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SUPREME COURT OF INDIA
L. NAGESWARA RAO, S. RAVINDRA BHAT, JJ.
Lalit Kumar Jain – Petitioner
Versus
Union of India and Others – Respondents
T.C. (C) Nos. 245, 246, 247, 248, 249, 250, 251, 252, 253, 254, 255, 256, 257, 1193, 1196, 1202, 1203, 1220, 1252, 1285, 1289, 1292, 1299, 1323, 1325, 1331, 1333, 1339 of 2020, W.P. (C) Nos. 1276, 1287, 1342, 1343, 1344, 1348, 1353, 1364, 1371, 1419, 1420, 1434 of 2020, 32, 38, 62, 97, 106, 117, 122, 131, 135, 138, 142, 146, 160, 168, 180, 182, 187, 194, 203, 205, 207, 209, 217, 220, 221, 224, 225, 228, 229, 234, 239, 240, 260, 262, 283 of 2021
Decided On : 21-05-2021
(A) Insolvency and Bankruptcy Code, 2016 – Sections 2(e), 5(22), 60, 179 and 239 – Demand notices – Recovery proceedings initiated after invocation of guarantees – Vires and validity of Notification dated 15.11.2019 issued by Central Government – Impugned notification authorises Central Government and Board to frame rules and regulations on how to allow pending actions against a personal guarantor to a corporate debtor before Adjudicating Authority – Intent of notification, facially, is to allow for pending proceedings to be adjudicated in terms of Code – Parliamentary intent was to treat personal guarantors differently from other categories of individuals – Intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as 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 Adjudicating authority was common with corporate debtor to whom they had stood guarantee – Fact that process of insolvency in Part III is to be applied to individuals, whereas process in relation to corporate debtors, set out in Part II is to be applied to such corporate persons, does not lead to incongruity – Impugned notification is not an instance of legislative exercise, or amounting to impermissible and selective application of provisions of Code – There is no compulsion in 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 Code, by Section 2(e), Section 5(22), Section 60 and Section 179 indicating that personal guarantors, though forming part of larger grouping of individuals, were to be, in view of their intrinsic connection with corporate debtors, dealt with differently, through same adjudicatory process and by same forum (though not insolvency provisions) as such corporate debtors – Exercise of power in issuing impugned notification under Section 1(3) is not ultra vires – Notification is valid. (Paras 95, 100 and 101)
(B) Insolvency and Bankruptcy Code, 2016 – Sections 31 – Contract Act, 1872 – Sections 128, 133 and 140 – Guarantor’s liability – Vires and validity of Notification dated 15.11.2019 issued by Central Government – 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 nature and extent of liability, much would depend on terms of guarantee itself – However, this court has indicated, time and again, that an involuntary act of principal debtor leading to loss of security, would not absolve a guarantor of its liability – Release or discharge of a principal borrower from 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 surety/guarantor of his or her liability which arises out of an independent contract – Impugned notification is legal and valid – 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) – Writ petitions, transferred cases and transfer petitions are accordingly dismissed. (Paras 108, 111 and 112)
Facts of the case:
Common question which arises in all these cases concerns the vires and validity of a notification dated 15.11.2019 issued by the Central Government. Other reliefs too have been claimed concerning the validity of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 issued on 15.11.2019. Likewise, the validity of regulations challenged by the Insolvency and Bankruptcy Board of India on 20.11.2019 are also the subject matter of challenge. However, challenge would be confined to impugned notification. This judgment will dispose of common questions of law, which arise in various proceedings preferred under Article 32 of the Constitution of India, as well as transferred cases under Article 139A; those causes were transferred to the file of this court, from various High Courts1, as they involved interpretation of common questions of law, in relation to provisions of the Insolvency and Bankruptcy Code, 2016.
Findings of Court:
All creditors and other classes of claimants, including financial and operational creditors, those entitled to statutory dues, workers, etc., who participate in the resolution process, are heard and those in relation to whom the CoC accepts or rejects pleas, are entitled to vent their grievances before the NCLT. After considering their submissions and objections, the resolution plan is accepted and approved. This results in finality as to the claims of creditors, and others, from the company (i.e. company which undergoes the insolvency process).
Result : Writ petitions, transferred cases and transfer petitions dismissed.
The legal document primarily addresses the validity and scope of the Central Government’s notification dated 15.11.2019, which pertains to the enforcement of certain provisions of the Insolvency and Bankruptcy Code, 2016, specifically in relation to personal guarantors of corporate debtors. The core issue revolves around whether the exercise of this notification constitutes an ultra vires act or an impermissible delegation of legislative authority.
The court finds that the notification is within the powers conferred by Parliament under Section 1(3) of the Code, which allows the government to bring provisions into force in phases and in respect of specific categories. The phased enforcement aligns with the overarching scheme and purpose of the legislation, which aims to facilitate a structured, time-bound resolution process for different classes of entities, including personal guarantors.
Furthermore, the court emphasizes that the application of the Code to personal guarantors, through the impugned notification, does not amount to legislative overreach or unconstitutional delegation. Instead, it reflects a considered exercise of the executive’s discretion, grounded in the legislative framework, to operationalize provisions in a manner that addresses the interconnectedness between corporate debtors and their personal guarantors.
The decision clarifies that the provisions relating to insolvency and bankruptcy are not required to be applied uniformly to all individuals at once; the law permits phased and category-specific enforcement. This phased approach is consistent with the legislative intent, the scheme of the Code, and established principles of conditional legislation and delegated authority.
In addition, the court recognizes that the exercise of these powers does not infringe upon the substantive rights of guarantors to discharge liabilities or to be protected under the Indian Contract Act. The finality of resolution plans does not automatically discharge guarantors; their liabilities remain unless explicitly extinguished through specific contractual terms or subsequent legal proceedings.
Overall, the court concludes that the impugned notification is valid, within the scope of the powers granted by Parliament, and consistent with the legislative intent behind the Code. It affirms that the phased enforcement and category-specific application of the provisions are legitimate and do not amount to unconstitutional overreach or arbitrary exercise of delegated legislative power.
JUDGMENT :
S. RAVINDRA BHAT, J.
1. This judgment will dispose of common questions of law, which arise in various proceedings preferred under Article 32 of the Constitution of India, as well as transferred cases under Article 139A; those causes were transferred to the file of this court, from various High Courts1 [Madhya Pradesh, Telengana, Delhi, etc.] as they involved interpretation of common questions of law, in relation to provisions of the Insolvency and Bankruptcy Code, 2016 (hereafter “the Code”).
(I) The Petitions and Common Grievances
2. The common question which arises in all these cases concerns the vires and validity of a notification dated 15.11.2019 issued by the Central Government2 [S.O. 4126 (E) issued by the Ministry of Corporation Affairs, Central Government] (hereafter called “the impugned notification”). Other reliefs too have been claimed concerning the validity of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 issued on 15.11.2019. Likewise, the validity of regulations challenged by the Insolvency and Bankruptcy Board of India on 20.11.2019 are also the subject matter of challenge. However, during the course of submissions, learned counsel for the parties stated that the challenge would be confined to the impugned notification.
3. All writ petitioners before the High Courts, arrayed as respondents in the transferred cases before this Court, as well as the petitioners under Article 32 claim to be aggrieved by the impugned notification. At some stage or the other, these petitioners (compendiously termed as “the writ petitioners”) had furnished personal guarantees to banks and financial institutions which led to release of advances to various companies which they (the petitioners) were associated with as directors, promoters or in some instances, as chairman or managing directors. In many cases, the personal guarantees furnished by the writ petitioners were invoked and proceedings are pending against companies which they are or were associated with and the advances for which they furnished bank guarantees. In several cases, recovery proceedings and later insolvency proceedings were initiated. The insolvency proceedings are at different stages and the resolution plans are at the stage of finalization. In a few cases, the resolution plans have not yet been approved by the adjudicating authority and in some cases, the approvals granted are subject to attack before the appellate tribunal.
4. All the writ petitioners challenged the impugned notification as having been issued in excess of the authority conferred upon the Union of India (through the Ministry of Corporate Affairs) which has been arrayed in all these proceedings as parties. The petitioners contend that the power conferred upon the Union under Section 1 (3) of the Insolvency and Bankruptcy Code, 2016 (hereafter 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 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) and (i) Section 239 (2) (m) to (zc); Section 239 (2) (zn) to (zs) and Section 249.
5. After publication of the impugned notification, many petitioners 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 petitioners. The main argument advanced in all these proceedings on behalf of the writ petitioners is that the impugned notification is an exercise of excessive delegation. It is contended that the Central G
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