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Approval of a resolution plan of corporate debtor does not operate so as to discharge the liabilities of personal guarantors: Supreme Court

The SC on May 21, 2021 {LALIT KUMAR JAIN vs. UNION OF INDIA & ORS.} held that the theme of gradual implementation of law or legal principles is that there is no constitutional imperative that a law or policy should be implemented all at once.

It was also held by the Bench, comprising of Justice S. RAVINDRA BHAT and Justice L. NAGESWARA RAO, that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor’s liability. It was held that as to the nature and extent of the liability, much would depend on the terms of the guarantee itself. It was held that the court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability.

The SC further held that the impugned notification is not an instance of legislative exercise, or amounting to impermissible and selective application of provisions of the Code. It was held that there is no compulsion in the Code that it should, at the same time, be made applicable to all individuals, (including personal guarantors) or not at all. It was held that there is sufficient indication in the Code- by Section 2(e), Section 5(22), Section 60 and Section 179 indicating that personal guarantors, though forming part of the larger grouping of individuals, were to be, in view of their intrinsic connection with corporate debtors, dealt with differently, through the same adjudicatory process and by the same forum (though not insolvency provisions) as such corporate debtors. It was held that the notifications under Section 1(3), (issued before the impugned notification was issued) disclose that the Code was brought into force in stages, regard being had to the categories of persons to whom its provisions were to be applied. It was held that the impugned notification, similarly inter alia makes the provisions of the Code applicable in respect of personal guarantors to corporate debtors, as another such category of persons to whom the Code has been extended. It was held that the impugned notification was issued within the power granted by Parliament, and in valid exercise of it. It was held that the exercise of power in issuing the impugned notification under Section 1(3) is therefore, not ultra vires; the notification is valid.

It was also held that the argument that the insolvency processes, application of moratorium and other provisions are incongruous, and so on, in the opinion of the court, are insubstantial. It was held that the insolvency process in relation to corporate persons (a compendious term covering all juristic entities which have been described in Sections 2 [a] to [d] of the Code) is entirely different from those relating to individuals; the former is covered in the provisions of Part II and the latter, by Part III. Section 179, which defines what the Adjudicating authority is for individuals is “subject to” Section 60. It was held that Section 60(2) is without prejudice to Section 60(1) and notwithstanding anything to the contrary contained in the Code, thus giving overriding effect to Section 60(2) as far as it provides that the application relating to insolvency resolution, liquidation or bankruptcy of personal guarantors of such corporate debtors shall be filed before the NCLT where proceedings relating to corporate debtors are pending. 

The petitioners contended before the SC in present Writ Petition under Art. 32 of the Constitution of India that the power conferred upon the Union under Section 1(3) of the Insolvency and Bankruptcy Code, 2016 (herein referred to as “the Code”) could not have been resorted to in the manner as to extend the provisions of the Code only as far as they relate to personal guarantors of corporate debtors. The impugned notification which was challenged before the SC in present case brought into force Section 2(e), Section 78 (except with regard to fresh start process), Sections 79, 94-187 (both inclusive); Section 239(2)(g), (h) & (i); Section 239(2)(m) to (zc); Section 239 (2)(zn) to (zs) and Section 249 of the Code. 

It was held by the SC that the fact that the process of insolvency in Part III is to be applied to individuals, whereas the process in relation to corporate debtors, set out in Part II is to be applied to such corporate persons, does not lead to incongruity.  It was held on the other hand there appear to be sound reasons why the forum for adjudicating insolvency processes – the provisions of which are disparate- is to be common, i.e through the NCLT. It was held that the NCLT would be able to consider the whole picture, as it were, about the nature of the assets available, either during the corporate debtor’s insolvency process, or even later; this would facilitate the CoC in framing realistic plans, keeping in mind the prospect of realizing some part of the creditors’ dues from personal guarantors.

It was concluded by the SC that the impugned notification is legal and valid. It was also held 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).

The writ petitions, transferred cases and transfer petitions were accordingly dismissed by the SC.

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