Lalit Kumar Jain VS Union of India & Ors : The Supreme Court Held Valid Notification Regarding Applicability Of IBC Provisions TO Personal Guarantors

The Supreme Court in Lalit Kumar Jain Vs. Union of India (Transferred Case (Civil) No. 245/2020) held valid the notification dated 15.1.2019 issued by Central Government, whereby certain provisions were made applicable to the personal guarantors  of corporate debtors.

Brief Facts

The Central Government has issued notification dated 15.11.2019 which brought into force  Section 2(e) , Section 78 ( except with regard to fresh start process), Sections 79, Section 94-187 and some other provisions of the Code in force in relation to personal guarantor of corporate debtors. 

It is pertinent to mention that Section 2 (e) has introduced separate category of “personal guarantors to Corporate Debtors” under the Code vide 2018 amendment.

Part III of the Code deals with insolvency and bankruptcy of individuals and partnership firms. These provisions have as yet not been notified by the Government.   Notification dated 15.11.2019 brought into force certain provisions i.e. Section 2(e) , Section 78 ( except with regard to fresh start process), Sections 79, Section 94-187 relating with insolvency and bankruptcy of individual and partnership firms in respect of only “personal guarantors to Corporate Debtors”. These provisions have not been made applicable to other individual and partnership firms.

Grounds of Challenge

Writ Petitioners challenged the notification on following major grounds.

It was argued that impugned notification as having been issued in excess of the authority conferred upon the Union of India. The petitioners contended that the power conferred upon the Union under Section 1 (3) of 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 to the Corporate Debtor. It was argued that the provision 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 of the Corporate Debtor.

It was also argued that the notification suffers from non-application of mind because the Central Government failed to bring into effect Section 243 of the Code which could have repealed the Presidency Town Insolvency Act, 1909 and Provincial Insolvency Act, 1920. Since 243 has not been brought into force, the impugned notification has the illogical effect of creating two self-contradictory legal regimes for insolvency proceedings against personal guarantors of the Corporate Debtor.

It was also argued that liability of a guarantor is coextensive with that of the principal debtor. Upon conclusion of the insolvency proceedings all the claims get extinguished as such personal guarantors are no more liable to pay any money.

Findings of the Supreme Court

The Supreme Court held that the method adopted by the Central Government was to bring into force different provisions of the Code having regard to priorities. Parliament vide 2018 Amendment Act altered Section 2 (e) and subcategorized three categories of individuals resulting in Sections 2 (e), (f) and (g).  This amendment introduced Section 2 (e) i.e. personal guarantors to the Corporate Debtor as a distinct category to whom the code applied. The Supreme Court held that there was sufficient legislative guidance  to distinguish and classify personal guarantors separately from  other individuals.

The Supreme Court held that impugned notification is not an instance of legislative exercise or amounting to impermissible and selective application of provisions of the Code.

The Supreme Court also justified that rationale for not notifying  Section 243 as far as personal guarantors to corporate persons are concerned. Section 243 (2) saves pending proceedings under the Acts repealed (PIA and PTI Act)  to be undertaken in accordance with those eanctments. As of now, Section  243 has not been notified. In the event Section 243 is notified and those two Acts repealed, then the present notification would not have had the effect of covering pending proceedings against individuals, such as personal guarantors in other forums, and would bring them under the Provisions of the Code pertaining to Insolvency and bankruptcy of personal guarantors. The impugned notification, as a consequence of the non-obstante clause in Section 238, has the result that if any proceeding were to be initiated against personal guarantors it would be under the Code.

The Supreme Court also rejected the contention that liability of the personal guarantors of the Corporate Debtor gets extinguished with the approval of the Resolution Plan by the Adjudicating Authority. 

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