Case Brief Lalit Kumar Jain vs. Union of India & Ors.

Varun Pandey, Student 4th year BA.LLB (Hons) School of law and Governance Central University of South Bihar

Lalit Kumar Jain v. Union of India & Ors.

Case Citation: 2021 SCC Online SC 396

Quorum: Division Bench

Bench: L. Nageswara Rao and S. Rabindra Bhat, JJ.

Date of decision:21.05.2021

Lalit Kumar Jain v. UOI is a landmark judgment held by the Supreme Court on 21.05.2021, which ultimately decided the disputes between corporate and the Central Government. The Court interpreted the substantial question of law about the Insolvency and Bankruptcy Code, 2016.This Case was related to the liability of the personal guarantor at the time of the insolvency of the corporate debtor, and further, the Court held that the Notification of the central government that the liability of the personal guarantor is valid intra vires and legal.

The fact of the Case

The question of the law that arises, in this case, concerns the validity and legality of the Notification were issued by the Central Government on 15th Nov 2019. The other relief has been claimed by the Petitioner relating to Insolvency and Bankruptcy (Application to Adjudication Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rule, 2019 emanated on 15.11.2019. In the same way, the Petitioner challenged the validity of the Regulation of Insolvency and Bankruptcy provided on 20.11.2019.

The various Writ petitions were filed in different High Court under Article 32 of the Constitution claim to be aggrieved by the said impugned Notification. On the other side, the Petitioner had provided the personal guarantee to the banks and financial institutions, which led to released advanced to the companies. The personal guarantors associated with the companies as promoters, Directors, and Managing Directors. There are many cases where the personal guarantees were invoked, and the proceeding was initiated against the Companies in which they were associated with the bank guarantees. In many cases, recovery proceedings and insolvency proceedings were initiated. There are many proceeding the resolution plans finalized, and somewhere the resolution plans have not been approved by the adjudicating authority.

Previous to this Notification, the Debt Recovery Tribunal has the power to initiate the proceeding of IBC against the Personal Guarantors.

After this Notification, the right has been given to the banks to initiate the proceedings resulting increase in the liability of the personal guarantors. This Notification has given power also the Creditors to initiate the IBC proceeding against the individual and personal guarantors. Many petitioners were served various demand notices proposing to initiate insolvency under the Code, including recovery proceedings after the invocation of the guaranteed.

Issue of the Case

1. Whether the Case is maintainable under Art. 32, and 139A of the Constitution?

2. Whether the impugned Notification issued by the Ministry of Corporate Affairs is valid?

3. Whether the validity of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate debtor) Rules, 2019 issued on 15.11.2019.

Arguments of the Petitioners

All the petitioners challenged the impugned Notification was issued in excess of the authority of the Central Government, which has been the main concern in all these proceedings. They raised various contentions that there is no statutory authority to issue this Notification to enforce the IBC is being deemed to ultra vires.

There are many contentions of the petitioners as under: -

1. The impugned Notification is notified in various provisions of the Code only in so far as they relate to personal guarantors to corporate debtors. So, it is ultra vires the proviso to Section 1(3) of the Code. The impugned Notification is an exercise of excessive delegation. It is contended that the Central Government has no statutory authority to impose conditions on the enforcement of the Code.

2. It is further contended as a corollary that the enforcement of Sections 78, 79, 94-187, etc., in terms of the impugned Notification of the Code only in relation to personal guarantors is ultra vires the powers granted to the Central Government.

3. The petitioners also attack the impugned Notification on the ground that it suffers from non-application of mind because the Central Government failed to bring into effect Section 243 of the Code, which would have repealed the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.

4. It is further contended that provisions of the Code brought into effect by the impugned Notification when enforced only in respect of personal guarantors to corporate debtors are manifestly arbitrary; they are also discriminatory because:

• there is no intelligible differentia on which the personal guarantors to corporate debtors have been singled out, which is being covered by the Notification

• This Notification treating financial creditors and operation creditors on equal footing, which was clearly held in the Case of Swiss Ribbons Pvt. Ltd. v. UO[1] [i]that there are differences between Financial Creditors and Operational Creditors.

It is argued that the liability of a guarantor is co-extensive with that of the principal debtor (Section 128 of the Indian Contract Act, 1872). Further, it is settled law that upon conclusion of insolvency proceedings against a principal debtor, the same amounts to the extinction of all claims against the principal debtor, provided the extent admitted in the insolvency resolution process itself. It was held in the case Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta[ii].

Arguments of Respondents

It was argued for the Union of India that the Code was amended to substituted three different types of creditors, and the purpose is to cover three separate categories of debtors. Legislature wanted to deal with the personal guarantors under Section. 2(e) differently from individuals. The intention is to make differences between personal guarantors to corporate debtors from the other individuals.

The respondents submitted that the Notification is issued o facilitate the process of insolvency, which is to be adopted by NCLT to take a clear vision of the extent of debt of the corporate debtor, its available resources, and also the resources of the personal guarantors.

The Attorney General submitted that the expression ‘provision’ has clearly defined in the Black Law Dictionary as a clause in statute contract or legal instrument. He cited the Case of Chettiar Veettil Amman v. Taluk Land Board[iii], in which the Court defined the literal meaning of the provision as a provision is, therefore, a distinct rule or principle of law in a statute which governs the situation covered by it.

He, therefore, urged that the section. 2(e) being complete provision and different within the meaning of sec.1(3) and Central Government acted intra vires to enforced these provisions.

The Solicitor General submitted that the guarantors’ obligations are not discharged in terms of section. 133 to 136 of Contract Act, 1872, on the basis of release and discharge or in the variation of the contract which borrower may secure by operation of law but the rights of creditors continued against the guarantors in the events of liquidation. It was held in the Case of State Electricity Board Bombay v. Official Liquidator, HC, Ernakulam.

Lastly, it was argued that the Central Government has acted within the statutory power and not used excessive power.

Judgment

The Court said that the said Notification operationalized the Code which relates the personal guarantors to corporate debtors:

• Sec. 79 provides the definitional Section for the purpose of insolvency resolution and bankruptcy of individuals.

• Sec. 94 to 187 deal with the entire structure regarding initiation of the resolution process for the individuals.

The Notification authorized the Central Government and also the Board to frame rules on how to allow the pending actions against the personal guarantors to the corporate debtor. The intention of the said Notification is to allow the pending proceeding to adjudicate in terms of Code.

In the opinion of the Court that there was sufficient legislative guidance for the government, which made it effective to make differences and classify the personal guarantor distinct from other individuals. The Court said that this amendment as it inserted sec 2(e) and altered sec. 60(2) was objected to strengthening the corporate insolvency and IBC, 2016. It was held that the Notification is not an instance of legislative exercise or amounting to impermissible of the Code. There is an intrinsic connection between corporate debtors and personal guarantors. The said Notification extended the provision of the Code that can be applied in respect of personal guarantors to corporate debtors. So, it was held that the Notification on 15.11.2019 was issued within the powers granted by parliament, and it is not ultra vires and invalid.

The Court held that any recourse under Section. 133 of the Contract Act to discharge the liability of the surety on account of variation in terms of the contract, without her or his consent stand negated by the Court, and it was observed that the language of Sec. 31 makes clear that the approved plan is binding on the guarantors to avoid any escape of liability under the provision of Contract Act. It is therefore clear that the sanction of resolution plan and finality in sec 31 does not discharge the guarantor’s liability.

It was decided that the approval of the resolution plan does not ipso facto discharge the liability of the personal guarantors of the corporate debtor under the contract of guarantee. Because of these reasons, the Supreme court held that the Notification is legal and valid. In the writ petition, transferred cases are dismissed without order on cost.

Conclusion

The Lalit Kumar Jain v. Union of India was a Landmark judgment held by the Supreme Court seen as a great decision. This judgment increases the rights and powers of the Creditors to initiate proceedings against the personal guarantors to the corporate debtor. It also increases the accountability and responsibility of the personal guarantors. This judgment has given benefit to the Creditors community to recover their bad debts.

The decision of the Supreme court has strengthened the Insolvency proceeding and also the Insolvency and Bankruptcy Code.

I Writ Petition (civil) 99 of 2018

[ii] Civil appeal No. 8666-8667 of 2019

[iii] (1980) 1 SCC 499