The provisions of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "the Code") relating to the insolvency of personal guarantors, which were brought into force in 2019, were upheld by a bench consisting of Hon'ble Mr. Justice NageshwarRao and Hon'ble Mr. Justice RavinderBhat ("Hon'ble Court") in its final Judgement and Order dated 21.05.2021. The main point of contention in all of these proceedings has been that the executive government could not have selectively implemented the Code and applied some of its provisions to one sub category of people, namely personal guarantors to corporate creditors. This is a watershed moment for the banking sector, as the subject has long been a source of contention.
The 15.11.2019 impugned notification was already challenged before several High Courts. The petition was transferred to the Hon'ble Supreme Court from several High Courts in October 2020.
The most prevalent question raised in the batch of matters involved the vires and validity of a Central Government notification dated 15.11.2019 (hereafter referred to as "impugned notification"). The Petitioners also questioned the validity of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, which were issued on November 15, 2019. The validity of the regulation challenged by the Insolvency and Bankruptcy Board of India on November 20, 2019, was also challenged. The arguments, however, were limited to the validity of the impugned notification.
The impugned notification was challenged in the batch of cases before the Hon'ble Supreme Court as having been issued in excess of the authority granted on the Union of India (through the Ministry of Corporate Affairs). The Petitioners claimed that the Union's power under Section 1(3) of the Code could not have been used to limit the Code's provisions to personal guarantors of corporate debtors. Section 2 (e), Section 78 (except with reference to the 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 239(2)(zn) to (zs); and Section 249 were brought into force by the impugned notification.
Contention on behalf of Petitioner:
a) That the impugned notification is a case of excessive delegation exercise. The Petitioners argued that the Central Government has no legal or statutory jurisdiction to impose conditions on the Code's enforcement. As a corollary, it was argued that enforcing Sections 78, 79, 94-187, and other provisions of the Code in terms of the impugned notification only in respect to personal guarantors is a violation of the powers entrusted to the Central Government.
b) That the power delegated under Section 1(3) only applies to the points in time at which distinct provisions of the Code can take effect, and that it does not allow the Central Government to notify specific provisions of the Code or to limit the application of the provisions to certain groups of persons.
c) That the Central Government's decision to enforce Sections 78, 79, 94 to 187, etc. only in respect to personal guarantors to corporate debtors is an exercise of legislative power is totally impermissible in law and amounts to an unconstitutional usurpation of legislative authority by the executive.[5]
d) That the Impugned notification violates the Code's provisions in that it exclusively discloses the provisions of Part III of the Code in relation to personal guarantors to corporate debtors. Part III of the Code covers "Insolvency Resolution and Bankruptcy for Individuals and
Section1(3) reads as: “It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint: Provided that different dates may be appointed for different provisions of this Code and any reference in any such provision to the commencement of this Code shall be construed a reference the commencement of that provision.”, The Insolvency and Bankruptcy Code, 2016.
Partnership Firms," and it has no provision allowing personal guarantors to corporate debtors to initiate the insolvency resolution procedure (hereinafter "IRP").
e) That Personal guarantors to corporate debtors have been singled out for being covered by the impugned provisions for no intelligible differentia, particularly where the provisions of the Code do not apply separately to one sub-category of individuals, i.e., personal guarantors to corporate debtors.
Issues Involved:
1. Whether the impugned notification was constitutionally valid?
2. Whether the impugned notification takes away the protection of the personal guarantor afforded by law under the contract of guarantee (reference was made to Sections 128, 133 and 140 of the Contract Act)?
Findings of the court:
The Hon'ble Supreme Court upheld the validity of the impugned notification. The Hon'ble Court stated that the impugned notification is not an instance of excessive legislative exercise because the Code does not mandate that it be applied to all individuals at the same time. As a result, the power exercised in issuing the impugned notification under Section 1(3) is not ultra vires. The Hon'ble Court further stated that the personal guarantors and their corporate debtors had a "intrinsic" tie.
The Supreme Court has ruled that a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the guarantee contract. The release or discharge of a principal borrower from its debt owing to its creditor by an involuntary process, such as by operation of law or due to liquidation or insolvency proceedings, does not absolve the surety/guarantor of his or her liability arising out of an independent contract, according to this court.
All batch matters and writ petitions, including those transferred from different high courts, were dismissed in light of the foregoing. While transferring all the petitions to itself in October 2020, the Hon'ble Supreme Court stated that the Code was still in its nascent stage and that it was better for the Court to take up the interpretation of the Code's provisions in order to avoid confusion and authoritatively settle the law.
Thus this judgment creates an additional burden on the promoters/guarantors. Now OTS negotiation will be at the mercy of the Banks as it is clear that the IBC proceeding is not finality of the default account.
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