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2021 (5) TMI 743 - SC - Insolvency and BankruptcyInsolvency proceedings against the Personal Guarantors - Vires and validity of a notification dated 15.11.2019 issued by the Central Government - petitioners contend that the power conferred upon the Union under Section 1(3) of the Insolvency and Bankruptcy Code, 2016 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 - HELD THAT - The notification of 30.11.2016 brought into force certain provisions that hadthe effect of operationalizing the enactment in respect of four distinct categories, i.e. companies incorporated under the Companies Act, companies governed by special Act, LLPs and other bodies incorporated under any law which the Central Government could by notification specify. These provisions triggered the application of the Code to corporate debtors as well as LLPs and other companies and corporations - It is quite evident that the method adopted by the Central Government to bring into force different provisions of the Act had a specific design to fulfill the objectives underlying the Code, having regard to its priorities. Plainly, the Central Government was concerned with triggering the insolvency mechanism processes in relation to corporate persons at the earliest. Therefore, by the first three notifications, the necessary mechanism such as setting up of the regulatory body, provisions relating to its functions, powers and the operationalization of provisions relating to insolvency professionals and agencies were brought into force. These started the mechanism through which insolvency processes were to be carried out and regulated by law. The Adjudicating Authority for personal guarantors will be the NCLT, if a parallel resolution process or liquidation process is pending in respect of a corporate debtor for whom the guarantee is given. The same logic prevails, under Section 60(3), when any insolvency or bankruptcy proceeding pending against the personal guarantor in a court or tribunal and a resolution process or liquidation is initiated against the corporate debtor. Thus if A, an individual is the subject of a resolution process before the DRT and he has furnished a personal guarantee for a debt owed by a company B, in the event a resolution process is initiated against B in an NCLT, the provision results in transferring the proceedings going on against A in the DRT to NCLT. It is clear that Parliamentary intent was to treat personal guarantors differently from other categories of individuals. The intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as the possibility of two separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals, for whom the Adjudicating authority was common with the corporate debtor to whom they had stood guarantee. 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. The impugned notification is not an instance of legislative exercise, or amounting to impermissible and selective application of provisions of the Code. 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. 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 is held that the impugned notification was issued within the power granted by Parliament, and in valid exercise of it. The exercise of power in issuing the impugned notification under Section 1(3) is therefore, not ultra vires; the notification is valid. The other question which parties had urged before this court was that the impugned notification, by applying the Code to personal guarantors only, takes away the protection afforded by law; reference was made to Sections 128, 133 and 140 of the Contract Act; the petitioners submitted that once a resolution plan is accepted, the corporate debtor is discharged of liability - The rationale for allowing directors to participate in meetings of the CoC is that the directors liability as personal guarantors persists against the creditors and an approved resolution plan can only lead to a revision of amount or exposure for the entire amount. Any recourse under Section 133 of the Contract Act to discharge the liability of the surety on account of variance in terms of the contract, without her or his consent, stands negated. 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. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. However, this 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. Thus, it is held that 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. As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract - the impugned notification is legal and valid. It is 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 are accordingly dismissed.
Issues Involved:
1. Validity of the notification dated 15.11.2019. 2. Authority of the Central Government under Section 1(3) of the Insolvency and Bankruptcy Code, 2016. 3. Impact of the notification on personal guarantors to corporate debtors. 4. Interpretation of various sections of the Insolvency and Bankruptcy Code, 2016. 5. Rights and liabilities of personal guarantors under the Indian Contract Act, 1872. Detailed Analysis: 1. Validity of the Notification Dated 15.11.2019: The common question in all these cases concerns the vires and validity of a notification dated 15.11.2019 issued by the Central Government. The petitioners challenged the notification as having been issued in excess of the authority conferred upon the Union of India. They contended that the power conferred under Section 1(3) of the Insolvency and Bankruptcy Code, 2016 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 Supreme Court 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 is held that the impugned notification was issued within the power granted by Parliament, and in valid exercise of it. The exercise of power in issuing the impugned notification under Section 1(3) is therefore, not ultra vires; the notification is valid. 2. Authority of the Central Government under Section 1(3) of the Insolvency and Bankruptcy Code, 2016: The petitioners argued that the power delegated under Section 1(3) is only as regards the point(s) in time when different provisions of the Code can be brought into effect and that it does not permit the Central Government to notify parts of provisions of the Code, or to limit the application of the provisions to certain categories of persons. The Supreme Court 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. 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. 3. Impact of the Notification on Personal Guarantors to Corporate Debtors: The petitioners argued that the impugned notification has the illogical effect of creating two self-contradictory legal regimes for insolvency proceedings against personal guarantors to corporate debtors. The Supreme Court held that the notification does not create any anomaly or problem in enforcement. The intimate connection between personal guarantors and corporate entities to whom they stood guarantee, as well as the possibility of two separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals, for whom the Adjudicating authority was common with the corporate debtor to whom they had stood guarantee. 4. Interpretation of Various Sections of the Insolvency and Bankruptcy Code, 2016: The petitioners argued that the provisions of the Code brought into effect by the impugned notification are not severable, as they do not specifically or separately deal with or govern insolvency proceedings against personal guarantors to corporate debtors. The Supreme Court held that the impugned notification operationalizes the Code so far as it relates to personal guarantors to corporate debtors. Section 60(2) prescribes that in the event of an ongoing resolution process or liquidation process against a corporate debtor, an application for resolution process or bankruptcy of the personal guarantor to the corporate debtor shall be filed with the concerned NCLT seized of the resolution process or liquidation. 5. Rights and Liabilities of Personal Guarantors under the Indian Contract Act, 1872: The petitioners argued that the impugned notification deprives the guarantors of their valuable substantive rights under Sections 128, 133, and 140 of the Indian Contract Act, 1872. The Supreme Court held 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. The court observed that the liability of the surety is coextensive with that of the principal debtor unless it is otherwise provided by the contract. 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.
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