by payee, or as the case may be, holder in due course and such complaint is lodged within Thirty (30) days from the date of cause of action which arises u/s 138( c) of the proviso to NI Act and that only Metropolitan Magistrate or judicial Magistrate of First Class shall be competent to take cognizance on the complaint. 

**** As per Section 141(2) the complaint u/s 138 of NI Act shall be inquired and tried only by a court within whose local jurisdiction:

(a)  If  the cheque is delivered for collection through an account, the branch of the bank, where the payee or holder in due course, as the case may be maintains the account; is situated or

(b)   If the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.

**** Inserted by Negotiable Instruments ( Amendment ) Act 2015 w.e.f 15.06.2015. The amendment was necessary in view of Dasrath Singh Roop Singh Rathod judgment (Supra) of Supreme Court as nnarrated below.

The import of the above discussion is that if the proposed accused/payer is a company, then apart from arraying company as an accused, the Managing Director and full time Directors, Manager and Secretary or such other responsible persons, who may be in charge of every day affairs of the company and the offence is committed within their knowledge and in connivance may be arrayed as party. The statutory legal notice u/s 138 of NI act therefore should be sent to all in the above cont4ext and in the complaint filed, before the court of Metropolitan Magistrate or Judicial Magistrate, First Class, as the case may be all such persons should be arrayed as accused.  

SECTION 118 & 139 OF NEGOTIABLE INSTRUMENTS ACT

               PRESUMPTION OF LIABILITY

Section 5 of Negotiable Instruments act defines “Bill of Exchange” “as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument”

That section 118 & 139 of the N.I. Act has clearly spelt out a presumption as to the existence of a debt or liability in favour of the holder of a cheque. Presumption in favour of holder It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability. Similarly, Section 118 (a), N.I. Act provides as follows:

 

Presumptions as to Negotiable Instruments. — Until the contrary is proved, the following presumption shall be made:— (a) of consideration —that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration;

Yet again, section 139 contains the following:

“139: Presumption in fvaour of holder: It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part of any debt or liability”.

In the case of M.M.T.C. Ltd. & Anr. v Medchl Chemicals and Pharma (P) Ltd. & Anr. reported in (2002) 1 SCC 234, the Supreme Court has already held that there is no requirement under the law that the complainant must specifically allege in the complaint that there was a subsisting liability. The burden of proving that there was no existing debt or liability is on the accused and that may only be during trial. The presumption that the cheque or cheques were handed over for the legally recoverable debt is presumed in the initial stage.

STATUTARY LEGAL NOTICE OR DEMAND NOTICE

The statutary demand notice should be sent to the payer after dishonor of cheque and within 30 days of receipt of Bank Memo. The demand notice should contain the amount of bounced cheques only and clear demand of the “dishonoured cheque” or cheques amount should be made while specifying that should the payee fails to pay the amount within fifteen (15) days the payee shall be liable to be prosecuted under section 138 of Negotiable Instruments Act. The cause of action shall arise upon expiry of fifteen (15) days from the date of receipt of demand/statutary legal notice.  The cause of action arise at the stage of expiry of Fifteen(15)  days and even then if the payee fails to pay the amount as per the legal notice, the criminal complaint can be instituted against him within Thirty (30) days from the date of cause of action in the appropriate courts of jurisdiction i.e Courts of Metropolitan Magjstrate or Judicial Magistrate as the case may be i.e whether the case is filed in Metropolitan cities or other Cities or Towns. 

The legal notice should be sent in writing in the correct address of payee vide registered or speed post preferably, apart from any other mode. The notice if sent on correct address, there shall be sufficient presumption of deemed service of notice.

In a matter captioned as AMIT KUMAR MISHRA v/s THE STATE (GOVT OF NCT OF DELHI & ANR) bearing no. Crl M.C 1189/2018 decided on 30.01.2020, The hon’ble Delhi High Court had quashed criminal complaint against the accused under Section 138 of Negotiable Instruments Act, 1881 on founding that Legal Notice of demand was served beyond 30 days by the complainant. 

The aforesaid judgment was passed after taking note of pronouncement of hon’ble Supreme Court in matters captioned as Kamlesh Kumar Vs State of Bihar & Anr (2014) 2 SCC 424, and Dheeraj jain Vs State & Anr 2012 SCC OnLine Del 1687

                                     SERVICE OF NOTICE

The service of notice i.e statutary demand notice shall be presumed on the payer, if sent through post or such other means on correct address with due postage paid. In this context some of the precedents may also be noted, which is narrated as under: 

(i)     That it has been reaffirmed by the Hon’ble Supreme Court in the case of C.C. Alavi Haji Vs. Palapetty Muhammed & Anr. (2007) 6 SCC 555, wherein the Court opined that Section 27 of General Clauses Act, 1897 gives rise to a presumption that service of notice has been effected when it is sent to the correct address by registered post …….unless and until the contrary is proved by the addressee, serviced of notice is deemed to have been effected at the time at which the letter would have been delivered in the ordinary court of business.

 

(ii)   That In the case of Gujarat Electricity Board & Anr. v. Atmaram Sungomal Poshani AIR 1989 SC 1433,  the Supreme Court examined the issue regarding the presumption of service of letter sent by registered post under Section 27  of General Clauses Act, and held that there is a presumption of service of a letter sent under registered cover…. No doubt the presumption is rebuttable and it is open to the party concerned to place evidence before the court to rebut the presumption by showing that the address mentioned on the cover was incorrect or that the postal authorities never tendered the registered letter to him…..The burden to rebut the presumption lies on the party challenging the factum of service. 

(iii)   Similarly, in the case of Parimal v. Veena @Bharti, CIVIL APPEAL NO.1467 OF 2011 (Arising out of S.L.P.(C) NO. 19632 of 2007) the Supreme Court held that in view of Section 114 (f) read with Section 27 of General Clauses Act, here is a presumption that the addressee has received the letter sent by registered post. 

 

The provision of Section 101 of Evidence Act provide that the burden of proof of the facts rests on the party who substantially asserts it and not on the party who denies it. The law under Section 103 of the Act, further amplifies the general rule of Section 101 that the burden of proof lies on the person who asserts the affirmative of the facts in issue.

 

Liability of Directors/ managing Director

If accused is a company, then the Managing Director and whole time Director/s apart from the company is to be arrayed as a party as per the trap of section 141 of NI Act and averments has to be made in the complaint, as regards their roles in dishonor of cheque and details as to why are they liable.  Merely, because someone is a Director of accused company, on that premise alone complaint case against such Director is not likely to sustain. To make a Director liable his clear role in dishonor of cheque and pervasive involvement in day to day affairs in the accused company is to be clearly averred in the complaint. Unless, averments of his actually being involved in everyday affair is averred in the complaint such Directors cannot be prosecuted u/s 138 of NI Act.( Ref: SMS Pharmaceuticals Ltd Vs Neeta Bhalla & Anr 123 (2005)DLT 275 SC-Para 7 )

Jayalakshmi Nataraj v. Jeena & Co. (1996) 86 Comp Case 265

The Managing Director of a Company accused under Section 138 of NI Act was held guilty notwithstanding her plea that she did not participate in the day-to-day administration of the company and was not aware of it’s affairs.

Geekay Exim (India) Ltd. v. State of Gujarat (1998) 94 Comp Cas 516

Mens rea not open to presumption- event though mens rea is not an essential condition specified in Section 138, such element may be presumed to have existed only on the basis of facts and circumstances of each case.

On Territorial Jurisdiction & CAUSE OF ACTION

(i)          The hon’ble Supreme Court in K. Bhaskaran Vs Sankaran Vaidhyan Balan (1999) 7 SCC 510 had interpreted Section 138 of the NI Act to indicate that:

“the offence under Section 138 can be completed only with the concatenation of a number of acts. Following are the acts which are components of the said offence: (1) Drawing of the cheque, (2) Presentation of the cheque to the bank, (3) Returning the cheque unpaid by the drawee bank, (4) Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount, (5) Failure of the drawer to make payment within 15 days of the receipt of the notice.”

The provisions of Section 177 to 179 of the Code of Criminal Procedure, 1973 (for short, ‘CrPC’) have also been dealt with in detail. Furthermore, Bhaskaran in terms draws a distinction between ‘giving of notice’ and ‘receiving of notice’. This is for the reason that clause (b) of proviso to Section 138 of the NI Act postulates a demand being made by the payee or the holder in due course of the dishonoured cheque by giving a notice in writing to the drawer thereof. While doing so, the question of the receipt of the notice has also been cogitated upon

(ii)        Harman Electronics Pvt Ltd vs National Panasonic India Ltd 156(2009)DLT 160 SC-If only legal notice is issued from Delhi then Delhi court shall have no jurisdiction. To attract jurisdiction it has to be more than the act of sending legal notice from a particular place.

(iii)       That the complaint u/s 138 Negotiable Instruments Act are based on distinct cause of action and the complaint relates to offence. The cause of complaint should be bundle of cause of action and conjoint- the dishonor of cheque being the first part of it, receipt of bank memo with the intimation of reasons of dishonor of cheque is another, yet another is sending and serving legal notice to payer within 30 days of receiving cause of action and still thereafter if after expiry of Fifteen (15) days of receipt of demand notice the payment is not made, then cause of action arises and thereafter within 30 days of such cause of action the complaint could be instituted in a court of Metropolitan magistrate or Judicial Magistrate’s court, as the case may be.

 

(iv)    In the case of Dashrath Roopsingh Rathod Vs State of Maharashtra & Anr, reported   in   MANU   /SC/   0655/  2014 the Supreme Court had changed the basic criteria and had laid down that the complaint could only be instituted by a complainant in a place where bank of the accused is situated and where the accused in ordinary course had maintained his account. This was contrary to earlier provisions. However, the said judgment of Supreme Court did no remain in force for long and the Negotiable Instruments act was amended subsequently to restore the earlier position.

 

REMARK

The law relating to Negotiable Instruments Act, 1881, more particularly 138 of NI Act 1881 has evolved over the years, after its inclusion in the Act vide the amendment in 1988. The NI Act has periodically been amended in the face of several bumpy rides and the section has charted its course in the journey. The Dasrath Singh Roop Singh Rathod (Supra) judgment, at one stage, had changed the criteria completely and tremendous hardship was felt by the complainants all over the country. This was so, as it was held by hon’ble Supreme Court in the said judgment that the complaint could only be lodged against the accused (payer) , in a place, where the accused (payee) in ordinary course maintained his bank account. The judgment had caused chaos in as much as Crores of cases, even ongoing cases were transferred to the location of accused, rendering prosecution of complainants extremely difficult. In a country as vast as India, thus, many complaints could not be prosecuted, due to a virtual roadblock caused due to distance. This, in a sense, turned out to according premium, to the delinquent. The very concept of cause of action was relegated and new vista was charted as per that judgment. What was also unfathomable, as to, in a fast moving world, where the sums under the cheques are paid at par all over the country and even otherwise, electronic mode of payment and transactions are culminated by click of mouse or touch of finger, then, why the hon’ble Supreme Court had accorded so much sanctity to the location of banker of the accused (payee) and had stipulated that compliant could be filed in the location of accused only. Earlier, the cause of action was to arise at the location of complainant upon the stage of dishonor of cheque itself. The communication of dishonor that the complainant was of paramount importance and that only culminated of cause of action. However, it was undone, as stated. In the face of the imbroglio and perennial hardship caused to the complainants, the section 142 of Negotiable Instruments Act was amended by virtue of Negotiable Instruments (Amendment) Act 2015 The situation as existed, i.e before the recitation of Dasrath Singh Roop Singh (Supra) judgment is thus restored, to the solace of many.

The provision of section 138 also have undergone periodical changes and as per the recent amendment in the Act in the year 2018, section 143 A was inserted enjoining the accused upon causing appearance in court to pay in the court 20% of the amount of cheque as interim payment, subject to outcome of the complaint. However, the provision in practice could hardly be invoked, in view of judgments to the contrary by courts of law. However, upon conviction of accused, if any, appeal is preferred, then 20% of the awarded amount is liable to be paid in court as interim payment, over and above of payment, if any made u/s 143 A of the Act, subject to the outcome of appeal. The said provision is included as section 148 of NI Act, vide Amendment act 2018. The law as regards bouncing of cheques, has evolved in last several decades and roadblocks if and when felt, are sought to be negated, periodically. The changes are the dynamic process and therefore, no changes could be perceived as final. It could be said that Section 138 of the Act has all the trap of civil proceeding, still, elements of criminal proceedings are conspicuous as well. The provision was incorporated with a view to infuse confidence in transaction by way of cheque and hence the element of criminality was crafted into it, to achieve the object and to dissuade the truant drawer from causing manipulation or mischief.

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INSOLVENCY PROCEEDINGS AGAINST PERSONAL GUARANTORS: IBC 2016 NOTIFICATION GETS PASS MUSTER

 

Insolvency PROCEEDINGS AGAINST personal guarantors: IBC 2016 NOTIFICATION getS pass muster

                                              ANIL K KHAWARE

                                              ADVOCATE

In a recent judgment pronounced on 21^st May 2021 captioned as LALIT KUMAR JAIN Vs UNION OF INDIA & ORS bearing Transferred Case (Civil) No. 245/2020 whereby batch of writ petitions pending before different high courts, challenging the provisions of Insolvency & Bankruptcy Code 2016 (In short “IBC” or “Code”) with regard to personal insolvency was transferred to itself on October, 2020. The petitions under Article 32 of Constitution of India in this regard filed before the hon’ble Supreme Court along with writ petitions transferred to itself by the hon’ble Supreme Court under article 139-A of Constitution of India, were also clubbed together and the present judgment is rendered. The judgment is path breaking as the vista of Promoters/ Guarantors, who have executed personal guarantee, to the loan is determined in the light of provisions of IBC 2016, and subsequent notification dated 15.11.2019, the details whereof shall be dealt with, little later.  Suffice to say, here, that by virtue of the said notification, the banks and Financial Institutions (FIs) are now enabled to invoke Personal Guarantee of “Corporate Debtors” even if Corporate Insolvency Resolution Process (CIRP) is still in progress. Needless to say the judgment shall have far reaching consequences and it is also causing consternation amongst some promoters.

We know that Insolvency and Bankruptcy Code, 2016, that allowed the banks or FIs to move an application for initiation of insolvency against personal guarantors to corporate debtors. New provisions was introduced in IBC 2016, in 2019 enabling the bank to hold  the promoters of the defaulter companies who had furnished personal guarantees for the loans taken by their entities, liable. The cases are now, therefore, being filed against the top business tycoons under the Code. This has resulted in challenging the vires of the law in Code and its notification as elucidated above, claiming that the promoters alone should not be held liable for the default on debt repayment. However, by virtue of this judgment of hon’ble Supreme Court, the creditors’ right is strengthened and they are enabled now to initiate concurrent insolvency proceedings against the “corporate debtor” and “personal guarantors”. The personal guarantors’ who are invariably promoters shall be liable now personally for their flawed decisions. The traditional route was relatively tardy and personal guarantors were virtually insulated in the first instance, now, no longer.  

What is significant is that the Supreme Court has reaffirmed the legal position that once a resolution plan approved by the Committee of Creditors( In short “CoC) , takes effect, it is binding on the Guarantor and for this reason a Guarantor cannot escape its payment obligations as per the resolution plan. The stumbling block was that as per the law laid down earlier, the successful resolution applicant was to take over the “Corporate Debtor” on a clean slate and could not have been burdened with undecided claims after the resolution plans took effect. This meant that virtually subrogation rights of the Guarantors was foreclosed. The Supreme has now held that Sections 95, 96, 99, 100, 101 of the IBC are valid and shall apply to personal guarantors of “corporate debtors”. This judgment as remitted now, shall aid the creditor and shall prove to be Achilles heel  for the promoters.

It may be apt to reproduce some of the notifications relating to IBC 2016, including, the one, under scrutiny of hon’ble Supreme Court, as also that of and subsequent decisions. The bare glimpse of the notifications in the Code is narrated as under:

S.N	Date	S.O	Provisions brought into force in IBC 2016
1.	05.08.2016	S.O. 2618(E)	Sections 188 to 194
2.	19.08.2016	S.O.2746(E)	clauses (1), (5), (22), (26), (28) and (37) of Section 3, Section 221   222, 225, 226, 230, 232and 233, sub-section (1) and clause (zd) of sub-section (2) of section 239, subsection (1) and clause (zt) of sub-section (2) of section 240, sections 241 and 242
3.	01.11.2016	S.O.3355(E)	Clause (2) to clause(4), clause (6) to clause (21), clause (23) to clause (25), clause (27)clause (29) to clause (36) of section 3, sections 196, 197 and 223, clause(ze) to clause (zh),clause (zl) to clause (zm) of sub-section (2) of section 239, clause (a) to clause (zm),clause (zu) to clause (zzzc) of sub-section (2) of section240, section 244, section 246 to section 248 (both inclusive), sections 250 and 252
4.	15.11.2016	S.O. 3453(E)	Section 199 to section 207 (both inclusive), clause (c)and
5.	01.12.2016	S.O. 3594(E)	Clause (a) to clause (d) of section 2 (except with regard to voluntary liquidation or Bankruptcy section 4 to section 32 (both inclusive), section 60 to section 77(both inclusive), section 198,section 231, section 236 to section 238 (both inclusive) and clause (a) to clause (f)of subsection (2)of section 239
6.	09.12.2016	S.O. 3687(E)	Section 33 to section 54 (both inclusive)
7.	01.04.2017	S.O. 1005 (E) dated  30.03.2017	Section 59; section 209 to 215 (both inclusive); subsection (1) of section 216; and section 234and section 235
8.	01.04.2017	S.O. dated 15.05.2017 S.O. 1570 (E)	Clause (a) to clause (d) of section 2 relating to voluntary liquidation or bankruptcy
9.	14.06.2017	S.O. 1910(E)	Section 55 to section 58 (both inclusive)
10.	01.05.2018	S.O. 1817(E)	Section 227 to section 229 (both inclusive)
11.	15.11.2019	S.O. 4126 (E) S.O. dated 15.11.2019 (impugned notification) Came into force on 01.12.2019	Section 2 (e); section 78 (except with regard to fresh start process) and section 79; Sections 94 to 187 [both inclusive]; Section 239 (2) (g) to (i) ;239 (2) (m) to (zc);Section 240 (2) (zn) to (zs); and section 249 only in so far as they relate to personal guarantors to corporate debtors

 

There are other notifications/ amendments in IBC 2016, including, as recent as, in April 2021, however, the same is not being referred to, for, the discussion herein, shall not relate to such subsequent amendments or notifications and only the amendment/notification in S.N 11 shall be relevant for the purpose of present discussion.

GROUNDS OF CHALLENGE TO NOTIFICATION DATED 15.11.2019

(i)              The common question which arises in all these cases before hon’ble Supreme Court is the concern about vires and validity of notification dated 15.11.2019 issued by the Central Government. After publication of the impugned notification, many Guarantors (promoters) were served with demand notices proposing to initiate insolvency proceedings under the Code. These demand notices were based on various counts, including that recovery proceedings were initiated after invocation of the guarantees. This led to initiation of insolvency resolution process under Part-III of the Code against some of the Guarantors (petitioners)/promoters. The main thrust of the argument on behalf of the Personal Guarantors, related against the impugned notification, being allegedly an exercise of excessive delegation, in as much as, it was contended that the Central Government had no authority – legislative or statutory – to impose conditions on the enforcement of the Code. As a corollary, it is also contended that the enforcement of Sections 78, 79, 94-187 etc. in terms of the impugned notification of the Code only in relation to personal guarantor is ultra vires the powers available to the Central Government. It was contended that the notification is ultra vires, the proviso to Section 1(3) of the Code itself.

(ii)            The 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, which is wholly impermissible in law and amounts to an unconstitutional usurpation of legislative power by the executive.

(iii)       The 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 claimed that Section 2(e) of the Code, as amended by Act 8 of 2018, came into force with retrospective effect from 23.11.2017.

(iv)       The Supreme Court has noted in the case of State Bank of India v. V. Ramakrishnan 2018 (17)SCC 394  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."

It was urged, thus, that the impugned notification is liable to be set aside.

(v)             Once, the Central Government failed to bring into effect Section 243 of the Code, which would have repealed the Presidency Towns Insolvency Act, 1909 (“PTI Act” hereafter) and the Provincial Insolvency Act, 1920 (“PIA” hereafter). Prior to issuance of the impugned notification, insolvency proceedings against an individual could be initiated only in terms of the said two Acts. After enactment of the Code, insolvency proceedings against personal guarantors to corporate debtors would lie before the Adjudicating Authority, in terms of Section 60 of the Code, although they would be governed by the said two Acts.

With the enforcement of the impugned provisions, rules and regulations, insolvency proceedings can now be initiated against “personal guarantors to corporate debtors” under Part III of the Code, and also under the PTI Act and the PIA. Since, Section 243 of the Code has not been brought into force, hence, the impugned notification has the illogical effect of creating two self-contradictory legal regimes for insolvency proceedings against personal guarantors to corporate debtors.

(vi)       In Swiss Ribbons (P.) Ltd. v. Union of India, hon’ble Supreme Court has upheld the difference in procedure for operational creditors and financial creditors on the basis that there are fundamental differences in the nature of loan agreements with financial creditors, from contracts with operational creditors for supplying goods and services. Financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business. The “Financial Creditors” generally involve large sums of money and the act of clubbing financial creditors and operational creditors in relation to the procedure for insolvency resolution of personal guarantors to corporate debtors amounts to, treating unequals, equally and is akin to collapsing the classification that is carefully created by Parliament in Part II of the Code.

The application of Sections 96 and 101 of the Code by the impugned notification results in the illogical consequence of staying insolvency proceedings against the corporate debtor, when insolvency proceedings are initiated against the personal guarantor. A combined reading of Sections5 99 and 100 of the Code shows that the resolution professional, while recommending the approval/rejection of the application, and the Adjudicating Authority while accepting it, do not have to consider whether the underlying debt owed by the corporate debtor to the creditor stands discharged or extinguished.

(vii)     The liability of a guarantor is co-extensive with that of the principal debtor (Section 128 of Indian Contract Act, 1872). It is settled law that upon conclusion of insolvency proceedings against a principal debtor, the same amounts to extinction of all claims against the principal debtor, except to the extent admitted in the insolvency resolution process itself. This is clear from Section 31 of the Code, which makes the resolution plan approved by the Adjudicating Authority binding on the corporate debtor, its creditors and guarantors.

(viii)    The impugned notification allows creditors to unjustly enrich themselves by claiming in the insolvency process of the Guarantor without accounting for the amount realized by them in the corporate insolvency resolution process of the “corporate debtor” under Part II of the Code. It is therefore, untenable.

(ix)       The impugned notification has resulted in clothing authorities, the Committee of Creditors (CoC) and Resolution Professionals (RPs) with powers beyond the enacted statute. They have defined the term "Guarantor" as a debtor, who is a personal guarantor to a “corporate debtor” and in respect of whom guarantee has been invoked by the creditor and remains unpaid in full or part. The parent statute does not define "Guarantor". It is pointed out that though Section 239(1) of the Code empowers the Insolvency Board to make rules to carry out the provisions of the Code, those rules cannot define a term that is not defined in the Code, as it is likely to result in class legislation for one category of Guarantors, i.e., personal guarantors to corporate debtors. The impugned notification is, therefore, ultra vires the Code.

(x)             That Part III of the Code does not create any distinction between an individual and a personal guarantor to a corporate debtor. Part III provides for "Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms", and thereafter refers to these two categories of persons simply as debtors. The impugned notification in substance modifies the text of the actual sections of Part III, despite the absence of any element of legislation/legislative authority having been conferred upon the Central Government. The words "only in so far as they relate to personal guarantors to corporate debtors” forming a part of the impugned notification are attempted to be added like a rider to each of the sections mentioned in the impugned notification, clearly rendering such an exercise completely outside the scope and powers conferred under Section 1(3) of the Code.

(xi)       Part III of the Code relating to individuals and partnership firms are outlined in various sections of the Act. Of these chapters, I, III to VII, all of which have been notified are operative components of the Code, relatable to individuals and partnership firms. They can certainly be brought into force independently, whenever the executive is of the opinion that it is appropriate to do so. However, Section 2 cannot be used for this purpose, certainly not for bifurcating individuals and partnership firms into subcategories and then to apply Part II provisions exclusively to personal guarantors. In terms of the judgment of the National Company Law Appellate Tribunal (NCLAT) in Dr. Vishnu Kumar Agarwal v. Piramal Enterprises Ltd, it was held that "for the same set of debts, claim cannot be filed by same financial creditor in two separate corporate insolvency resolution processes."

The reliance in the above reference by the promoters/purported guarantors are as under:

S.N	Particulars	Citation
1.	State Bank of India Vs Ramkrishnan	2018(17)SCC 394
2.	Swiss Ribbons (P) Ltd Vs Union of India	(2019) 4 SCC 17
3.	Vasu Dev Singh & Ors Vs Union of India & Ors	8(2006) 12 SCC 753
4.	Babulal Vardharji Gurjar v. Veer Gurjar Aluminum Industries Pvt. Ltd. & Anr	2020 (15)SCC1
5.	Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta	172019 SCC Online SC 1478
6.	Dr. Vishnu Kumar Agarwal v. Piramal Enterprises Ltd	2019 SCC Online NVCLAT 542

 

 

REBUTTAL from UNION OF INDIA (UOI),BANK & FIs 

 

(i)          The Code was amended in 2018. The pre-amended definition in Section 2(e) by introducing three different classes of debtors, which were personal guarantors to corporate debtors [Section 2(e)], partnership firms and proprietorship firms [Section 2 (f)] and individuals [Section 2(g)]. The purpose of splitting the provision and defining three separate categories of debtors was to cover three separate sets of entities. Personal guarantors [under Section 2(e)], has to be dealt differently from partnership firms and proprietorship firms [under section 2(f),] and individuals other than persons referred to in Section 2 (e) [under Section 2(g)]. The intention was to clearly distinguish personal guarantors to corporate debtors from other individuals. This was, because, Section 60 of the Code which deals with the Adjudicating Authority for corporate debtors too was partially amended in 2018. The amendment to Section 60(2) added that it applied to insolvency proceedings or liquidation/bankruptcy of a corporate guarantor or personal guarantor as the case may be, to a corporate debtor. The result of the amendment is that when a corporate debtor faces insolvency proceedings, insolvency of its corporate guarantor too can be triggered. Likewise, a personal guarantor to a corporate debtor, facing insolvency, can be subjected to insolvency proceedings. All this is to be resolved and decided by the National Company Law Tribunal (NCLT). In other words, the amendment by Section 60(2) too achieved 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.

(ii)        If insolvency resolution proceedings against corporate debtors were continued without this amendment, and without the unification, (of the adjudicatory body) on the default of the corporate debtor, to a debt owed to a financial creditor, the entire machinery of the Code relating to the corporate debtor would work itself out, to the exclusion of personal guarantors. This has presented a peculiar problem, in that, the resolution applicant, wishing to bid for takeover of the corporate debtor and operate it as a running concern would be faced with a huge liability, and the personal guarantor in most cases would be one of the individuals, primarily responsible for the insolvency of the company, but would be out of the resolution process and have to be separately proceeded with. What therefore, has been effectuated by creating an independent provision, by separating personal guarantors of corporate debtors and by the same amendment, placing the personal guarantor's debt before one tribunal/forum namely the NCLT, is that such a forum would apply the procedure in Part III, in regard to personal guarantors for providing repayment of the entire debt for which the guarantee is furnished in the first place. If that debt is not repaid in the Part III, the personal guarantor would not stand discharged, but on the other hand, would himself be forced into bankruptcy proceedings.

(iii)       The amendment, and the impugned notification would ensure a more optimal resolution process, as resolution applicants wishing to take over the management of corporate debtors, would ultimately find the process of taking over more attractive; besides, there will be more competition in regard to the bids proposed, and the total debt servicing of the corporate debtor might be lowered, if the personal guarantor’s assets are also taken into account to mitigate the corporate debtor’s liabilities. The personal guarantor in such cases, who provides assets which have been charged against the amount advanced to his company would most probably, not permit himself to be driven to bankruptcy, and would therefore, be more likely to arrange for payment of sums due from him to obtain a discharge by payment of the amount outstanding to the bank or other Financial Creditor. In some cases, the creditor bank may be even prepared to forego the interest amounts so as to enable an equitable settlement of the corporate debt, as well as that of the personal guarantor. This would result in maximizing the value of assets and promoting entrepreneurship, which is one of the main purposes of the Code.

(iv)       Section 1(3) of the Code confers wide powers enabling the Central Government to operationalize the Code in a subject-wise and (not necessarily in a contiguous manner) – particular sections, provisions or parts.

(v)         The report of the Bankruptcy Law Reforms Committee (“BLRC”) tasked with introducing a comprehensive framework for insolvency in bankruptcy has recognized that personal guarantors were a category of entities to whom individual insolvency proceedings applied, and acknowledged the link between them and corporate debtors and found that under a common Code, there could be synchronous resolution.

(vi)       Before the 2018 amendment, Section 2(e) was generic and that the amendment classified three distinct types of entities. The personal guarantors to corporate debtors are no doubt individuals like others, but are in fact at the centre of insolvency of a corporate debtor. A predominant reason for the insolvency of corporate debtors invariably is the role played by its directors, etc., who are personal guarantors and are or were, mostly at the helm of affairs of the corporate debtor itself.

(vii)     The impugned notification does not modify any provisions of the Code. By enforcing certain provisions of the Code by its seven clauses" only in so far as they relate to personal guarantors to corporate debtors", the notification does not modify any legislative provision. It merely carries out the Parliamentary intention as expressed by the scheme, structure and purpose of the Code. Section 1(3), Section 2, Section 3(23), Section 5(5)(a) and (22), Section 14(3), Section 31(1)and in particular, Section 60 and Section 179 are indicative of the fact that the scheme and structure of the Code involves a parliamentary hybridization and legislative fusion of the provisions of Part III, in so far as personal guarantors of corporate debtors are concerned. The object of this hybridization is to empower the NCLT to deal with the insolvency resolution and bankruptcy process of the corporate debtor along with the corporate guarantor and personal guarantor of the corporate debtor.

(viii)    Section  60(1), (2), (3) and (4) and urged that Parliament had merged the provisions of Part III with the process undertaken against the corporate debtors under Part II. The process of Part II and the provisions of Part III were legislatively fused for the purpose of proceedings against personal guarantors along with the corporate debtors. Moreover, Section 179, the corresponding provision in Part III, begins by deploying the phrase "subject to the provisions of Section 60". Section 60(4) incorporates the provisions of Part III, in relation to proceedings before the NCLT against personal guarantors. The other individuals and partnership firms do not figure in this Parliamentary hybridization/fusion. Sections 2(e) and 2(g), if read together, would indicate that personal guarantors are also individuals. The amendment of 2018 has brought about a trifurcation of the categories which were comprehended in Section 2(e) as it stood before the amendment. Section 179 also indicates that personal guarantors are individuals and Part III is applicable to them. In fact, it is by operation of the provisions in Chapter III of Part III that personal guarantors get the benefit of interim moratorium [Section 96] and moratorium [Section 101]. Personal guarantors do not get moratorium under Section 14. In this regard, reliance is placed on V.Ramakrishnan (supra). It is contended that the hybridization achieved by the impugned notification does not create any anomaly or problem in enforcement.

(ix)       Quite akin to the impugned notification, another notification dated 01-05-2018 was issued to bring into effect provisions of the Code in relation to a distinct class, i.e., “financial service providers”. This was achieved by bringing into force Sections 227 to 229 of the Code. The discretion conferred on the executive, to experiment, and bring into force a legislation in phases, is part of the general pattern of legislative practice and it recognizes that it is not always wise or possible to enforce provisions of a new law, together, at all places, in respect of all that it seeks to cover. The present notification, therefore cannot be faulted with.

 

Reliance in support of notification:

 

S.N	PARTICULARS	REMARK
1.	Lalit Narayan Mishra Institute of Economic Development v. State Of Bihar & Ors. Etc 1988 (2) SCC 433	the Central Government, therefore, acted within its rights to confine the enforcement of the provisions of the Code to a class of individuals, i.e., to personal guarantors, without altering the identity and structure of the Code. It was submitted that this is permissible as it is within the larger power of enforcement of the statute, which encompasses the discretion to enforce the law in respect of a definite category, provided that such an act of enforcement would not alter the character of the Code.
2.	Javed & Ors v. State of Haryana &Ors 2003 (8) SCC 369	-do-
3.	J. Mitra and Co. Pvt. Ltd. v. Assistant Controller of Patents 2008 (10) SCC 368	The report of the Working Group of Individual Insolvency (Regarding Strategy and Approach for Implementation of the Provisions of the Insolvency and Bankruptcy Code, 2016) to deal with insolvency of guarantors to corporate debtors and individuals having business, which had highlighted that in the absence of notification of provisions of the Code dealing with insolvency and bankruptcy of personal guarantors to corporate debtors and creditors are unable to effectuate the provisions of the Code and access remedies available under the Code.
	Industrial Investment Bank of India v. Biswanath Jhunjhunwala 2009 (9) SCC 478	A surety cannot alter or defer such a right of the creditor. 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.
4.	State Bank of India v. Index port Registered  AIR 1992 SC 1740	-Do-
6.	Bank of Bihar Ltd. v. Dr. Damodar Prasad & Anr2	Creditor also has the liberty to proceed against the principal borrower and all sureties simultaneously
7.	Maharashtra State Electricity Board Bombay v. Official Liquidator, High Court, Ernakulum & Anr. Ernakulam [(1982) 3 SCC 358 : AIR 1982 SC 1497]	Neither the guarantor's obligations are absolved nor discharged in terms of Sections 133 to 136 of the Indian Contract Act, 1872, on account of release/discharge/ composition or variance of contract which a principal borrower may secure by way of operation of law for instance as under the Code. The rights of a creditor against a guarantor continue even in the event of bankruptcy or liquidation
8.	State of West Bengal v. Union of India	A schematic, structural and purposive construction of Section 1(3) of the Code needs to be adopted to determine the scope of the power conferred on the Central Government by Section 1(3) of the Code. The Petitioners apply the rule of literal construction and seek to construe Section 1(3) in isolation, without reference to the context, scheme or purpose of the Code. It is submitted that the ambit of Section 1(3) should not be determined by merely applying the doctrine of literal construction. All provisions of the Code, including the enforcement provision should be construed in the context of the entire enactment and the approach should be schematic, structural and purposive. Furthermore, Section 1(3) should not be construed in isolation. It is well settled that a statute has to be read as a whole. The scope of the power under Section 1(3) of the Code cannot be expounded without taking note of the scheme of the Code and the other related provisions. Counsel relied on the following observations of this court in State of West Bengal v. Union of India “In considering the true meaning of words or expression used by the legislature the court must have regard to the aim, object and scope of the statute to be read in its entirety. The court must ascertain the intention of the legislature by directing its attention not merely to the clauses to be construed but to the entire Statute; it must compare the clause with the other parts of the law, and the setting in which the clause to be interpreted occurs."
9.	Rajendra K Bhatia Vs maharashtra Housing & Area Development Authority 2020 (13)SCC 208	it is held that when Section 60(2) alludes to insolvency resolution or bankruptcy, or liquidation of three categories, i.e. corporate debtors, corporate guarantors (to corporate debtors) and personal guarantors (to corporate debtors) they apply distributively, i.e. that insolvency resolution, or liquidation processes apply to corporate debtors and their corporate guarantors, whereas insolvency resolution and bankruptcy processes apply to personal guarantors, (to corporate debtors) who cannot be subjected to liquidation.
10.	Kaupthing Singer & Frielander Ltd ( In administration) UK Supreme Court 2012 (1)ALL ER 883	The ratio discussed below

 

FINDINGS OF SUPREME COURT

After having considered the rival contentions, the finding of the hobn’ble Supreme Court are as under:

 

(i)   The theme of gradual implementation of law or legal principles, was spoken about in Javed v. State of Haryana by the Supreme Court, which held that there is no constitutional imperative that a law or policy should be implemented, all, at once:

“      A uniform policy may be devised by the Centre or by a State However, there is no constitutional requirement that any such policy must be implemented at one go. Policies are capable of being implemented in a phased manner. More so, when the policies have far-reaching implications and are dynamic in nature, their implementation in a phased manner is welcome for it receives gradual willing acceptance and invites lesser resistance.”

Similar observations were made in Pannalal Bansilal Pitti v. State of A.P 1996) 2 SCC 498. where the court held that imposition of a uniform law, in some areas, or subjects may be counterproductive and contrary to public purpose.

State of Tamil Nadu v. K. Sabanayagam 7(1998) 1 SCC 318 too emphasized discretion to extend an enactment, having regard to the time, area of operation, and its applicability when it was emphasized that such power is “limited and almost ministerial function as an agent of the principal Legislature applying the Act to the area at an appropriate time”

(ii)            The hon’ble Supreme Court has also aptly relied upon In Kaupthing Singer and Friedlander Ltd. (supra) the UK Supreme Court reviewed a large number of previous authorities on the concept of double proof, i.e. recovery from guarantors in the context of insolvency proceedings. The court held that:

"The function of the rule is not to prevent a double proof of the same debt against two separate estates (that is what insolvency practitioners call "double dip”). The rule prevents a double proof of what is in substance the same debt being made against the same estate, leading to the payment of a double dividend out of one estate. It is for that reason sometimes called the rule against double dividend. In the simplest case of suretyship (where the surety has neither given nor been provided with security, and has an unlimited liability) there is a triangle of rights and liabilities between the principal debtor (PD), the surety (S) and the creditor (C). PD has the primary obligation to C and a secondary obligation to indemnify S if and so far as S discharges PD's liability, but if PD is insolvent S may not enforce that right in competition with C. S has an obligation to C to answer for PD's liability, and the secondary right of obtaining an indemnity from PD. C can (after due notice) proceed against either or both of PD and S. If both PD and S are in insolvent liquidation, C can prove against each for 100p in the pound but may not recover more than 100p in the pound in all.”

 

(iii)       Approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. 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. It is thus held that the impugned notification is legal and valid and that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors).

REMARK

The judgment recited by the hon’ble Supreme Court has therefore opened a new vista i.e while validating the impugned notification and amendment brought in the Code, in December 2019, including in the trap of IBC 2016, “Personal Guarantors to the Corporate Debtor” fully and completely. The initiation of corporate resolution process shall have no bar and creditors can sue the personal guarantors in separate proceedings before the NCLT as well. The primary intention being recovery of debt and the fact that the personal guarantor of corporato debtor while executing the personal guarantee having undertaken to pay debt cannot be overlooked. The Personal Guarantor to the Corporate Debtors” therefore cannot seek insulation from it, by raising a claim that they do not have any personal liability, in the face of ongoing corporate resolution process. The bank or FIs cannot ignore the personal guarantee as in that case these guarantee may be a dead letter and therefore the notification in question is declared as valid by hon’ble Supreme Court after navigating into vistas of law and precedecne in this regard. Given the magnitude of the judgment and its implication, it is quite likely, though, that efforts on the part of promoters/ guarantors to the corporate debtor may further be underway. The notification dated 15.11.2019 in IBC 2016 has stood the test of law and the Supreme Court pass muster. At the moment, thus, die is cast.

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