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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