TaxTMI 
TaxTMI 
2021 (5) TMI 743
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....mar Gupta Adv. Dr. Anindita Pujari, AOR Ms. Purti Gupta, Adv Ms. Henna George Adv. Mr. Om Narayan Adv. Ms. Harpreet Kaur Adv. Mr. Arjun Syal, Adv Mr. Shreyan Das, Adv Mr. Zeeshan Hashmi, Adv. Mr. Salman Hashmi, Adv. Mr. Mithu Jain, AOR Mr. Alok Dhir, Adv. Ms. Jayashree Shukla Dasgupta, Adv. Ms. Varsha Banerjee, Adv. Mr. Ashu Kansal, Adv. Ms. Swati Sharma, Adv. Mr. Ashish Pyasi, Adv. Mr. Milan Singh Negi, Adv. Mr. Karan Batura, AOR Mr. Harish Salve, Sr. Adv. Mr. Sudipto Sarkar, Sr. Adv. Mr. P. S. Narsimha, Sr. Adv. Mr. Mahesh Agarwal, Adv Ms. Shally Bhasin, Adv Mr. Ankur Saigal, Adv Mr. Kamaldeep Dayal, Adv Mr. Prateek Gupta, Adv Ms. Madhavi Agrawal, Adv Mr. Ankit Banati, Adv Ms. Saloni Mahajan, Adv Mr. E. C. Agrawala, AOR Mr. Sandeep S Ladda, Adv. Mr. Soumik Ghosal, AOR Mr. Gaurav Singh, Adv. Mr. Abhay Anand Jena, AOR Mr. Deepayan Mandal, AOR Mr. S.R. Raghunathan, Adv. Mr. S. Santanam Swaminadhan,Adv Ms. Abhilasha Shrawat, Adv Mrs. Aarthi Rajan, AOR Mr. Vikram Pooserla, Adv. Mr. Tadimalla Bhaskar Gowtham, Adv. Mr. Abhinay Reddy M. Adv. Mr. Nitish Bandary, Adv. Mr. Jeevan Kumar Nandam, Adv Mr. Keertivardhan Kommareddy, Adv Ms. Aahana Madhyala, Adv Ms. Krishma Nedun....
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....ddy, AOR Mr. Deepayan Mandal, AOR Mr. Sandeep Singh, AOR Mr. M. P. Vinod, AOR Mr. Vinod Kumar, Adv. Mr. M.D. Srinivasan, Adv. Ms. Avni Sharma, Adv. Mr. Dheeraj Nair, AOR Mr. Dheeraj Nair, AOR Ms. Anjali Anchayil, Adv. Ms. Avni Sharma, Adv. Ms. Vishrutyi Sahni, Adv. Mr. Vinam Gupta, AOR Mr. R. Sudhinder, Adv Mr. Nikhil Singh, Adv Mr. Rahul Dev, Adv Mr. Ranjit Shetty, Adv Mr. Ashok Mathur, AOR Mr. Vikas Mehta, AOR Mr. D. Bharat Kumar, Adv Mr. Aman Shukla, Adv Mr. Hathindra Manda, Adv Mr. Gopal Jha, AOR Ms. Misha, Adv Mr. Vaijayant Paliwal, Adv Ms. Charu Bansal, Adv Ms. Jasveen Kaur, Adv Mr. S. S. Shroff, AOR Ms. Misha, Adv. Mr. Anoop Rawat, Adv. Ms. Mahima Sareen, Adv. Ms. Moulshree Shukla, Adv. Ms. Prabh Simran Kaur, Adv. Mr. Shardul S. Shroff, AOR. Ms. Praveena Gautam, AOR Mr. Pawan Shukla, Adv. Ms. Sweety Pandey, Adv. Mr. Raja Ram, Adv. Mr. Vivek Sarin, Adv. Ms Astha Sehgal, Adv. Mr Satish C. Kaushik, Adv Mr. Aakarshan Aditya, AOR M/S. Cyril Amarchand Mangaldas, AOR Mr. Arun Aggarwal, AOR Ms. Anshika Aggarwal, Adv Ms. Ekjot Bhasin, Adv. Mr. Mritunjay Kumar Sinha, AOR Mr. Ankit, Adv. Ms. Kavita Jha, AOR Ms. Sandhya Iyer, Adv. Mr. Udit Naresh, Adv Mr. O. P. Gaggar....
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.....(C) No. 1434/2020, W.P.(C) No. 38/2021, W.P.(C) No. 1419/2020, T.P.(C) No. 1202/2020, T.P.(C) No. 1220/2020, T.P.(C) No. 1203/2020, T.P.(C) No. 1193/2020, T.P.(C) No. 1196/2020, T.P.(C) No. 1289/2020, T.P.(C) No. 1323/2020, T.P.(C) No. 1333/2020, T.P.(C) No. 1292/2020, T.P.(C) No. 1299/2020, T.P.(C) No. 1331/2020, W.P. (C) No. 1342/2020, T.P.(C) No. 1339/2020, W.P.(C) No. 1348/2020, W.P.(C) No. 1344/2020, W.P.(C) No. 1343/2020, T.C.(C) No. 250/2020, T.C.(C) No. 251/2020, T.C. (C) No. 247/2020, T.C.(C) No. 253/2020, T.C.(C) No. 252/2020, T.C.(C) No. 248/2020, T.C.(C) No. 254/2020, T.C.(C) No. 246/2020, T.C.(C) No. 256/2020, T.C.(C) No. 249/2020, T.C.(C) No. 255/2020, W.P.(C) No. 62/2021, W.P.(C) No. 32/2021, W.P.(C) No. 106/2021, W.P.(C) No. 97/2021, W.P.(C) No. 142/2021, W.P.(C) No. 135/2021, W.P.(C) No. 131/2021, W.P.(C) No. 122/2021, W.P.(C) No. 138/2021, W.P.(C) No. 146/2021, W.P. (C) No. 207/2021, W.P.(C) No. 160/2021, W.P.(C) No. 168/2021, W.P.(C) No. 205/2021, W.P.(C) No. 209/2021, W.P.(C) No. 194/2021, W.P.(C) No. 187/2021, W.P.(C) No. 180/2021, W.P.(C) No. 182/2021, W.P.(C) No. 203/2021, W.P.(C) No. 220/2021, W.P.(C) No. 229/2021, W.P.(C) No. 217/2021, W.P.(C) No. 221/2021....
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.... 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) & (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 ....
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.... carve out a limited application of the provisions only in relation to personal guarantors to corporate debtors. The Central Government's move to enforce Sections 78, 79, 94 to 187, etc. only in relation to personal guarantors to corporate debtors is an exercise of legislative power wholly impermissible in law and amounts to an unconstitutional usurpation of legislative power by the executive. The petitioners argue that the impugned notification, to the extent it brings into force Section 2 (e) of the Code with effect from 01.12.2019 is hit by non-application of mind. It is argued that Section 2(e) of the Code, as amended by Act 8 of 2018, came into force with retrospective effect from23.11.2017. This is duly noted by this court in the case of State Bank of India v. V. Ramakrishnan (2018) 17 SCC 394, which observed that: "Though the original Section 2(e) did not come into force at all, the substituted Section 2(e) has come into force w.e.f. 23.11.2017." It is urged that this court should, therefore, set aside the impugned notification. 9. The petitioners also attack the impugned notification on the ground that it suffers from non-application of mind, because the Central Governm....
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....of the Code brought into effect by the impugned notification [Clause (e) of Section 2, Section 78 (except with regard to fresh start process), Section 79, Section 94 to 187 (both inclusive), Clause (g) to Clause (l) of sub-section (2) of Section 239, Clause (m) to (zc) of sub-section (2) of Section 239, Clause (zn) to Clause (zs) of Sub-section (2) of Section 239 and Section 249] when enforced only in respect of personal guarantors to corporate debtors, are manifestly arbitrary; they are also discriminatory because: (i) There is no intelligible differentia or rational basis on which personal guarantors to corporate debtors have been singled out for being covered by the impugned provisions, particularly when the provisions of the Code do not separately apply to one sub-category of individuals, i.e., personal guarantors to corporate debtors. Rather, Part III of the Code does not apply to personal guarantors to corporate debtors at all. (ii) the provisions of Part III of the Code, which are partly brought into effect by the impugned notification, provide a single procedure for the insolvency resolution process of a personal guarantor, irrespective of whether the creditor is a fina....
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....f the Code, which makes the resolution plan approved by the Adjudicating Authority binding on the corporate debtor, its creditors and guarantors. The petitioners also contend that the impugned notification allows creditors to unjustly enrich themselves by claiming in the insolvency process of the guarantor without accounting for the amount realized by them in the corporate insolvency resolution process of the corporate debtor under Part II of the Code. It is therefore, untenable. 15. It is argued that the impugned notification has resulted in clothing authorities, the Committee of Creditors (CoC) and Resolution Professionals (RPs) with powers beyond the enacted statute. They have defined the term "guarantor" as a debtor who is a personal guarantor to a corporate debtor and in respect of whom guarantee has been invoked by the creditor and remains unpaid in full or part. The parent statute does not define "guarantor". It is pointed out that though Section 239(1) of the Code empowers the Insolvency Board to make rules to carry out the provisions of the Code, those rules cannot define a term that is not defined in the Code, as it is likely to result in class legislation for one catego....
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....ntor to a corporate debtor. Part III provides for "Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms", and thereafter refers to these two categories of persons simply as debtors. The impugned notification in substance modifies the text of the actual sections of Part III, despite the absence of any element of legislation/legislative authority having been conferred upon the Central Government. The words "only in so far as they relate to personal guarantors to corporate debtors" forming a part of the impugned notification are attempted to be added like a rider to each of the sections mentioned in the impugned notification, clearly rendering such an exercise completely outside the scope and powers conferred under Section 1(3) of the Code. 18. It was argued further by Mr. Salve, that the impugned notification is ex facie in violation of the principles of delegation, inasmuch as the Central Government has effected a classification of individuals- and sought to ensure that insolvency issues of one category of individuals, i.e. personal guarantors to corporate debtors, are considered along with insolvency proceedings of corporate debtors. The distinction between P....
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....plies them to personal guarantors and is therefore, ultra vires the Code. 20. Mr. P.S. Narasimha, learned senior counsel, who argued next, contended further that in several judgments, this court has ruled that conditional legislation is one where a legislative exercise is complete in itself, and the only power and/or function to be delegated to the authority (in this case the Central Government), is to apply the law to a specific area or to determine the time and manner of carrying into effect such law. He cited the decision in State of Bombay v. Narothamdas Jethabhai 1951 2 SCR51, at para 37. in which this court observed as follows: "......The section does not empower the Provincial Government to enact a law as regards the pecuniary jurisdiction of the new court and it can in no sense be held to be legislation conferring legislative power on the Provincial Government" Mr. Narasimha also cited Sardar Inder Singh v. State of Rajasthan 1957 SCR 605 at para 10. and Hamdard Dawakhana v. Union of India 1960 (2) SCR 671 at para 28. and urged that when legislation is complete, and the executive is left to apply the law to an area or determine the time and manner of carrying it out, th....
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....or this purpose. 24. It was submitted that Parliament undoubtedly amended the Code in 2018, defining "personal guarantor" as a species of individuals to whom the law applied. However, the manner of its application continued to be the same, i.e. to all individuals. Therefore, the resort to conditional legislation power under Section 1(3) to bring into force certain provisions selectively, in respect of some individuals, i.e. personal guarantors and not all individuals, is ultra vires, and contrary to the power conferred on Parliament. Illustratively, it is pointed out that the application of the law itself is limited- for instance in the case of Section 78 which applies to fresh start of insolvency proceedings- the Code is limited then, in its application to one sub category of individuals (all of whom are covered by the chapter, which is opened by Section 78) i.e., personal guarantors. This selective application is naked classification exercised by the government conferred with conditional legislative powers. 25. It was next argued that Part III of the Code relating to individuals and partnership firms are outlined in various sections of the Act. Of these chapters, I, III to VII,....
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....of the Code and those in Part III, it is argued that the procedure for initiation of insolvency resolution against personal guarantors to corporate debtors is the same as in relation to other individuals. The only difference is that the forum to decide this would be the National Company Law Tribunal (NCLT). In all other respects, in terms of Part III, the recovery process for debt realization is identical for personal guarantors to corporate debtors, as in the case of individuals. By separating the process in an artificial manner, and subjecting the insolvency process of personal guarantors who are also individuals, to adjudication by the NCLT, and furthermore, virtually directing that the two proceedings, i.e. in relation to the corporate debtor on the one hand, and the personal guarantor, on the other hand, to be clubbed, is, in effect, a legislative exercise, unsupported by any express provision of the Code. It is also submitted that the object of the Code is to ensure a revival of corporate debtors. On the other hand, if an application against a personal guarantor is admitted, a moratorium under Section 101 of the Code automatically applies. This results in stay of all pending ....
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....exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate ". Counsel therefore argued that an approved resolution plan in respect of a corporate debtor amounts to extinction of all outstanding claims against that debtor; consequently, the liability of the guarantor, which is co-extensive with that of the corporate debtor, would also be extinguished. 29. It was further argued that the resolution plans, duly approved by the Committee of Creditors would propose to extinguish and discharge the liability of the principal borrower to the financial creditor. Therefore, the petitioners' liability as guarantors under the personal guarantee would stand completely discharged. Reliance is placed on the judgment of the Punjab and Haryana High Court in Kundanlal Dabriwala v. Haryana Financial Corporation (2012) 171 Comp Cas 94., which ruled that: "on a fair reading of the provisions of the Contract Act, I am inclined to hold that as the liability of the surety is co-extensive with that of the principal debtor, if the latter's liability is scaled down in an amended decree, or....
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....e personal guarantors from other individuals such as partnership firms, proprietorships and individuals. It was felt that if this separation, achieved through the amendment of 2018 were not realized, the insolvency resolution process of corporate debtors would have to be dealt with separately and independently of its promoters, managing directors, and directors who had furnished their personal guarantees to secure debts of corporate debtors. If insolvency resolution proceedings against corporate debtors were continued without this amendment, and without the unification, (of the adjudicatory body) on the default of the corporate debtor to a debt owed to a financial creditor, the entire machinery of the Code relating to the corporate debtor would work itself out, to the exclusion of personal guarantors. This presented a peculiar problem, in that the resolution applicant, wishing to bid for takeover of the corporate debtor and operate it as a running concern would be faced with a huge liability, and the personal guarantor in most cases would be one of the individuals primarily responsible for the insolvency of the company, but would be out of the resolution process and have to be sepa....
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....is one of the main purposes of the Code. 34. The learned Attorney General submitted that the expression "provision" has been defined in Black's Law Dictionary (10th edition at page 1420) as, "a clause in a statute, contract or other legal instrument"/ He also relied upon the judgment in Chettian Veettil Amman v. Taluk Land Board (1980) 1 SCC 499. to the effect that: "A provision is therefore a distinct rule or principle of law in a statute which governs the situation covered by it. So an incomplete idea, even though stated in the form of a section of a statute, cannot be said to be a provision for, by its incompleteness, it cannot really be said to provide a whole rule or principle for observance by those concerned. A provision of law cannot therefore be said to exist if it is incomplete, for then it provides nothing." He therefore urged that Section 2(e) being complete and distinct is a provision within the meaning of Section 1(3), and the Central government acted intra vires to bring it into force, as well as certain provisions in Part III of the code. 35. It was argued that the executive has the power to bring into force any one provision of a statute at different times....
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....pany and ensure that it continues as the going concern in the interests of the economy. It was keeping in mind these objectives that the impugned notification was issued appointing 1st of December 2019 as the date on which certain provisions of the IBC were to come into force, only so far as they relate to personal guarantors to corporate debtors. The submission that the impugned notification creates a classification was refuted. He stated that it only brought into force sections in Part III of the Code and Section 2(e) of the Code, from 1st December 2019. From that date, proceedings could be filed against personal guarantors to corporate debtors under the Code. The proceedings would be initiated before the NCLT, which would also be seized of resolution proceedings against the corporate debtors. 38. The Attorney General submitted that the Amendment Act brought about a classification after detailed deliberations and in the light of the report of the Working Group on Individual Insolvency, Regarding Strategy and Approach for implementation of Provisions of the Code to Deal with Insolvency of Guarantors to Corporate debtors, and Individuals having business. In this report of 2017, th....
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.... 2018 and the impugned notification. The learned Attorney General also pointed out to Section 30, which enacts that an Adjudicatory authority approved resolution plan binds all stakeholders. However, at the same time, in the event a resolution plan permits creditors to continue proceedings against the personal guarantor, then such personal guarantors would continue to be liable to discharge the debts owed to the creditor by the corporate debtor, which would be limited of course to the extent of debt that did not get repaid under the resolution plan. The Attorney General also relied on Embassy Property Developments (P) Ltd. v. State of Karnataka (2020)13 SCC 308. where this court had examined and dealt with the interplay between Sections 5(22), 60 and 179 of the Code. 40. Mr. Tushar Mehta, Solicitor General of India, supported the submissions of the Attorney General. He too stressed that different provisions were brought into force on different dates. He highlighted that Section 1(3) of the Code confers wide powers enabling the Central Government to operationalize the Code in a subject-wise and (not necessarily in a contiguous manner) - particular sections, provisions or parts. He ....
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....he Code. This resulted in an anomaly inasmuch as one set of guarantors to corporate debtors, i.e. individuals or personal guarantors were outside the purview of the Code whereas other set of guarantors, i.e. corporate guarantors were subjected to the provisions of the Code and could also be proceeded against in Part-II. As a result, a conscious decision was taken to enforce Part-III and operationalize the mechanism suitably for a class of individuals, i.e. personal guarantors. This decision was implemented through the impugned notification. 42. Apart from reiterating the submission of the Attorney General with regard to the flexibility in respect of notifying parts of the Code on different dates, having regard to the difference in subject matter and those governed by it, the learned Solicitor General also relied upon the decision reported as J. Mitra and Co. Pvt. Ltd. v. Assistant Controller of Patents (2008) 10 SCC 368.. He relied upon the report of the Working Group of Individual Insolvency (Regarding Strategy and Approach for Implementation of the Provisions of the Insolvency and Bankruptcy Code, 2016) to deal with insolvency of guarantors to corporate debtors and individuals h....
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....is regard Gopilal J Nichani v. Trac Inds. and Components Ltd, AIR 1978 Mad. 134. It is stated that the creditor also has the liberty to proceed against the principal borrower and all sureties simultaneously; in this regard, he cited Bank of Bihar Ltd. v. Dr. Damodar Prasad & Anr. AIR 1969 (1) SCR 620. It is submitted that no court or co-surety can limit such a right. For this proposition, reliance was placed on State Bank of India v. Index port Registered AIR 1992 SC 1740. and Industrial Investment Bank of India v. Biswanath Jhunjhunwala (2009) 9 SCC 478. Counsel also submitted that a surety cannot alter or defer such a right of the creditor. Hence, until the debt is paid off to the creditor in entirety, the guarantor is not absolved of its joint and several liability to make payment of the amounts outstanding in favour of the creditor. 44. The Solicitor General submitted that neither the guarantor's obligations are absolved nor discharged in terms of Sections 133 to 136 of the Indian Contract Act, 1872, on account of release/discharge/composition or variance of contract which a principal borrower may secure by way of operation of law for instance as under the Code. The rights....
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....tion 135 of the Contract Act) cannot discharge the guarantor in any manner what so ever. The judgment of this court in State Bank of India v. V. Ramakrishnan & Ors. 2018(17) SCC 394. too was relied on, where the court recognized that a guarantor cannot seek a discharge of its liability on account of approval of a resolution plan, and the terms of such a plan can provide for the continuation of the debt of the guarantors. It was submitted that the continuation of a financial creditor's claim against a guarantor would not lead to double recovery of a claim as the financial creditor would be able to recover only the balance debt which remains outstanding and unrecovered from the principal borrower. There are enough safeguards against double recovery as provided under (a) the settled principle of contract law that simultaneous remedy against the co-obligors does not permit the creditor to recover more than the total debt owed to it, and (b) the provisions of the Code itself. The Solicitor General relied on the acknowledged practice, known as, the principle of "double dip" or the notion of dual nature of recovery by a creditor for the same debt from two entities - be it principal bo....
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....tral Government not only the power to determine the date on which the Code will come into force, but also empowers it to appoint different dates for different provisions of the Code. It was intended that all the provisions of the Code may not be enforced at once. Given the width of impact and with an eye on the objectives set out in the statement of objects and reasons and preamble, a staggered enforcement was anticipated. 47. Mr. Dwivedi stated that nothing much depends on the characterization of Section 1(3) as conditional or delegated legislation. Even conditional legislation involves a delegation of legislative power to the authority concerned. Under Section 1(3), the Central Government is only a delegate of the Parliament. In some cases, such provisions or provisions of broadly similar nature have been described by this court as conditional legislation, but equally in some cases such a power has been described as delegated legislation by different judges. Reliance was placed on Delhi Laws Act, 1912, In re v. Part 'C' States (Laws) Act, 1950 (supra) and Lachmi Narain v. Union of India (1976) 2 SCC 953, para 49.. 48. It was urged that provisions of diverse nature have ....
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..... Learned counsel therefore urged that the line of demarcation between conditional and delegated legislation at times gets blurred. 49. While judging the validity of the legislations, this Court has examined the sufficiency of the guidance afforded by the legislative policy indicated in the relevant statute. For this, reliance was placed on Edward Mills v. State of Ajmer (1955) I SCR 735. All these establish that diverse provisions apart from those which empower the executive to enforce the Act or provisions of the Act have been characterized as conditional legislation and their validity and scope has been determined in the light of the text, context and purpose of the Act. 50. Learned counsel stated that a schematic, structural and purposive construction of Section 1(3) of the Code needs to be adopted to determine the scope of the power conferred on the Central Government by Section 1(3) of the Code. The Petitioners apply the rule of literal construction and seek to construe Section 1(3) in isolation, without reference to the context, scheme or purpose of the Code. It is submitted that the ambit of Section 1(3) should not be determined by merely applying the doctrine of literal....
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....tive provision. It merely carries out the Parliamentary intention as expressed by the scheme, structure and purpose of the Code. Section 1(3), Section 2, Section 3(23), Section 5(5)(a) and (22), Section 14(3), Section 31(1) and in particular, Section 60 and Section 179 are indicative of the fact that the scheme and structure of the Code involves a parliamentary hybridization and legislative fusion of the provisions of Part III, in so far as personal guarantors of corporate debtors are concerned. The object of this hybridization is to empower the NCLT to deal with the insolvency resolution and bankruptcy process of the corporate debtor along with the corporate guarantor and personal guarantor of the corporate debtor. Parliament is conscious of the fact that personal guarantors to corporate debtors are generally promoters or close relatives of corporate debtors, and in many cases, the corporate's indebtedness was due to acts misfeasance and siphoning of funds done by personal guarantors. Apart from this, personal guarantors to corporate debtors have a contractually agreed debt alignment with such debtors. They are coextensively as well as jointly and severally responsible for the....
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....firms. It is made applicable to the various categories of individuals and partnership firms. Both Sections 2 and 78 carry the margin caption of "application". Section 2 commences with "the provisions of this Code shall apply" to the six categories and Section 78 also declares that "Part III shall apply" to the mentioned categories. Section 2 embraces the whole Code including Section 78 and other provisions enforced by the impugned notification, which clearly appoints the date of enforcement for Section 2(e) and other provisions, and Chapter III of Part III. There is no vivisection or dissection involved in the impugned notification. 55. Mr. K.V. Vishwanathan, learned senior counsel appearing for some respondents, argued that an overall reading of the provisions of the Code would show that personal guarantors to corporate debtors are a distinct class of individuals (by virtue of Section 2 (e) and Section 60); the classification is not achieved through the impugned notification, but by the amending Act of 2018, by Parliament. It is emphasized that the amendment ensured that the same forum (NCLT) deals with insolvency processes of corporate debtors, and also deals with similar issues....
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....laws with international standards. Parliament's previous attempts to ensure recovery of public debt, (through the Recovery of Debts due to Banks or Financial Institutions Act, 1993, hereafter "RDBFI Act") securitization (by the Securitization and Reconstruction and Enforcement of Security Interests Act, 2002 hereafter "SARFESI") deal with certain facets of corporate insolvency. These did not result in the desired consequences. The aim of the Code is to a) promote entrepreneurship and availability of credit; b) ensure the balanced interests of all stakeholders and c) promote time-bound resolution of insolvency in case of corporate persons, partnership firms and individuals. The relevant provisions of the code are extracted below: "1. Short title, extent and commencement - (1) This Code may be called the Insolvency and Bankruptcy Code,2016. (2) It extends to the whole of India: Provided that Part III of this Code shall not extend to the State of Jammu and Kashmir.8 (3) It shall come into force on such date1 as the Central Government may, by notification in the Official Gazette, appoint: Provided that different dates may be appointed for different provisions of th....
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....inimum amount of default of higher value which shall not be more than one crore rupees. 5. Definitions. - In this part, unless the context otherwise requires - (1) "Adjudicating Authority", for the purposes of this Part, means National Company Law Tribunal constituted under section 408 of the Companies Act, 2013 (18 of 2013); *** (5) "corporate applicant" means- (a) corporate debtor; or (b) a member or partner of the corporate debtor who is authorised to make an application for the corporate insolvency resolution process under the constitutional document of the corporate debtor; or (c) an individual who is in charge of managing the operations and resources of the corporate debtor; or (d) a person who has the control and supervision over the financial affairs of the corporate debtor; (5A) "corporate guarantor" means a corporate person who is the surety in a contract of guarantee to a corporate debtor; *** (22) "personal guarantor" means an individual who is the surety in a contract of guarantee to a corporate debtor" 59. Section 13 (Declaration of moratorium and public announcement) provides that the Adjudicating Authority shall (a) declare a moratorium for the ....
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....e distributed. 61. The insolvency resolution process under Section 6 can be initiated by the financial creditor [Section 7 of the Code] or operational creditor [subject to issuing a demand notice to the corporate debtor stating the amount involved in the default, under Section 8, of the Code] against the corporate debtor in the NCLT. Voluntary insolvency proceedings may also be initiated by the defaulting company, its employees or shareholders [Section 10 of the Code]. Once the resolution process begins, for the entire period, a moratorium is ordered by the NCLT on the debtor's operations. During this period, no judicial proceedings can be initiated. There can also be no enforcement of securities, sale or transfer of assets or termination of essential contracts against the debtor. The next step is appointment of an Interim Resolution Professional under Section16 of the Code. The resolution professional has to work under the broad guidelines of the committee of creditors (or "COC"- in terms of Section 21 of the Code). The CoC includes all the financial creditors of the corporate debtor, except all related parties and operational creditors. Further, Section 22 of the Code provid....
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....both inclusive); (4) clause (g) to clause (i) of sub-section (2) of section 239; (5) clause (m) to clause (zc) of sub-section (2) of section 239; (6) clause (zn) to clause (zs) of' sub-section (2) of section 240; and (7) Section 249. [F. No. 30/21/2018-Insolvency Section] GYANESHWAR KUMAR SINGH, Jt. Secy." V Analysis and conclusions 64. The principal ground of attack in all these proceedings has been that the executive government could not have selectively brought into force the Code, and applied some of its provisions to one sub-category of individuals, i.e., personal guarantors to corporate creditors. All the petitioners in unison argued that the impugned notification, in seeking to achieve that end, is ultra vires. This argument is premised on the nature and content of Section 1(3), which the petitioners characterize to be conditional legislation. Unlike delegated legislation, they say, conditional legislation is a limited power which can be exercised once, in respect of the subject matter or class of subject matters. As long as different dates are designated for bringing into force the enactment, or in relation to different areas, the executive acts within its p....
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....r, not created or authorized by the Councils Act. Nothing of that kind has, in their Lordships' opinion, been done or attempted in the present case." 66. The next case cited was Jatindra Nath Gupta where the validity of Section 1(3) of the Bihar Maintenance of Public Order Act, 1948 was challenged on the ground that it empowered the Provincial Government to extend the life of the Act for one year with such modification as it could deem fit. The Federal Court held that the power of extension with modification is not a valid delegation of legislative power because it is an essential legislative function which cannot be delegated. The court observed, inter alia, that: "The proviso contains the power to extend the Act for a period of one year with modifications, if any. It is one power and not two severable powers. The fact that no modifications were made in the Act when the power was exercised cannot help in determining the true nature of the power. The power to extend the operation of the Act beyond the period mentioned in the Act prima facie is a legislative power. It is for the Legislature to state how long a particular legislation will be in operation. That cannot be left t....
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....Laws) Act, 1950, which empowers the Central Government to extend laws passed by any legislature of Part A State, will also be ultra vires. To the extent the Central Legislature or Parliament has passed Acts which are applicable to Part A States, there can be no objection to the Central Government extending, if necessary, the operation of those Acts to the Province of Delhi, because the Parliament is the competent legislature for that Province. To the extent however the section permits the Central Government to extend laws made by any legislature of Part A State to the Province of Delhi, the section is ultra vires." Mahajan, J had this to say: "The section does not declare any law but gives the Central Government power to declare what the law shall be. The choice to select any enactment in force in any province at the date of such notification clearly shows that the legislature declared no principles or policies as regards the law to be made on any subject. It may be pointed out that under the Act of 1935 different provinces had the exclusive power of laying down their policies in respect to subjects within their own legislative field. What policy was to be adopted for Delhi, whe....
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....on the Central Government and clothing it with the same capacity as is possessed by the legislature itself the Parliament has acted unconstitutionally." B.K. Mukherjea, J, held as follows: "342. It will be noticed that the powers conferred by this section upon the Central Government are far in excess of those conferred by the other two legislative provisions, at least in accordance with the interpretation which I have attempted to put upon them. As has been stated already, it is quite an intelligible policy that so long as a proper legislative machinery is not set up in a particular area, the Parliament might empower an executive authority to introduce laws validly passed by a competent legislature and actually in force in other parts of the country to such area, with each modifications and restrictions as the authority thinks proper, the modifications being limited to local adjustments or changes of a minor character. But this presupposes that there is no existing law on that particular subject actually in force in that territory. If any such law exists and power is given to repeal or abrogate such laws either in whole or in part and substitute in place of the same other laws w....
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....ed the Act." 69. In Narottamdas Jethabhai (supra) three issues were involved; one of them concerned the question of empowering the executive to designate a court to exercise jurisdiction upto Rs. 25,000/-, i.e. Section 4 of the Bombay City Civil Courts Act. The contention successfully raised before the High Court was that once the legislature had conferred jurisdiction upto a pecuniary limit of Rs. 10,000/- to the City Civil Court, delegating the power to increase that jurisdiction was ultra vires. The argument was repelled by a majority of judges (Mahajan, Fazal Ali and B.K. Mukherjea, JJ). Fazal Ali, J stated that "22. It is contended that this section is invalid, because the Provincial Legislature has thereby delegated its legislative powers to the Provincial Government which it cannot do. This contention does not appear to me to be sound. The section itself shows that the Provincial Legislature having exercised its judgment and determined that the New Court should be invested with jurisdiction to try suits and proceedings of a civil nature of a value not exceeding Rs. 25,000, left it to the Provincial Government to determine when the Court should be invested with this larger....
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....tion. The vital matters of policy having been determined, the actual execution of that policy was left to the Provincial Government and to such conditional legislation no exception could be taken." Again, the court upheld the exercise of executive discretion on the ground that there was proper legislative framework and guidance to the government, with respect to conferring jurisdiction upon the City Civil Court, beyond the limit enacted by Section 3, and Section 4 was enacted to achieve that objective. 70. In Sardar Inder Singh, the validity of an ordinance which was extended by two notifications was involved. Section 4 of the original ordinance enacted that as long as it (the ordinance) was in force: "no tenant shall be liable to ejectment or dispossession from the whole or a part of his holding in such area on any ground whatsoever." The validity of this ordinance, enacted originally in 1949 (and in force for two years), was extended twice, for two years each (by notifications dated June 14, 1951 and June 20, 1953). The Legislative Assembly of Rajasthan was constituted and came into being on March 29, 1952. Till then, the Rajpramukh was vested with legislative authority. On ....
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....the legislative competence of the Rajpramukh but to Ordinance No- IX of 1949, and provided Section 3 is valid, the validity of the notification is co- extensive with that of the Ordinance. If the Ordinance did not come to an end by reason of the fact that the authority of the Rajpramukh to legislate came to an end-and that is not and cannot be disputed-neither did the power to issue a notification which is conferred therein. The true position is that it is in his character as the authority on whom power was conferred under Section 3 of the Ordinance that the Rajpramukh issued the impugned notification, and not as the legislative authority of the State. This objection should accordingly be overruled." 71. In Hamdard Dawakhana (supra), the validity of Section 3(d) of the Drug and Magic Remedies (Objectionable Advertisement) Act, 1954 was in issue. Section 16(1) of that Act conferred power on the government to frame rules, among others, by Section 16(2)(a) "to specify any disease or condition to which the provisions of Section 3 shall apply" and by Section 16(2)(b) "prescribe the manner in which advertisement of articles or things referred to in cl. (c) of sub-s. (1) of Section 14 ma....
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....ting from the date of its issue, thus resulting in the application of the Payment of Bonus Act for previous accounting years. As to the nature of the power (to exempt), this court, after considering various previous decisions, held that there are three broad categories of conditional legislation, and elaborated as follows: "In the first category when the Legislature has completed its task of enacting a Statute, the entire superstructure of the legislation is ready but its future applicability to a given area is left to the subjective satisfaction of the delegate who being satisfied about the conditions indicating the ripe time for applying the machinery of the said Act to a given area exercises that power as a delegate of the parent legislative body. Tulsipur Sugar Co. 's case (supra) is an illustration on this point. When the Act itself is complete and is enacted to be uniformly applied in future to all those who are to be covered by the sweep of the Act, the Legislature can be said to have completed its task. All that it leaves to the delegate is to apply the same uniformly to a given area indicated by the parent Legislature itself but at an appropriate time. This would be ....
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.... such power of conditional legislation. For example if a tariff is fixed under the Act and exemption power is conferred on the delegate whether to grant full exemption or partial exemption from the tariff rate it may involve such an exercise of conditional legislative function wherein the exercise has to be made by the delegate on its own subjective satisfaction and once that exercise is made whatever exemption is granted or partially granted or partially withdrawn from time to time would be binding on the entire class of persons similarly situated and who will be covered by the seep of such exemptions, partial or whole, and whether granted or withdrawn, wholly or partially, and in exercise of such a power there may be no occasion to hear the parties likely to be affected by such an exercise. For example from a settled tariff say if earlier 30% exemption is granted by the delegate and then reduced to 20% all those who are similarly situated and covered by the sweep of such exemption and its modification cannot be permitted to say in the absence of any statutory provision to that effect that they should be given a hearing before the granted exemption is wholly or partially withdrawn....
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.... contention that the exemption was in the exercise of conditional legislative power: "16. We, at the outset, would like to express our disagreement with the contentions raised before us by the learned counsel appearing on behalf of the respondents that the impugned notification is in effect and substance a conditional legislation and not a delegated legislation. The distinction between conditional legislation and delegated legislation is clear and unambiguous. In a conditional legislation the delegatee has to apply the law to an area or to determine the time and manner of carrying it into effect or at such time, as it decides or to understand the rule of legislation, it would be a conditional legislation. The legislature in such a case makes the law, which is complete in all respects but the same is not brought into operation immediately. The enforcement of the law would depend upon the fulfilment of a condition and what is delegated to the executive is the authority to determine by exercising its own judgment as to whether such conditions have been fulfilled and/or the time has come when such legislation should be brought into force. The taking effect of a legislation, therefore....
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....ing of the decisions cited on behalf of the petitioners would reveal that the power to extend laws has been upheld. As B.K. Mukherjea observed, in In re Delhi Laws Act, 1912 (supra): "it is quite an intelligible policy that so long as a proper legislative machinery is not set up in a particular area, the Parliament might empower an executive authority to introduce laws validly passed by a competent legislature and actually in force in other parts of the country to such area, with each modifications and restrictions as the authority thinks proper, the modifications being limited to local adjustments or changes of a minor character." Lord Selborne, in Burah (supra)held such power to be unexceptionable, saying that "Legislation, conditional on the use of particular powers, or on the executive of a limited discretion, entrusted by the Legislature to persons in whom it places confidence is no uncommon thing; and, in many circumstances, it may be highly convenient" In Jitendra Nath Gupta (supra), what the Federal Court held objectionable was the conferment of power to extend provisions of an enactment, beyond its expressed duration or time: "It is for the Legislature to state how....
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....ion (an amount of rent) were legislative exercises, beyond the powers conferred. They stricto sensu fall in the category of "general legislative authority, a new legislative Power, not created or authorized" by the parent legislation, (per Burah, supra). In Hamdard Dawakhana, the power to include new drugs, was held to be uncanalized, i.e. without any legislative guidance. The decision did not involve bringing into force provisions of an enactment, or exclusion, but inclusion within its fold, without any statutory guidance on new drugs. The case therefore involved delegated legislation. 76. It would now be useful to analyse some decisions cited by the respondents. In Bishwambhar Singh (supra)the power under Section 3(1) of the Orissa Estates Abolition (Amendment) Act, 1952 was involved. The provision enabled the state to declare that an estate had - in terms of notifications issued in that regard- vested in it, free from all encumbrances. This court negatived the challenge to that provision: "77. The long title of the Act and the two preambles which have been quoted above clearly indicate that the object and purpose of the Act is to abolish all the rights, title and interest in ....
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....ernment to establish a Corporation for the administration of the scheme of Employees' State Insurance by a notification. In other words, when the notification should be issued and in respect of what factories it should be issued, has been left to the discretion of the Central Government and that is precisely what is usually done by conditional legislation. [......] 5. [...] In the very nature of things, it would have been impossible for the legislature to decide in what areas and in respect of which factories the Employees' State Insurance Corporation should be established. It is obvious that a scheme of this kind, though very beneficent, could not be introduced in the whole of the country all at once. Such beneficial measures which need careful experimentation have some times to be adopted by stages and in different phases..." 77. The next decision cited was Lachmi Narain (supra). Here, the Central Government was empowered by Section 2 of the Part C States (Laws) (Act), 1950 to extend through a notification any enactment in Part A States. The Central Government had issued a Notification in 1951 to extend the provisions of the Bengal Finance (Sales Tax) Act to the then P....
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.... simultaneously with the extension of the enactment. This is one dimension of the statutory limits which circumscribe the power. The second is that the power cannot be used for the purpose other than that of extension. In the exercise of this power, only such "restrictions and modifications can be validly engrafted in the enactment sought to be extended, which are necessary to bring it into operation and effect in the Union territory. "Modifications" which are not necessary for, or ancillary and subservient to the purpose of extension, are not permissible. And, only such "modifications" can be legitimately necessary for such purpose as are required to adjust, adapt and make the enactment suitable to the peculiar local conditions of the Union territory for carrying it into operation and effect. In the context of the section, the words "restrictions and modifications" do not cover such alterations as involve a change in any essential feature, of the enactment or the legislative policy built into it. This is the third dimension of the limits that circumscribe the power. 61. It is true that the word "such restrictions and modifications as it thinks fit" if construed literally and in ....
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....inclusive) and clause (a) to clause (f)of subsection (2) of section 239 6. S.O. dated 09.12.2016 Came into force on 15.12.2016 S.O.3687(E) Section 33 to section 54 (both inclusive) 7. S.O. dated 30.03.2017; came into force on 01.04.2017 S.O.1005(E) Section 59; section 209 to 215 (both inclusive); subsection (1) of section 216; and section 234 and section 235 8. Came into force on 01.04.2017 vide S.O. dated 15.05.2017 S.O.1570(E) Clause (a) to clause (d) of section 2 relating to voluntary liquidation or bankruptcy 9. 14.06.2017 S.O.1910(E) Section 55 to section 58 (both inclusive) 10. 01.05.2018 S.O.1817(E) Section 227 to section 229 (both inclusive) 11. S.O. dated 15.11.2019 (impugned notification) Came into force on 01.12.2019 S.O.4126(E) Section 2 (e); section 78 (except with regard to fresh start process) and section 79; Sections 94 to 187 [both inclusive]; Section 239 (2) (g) to (i) ;239 (2) (m) to (zc);Section 240 (2) (zn) to (zs); and section 249 only in so far as they relate to personal guarantors to corporate debtors 79. The above tabular chart reveals that the provisions relating to the Insolvencyand Bankruptcy Board of India were brought into forc....
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....ts 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. In the next phase, the part of the Code dealing with one of its subjects, i.e., corporate persons [covered by Section 2(a) to 2(d) of the Code] was brought into force. The entire process for conduct of insolvency proceedings and provisions relating to such corporate persons were brought into force. The other notifications brought into force certain consequential provisions, as well as provisions which give overriding effect to the Code (as also the provisions that amend or modify other laws). All these clearly show that the Central Government followed a stage-by-stage process of bringing into force the provisions of the Code, regard being had to the similarities or dissimilarities of the subject matter and those covered by the Code. 82. As discussed in a previous part of this judgment, insolvency proceedings relating to individuals is regulated by Part-III of the Code. Before the amendment of 2018, all individuals (personal guarantors to co....
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....of Part III was to apply to them. The Statement of Objects and Reasons for the Amendment Bill of 2017, which eventually metamorphosized into the Amendment Act, stated that the Code provided for insolvency resolution for individuals and partnership firms "which are proposed to be implemented in a phased manner on account of the wider impact of these provisions. In the first phase, the provisions would be extended to personal guarantors of corporate debtors to further strengthen the corporate insolvency resolution process and a clear enabling provision for the purpose has been provided in the Bill." 85. The amendment introduced Section 2(e) i.e. personal guarantors to corporate debtors, as a distinct category to whom the Code applied. Now, the amendment was brought into force retrospectively, on 23 November, 2017. Section 1 of the Amendment Act states: "Section 1. (1) This Act may be called the Insolvency and Bankruptcy Code (Amendment) Act, 2018. (2) It shall be deemed to have come into force on the 23rd day of November, 2017." 86. In addition to amending Section 2, the same Amendment also amended Section 60(2). Interestingly, though "personal guarantor" was not defined, and....
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.... that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President." The term "no Bill or amendment" was construed distributively. The Court held "In our opinion, the High Court did not correctly appreciate the position. The language of the proviso cannot be interpreted in the manner accepted by the High Court without doing violence to the rules of construction. If both the words "introduced" or "moved" are held to refer to the Bill, it must necessarily be held that both those words will also refer to the word "amendment". On the face of it, there can be no question of introducing an amendment. Amendments are moved and then, if accepted by the House, incorporated in the Bill before it is passed. There is further an indication in the Constitution itself that wherever a reference is made to a Bill, the only step envisaged is introduction of the Bill. There is no reference to such a step as a Bill being moved. The Articles, of which notice may be taken in this connection, are Articles 109, 114, 117, 198 and 207. In all these articles, whatever prohibition is laid down relates to the int....
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....ct of what subject matters (in that case, factories and establishments) the provisions can apply. Crucially, it was held that "a scheme of this kind, though very beneficent, could not be introduced in the whole of the country all at once. "Further, held this court, such provisions may "need careful experimentation have some times to be adopted by stages and in different phases." 90. The theme of gradual implementation of law or legal principles, was also spoken about in Javed v. State of Haryana (2003) 8 SCC 369. by this court, which held that there is no constitutional imperative that a law or policy should be implemented all at once: "16. A uniform policy may be devised by the Centre or by a State. However, there is no constitutional requirement that any such policy must be implemented at one go. Policies are capable of being implemented in a phased manner. More so, when the policies have far-reaching implications and are dynamic in nature, their implementation in a phased manner is welcome for it receives gradual willing acceptance and invites lesser resistance." Similar observations were made in Pannalal Bansilal Pitti v. State of A.P. (1996) 2 SCC 498 where the court held ....
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....they read as follows: "234. (1) The Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code. (2) The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified. 235. (1) Notwithstanding anything contained in this Code or any law for the time being in force if, in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority ....
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....ing 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. 96. This court in V. Ramakrishnan (supra), noticed why an application under Section 60(2) could not be allowed. At that stage, neither Part III of the Code nor Section 243 had not been notified. This meant that proceedings against personal guarantors stood outside the NCLT and the Code. The non-obstante provision under Section 238 gives the Code overriding effect over other prevailing enactments. This is perhaps the 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 enactments. As of now, Section 243 has not been notified. In the event Section 243 is notifi....
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.... notified. Hence, it was advised that stakeholders who intend to pursue their insolvency cases may approach the appropriate authority/court under the existing enactments, instead of approaching the Debts Recovery Tribunals. 23. It is for this reason that sub-section (2) of Section 60 speaks of an application relating to the "bankruptcy" of a personal guarantor of a corporate debtor and states that any such bankruptcy proceedings shall be filed only before the National Company Law Tribunal. The argument of the learned counsel on behalf of the respondents that "bankruptcy" would include SARFAESI proceedings must be turned down as "bankruptcy" has reference only to the two Insolvency Acts referred to above. Thus, SARFAESI proceedings against the guarantor can continue under the SARFAESI Act. Similarly, subsection (3) speaks of a bankruptcy proceeding of a personal guarantor of the corporate debtor pending in any court or tribunal, which shall stand transferred to the adjudicating authority dealing with the insolvency resolution process or liquidation proceedings of such corporate debtor. An "Adjudicating Authority", defined under Section 5(1) of the Code, means the National Company ....
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....inion of this court, are insubstantial. The insolvency process in relation to corporate persons (a compendious term covering all juristic entities which have been described in Sections 2 [a] to [d] of the Code) is entirely different from those relating to individuals; the former is covered in the provisions of Part II and the latter, by Part III. Section 179, which defines what the Adjudicating authority is for individuals12 is "subject to" Section 60. Section 60(2) is without prejudice to Section 60(1) and notwithstanding anything to the contrary contained in the Code, thus giving overriding effect to Section 60(2) as far as it provides that the application relating to insolvency resolution, liquidation or bankruptcy of personal guarantors of such corporate debtors shall be filed before the NCLT where proceedings relating to corporate debtors are pending. Furthermore, Section 60(3) provides for transfer of proceedings relating to personal guarantors to that NCLT which is dealing with the proceedings against corporate debtors. After providing for a common adjudicating forum, Section 60(4) vests the NCLT "with all the powers of the DRT as contemplated under Part III of this Code for....
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....ion 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. The notifications under Section 1(3), (issued before the impugned notification was issued) disclose that the Code was brought into force in stages, regard being had to the categories of persons to whom its provisions were to be applied. The impugned notification, similarly inter alia makes the provisions of the Code applicable in respect of personal guarantors to corporate debtors, as another such category of persons to whom the Code has been extended. 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. 102. The other question which parties had urged before this court was that the impugned notification, by applying th....
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....h is the discharge of the principal debtor. ****************** 140.Rights of surety on payment or performance.-Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. 141.Surety's right to benefit of creditor's securities.-A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security." 104. All creditors and other classes of claimants, including financial andoperational 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 a....
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....ases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor - often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor." 107. In Committee of Creditors of Essar Steel (I) Ltd. v. Satish Kumar Gupta (2020) 8 SCC 531. (the "Essar Steel case") this court refused to interfere with proceedings initiated to enforce personal guarantees by financial creditors; it was observed as follows: "106. Following this judgment in V. Ramakrishnan case [SBI v. V. Ramakrishnan, (2018) 17 SCC 394], it is difficult to accept Shri Rohatgi's argument that that part of the resolution plan which states that the claims of the....
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....t, the liability of the surety is coextensive with that of the principal debtor unless it is otherwise provided by the contract. A surety is no doubt discharged under Section 134 of the Indian Contract Act by any contract between the creditor and the principal debtor by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. But a discharge which the principal debtor may secure by operation of law in bankruptcy (or in liquidation proceedings in the case of a company) does not absolve the surety of his liability (see Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath [AIR 1940 Bom 247; see also In re Fitzgeorge Ex parte Robson [(1905) 1 KB 462] )." 109. This legal position was noticed and approved later in Industrial Finance Corpn. of India Ltd. v. Cannanore Spg. & Wvg. Mills Ltd. (2002) 5 SCC 54 An earlier decision of three judges, Punjab National Bank v. State of U.P. (2002) 5 SCC 80 pertains to the issues regarding a guarantor and the principal debtor. The court observed as follows: "The appellant had, after Respondent 4's management was taken over by U.P. State Textile Co....
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....ents 1, 2 and 3 who stood guarantors arises out of the terms of the deed of guarantee which are not in any way superseded or brought to a naught merely because the appellant may not be able to recover money from the principal borrower. It may here be added that even as a result of the Nationalisation Act the liability of the principal borrower does not come to an end. It is only the mode of recovery which is referred to in the said Act." 110. In Kaupthing Singer and Friedlander Ltd. (supra) the UK Supreme Court reviewed a large number of previous authorities on the concept of double proof, i.e. recovery from guarantors in the context of insolvency proceedings. The court held that: "The function of the rule is not to prevent a double proof of the same debt against two separate estates (that is what insolvency practitioners call "double dip"). The rule prevents a double proof of what is in substance the same debt being made against the same estate, leading to the payment of a double dividend out of one estate. It is for that reason sometimes called the rule against double dividend. In the simplest case of suretyship (where the surety has neither given nor been provided with securi....
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....gainst one partner in a firm, any other application against another partner in the same firm shall be presented in or transferred to the Adjudicating Authority in which the first mentioned application is pending for adjudication and such Adjudicating Authority may give such directions for consolidating the proceedings under the applications as it thinks just. (4) An application under sub-section (1) shall be accompanied with details and documents relating to: (a) the debts owed by the debtor to the creditor or creditors submitting the application for insolvency resolution process as on the date of application; (b) the failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand; and (c) relevant evidence of such default or non-repayment of debt. (5) The creditor shall also provide a copy of the application made under sub-section (1) to the debtor. (6) The application referred to in sub-section (1) shall be in such form and manner and accompanied by such fee as may be prescribed. (7) The details and documents required to be submitted under Sub-section (4) shall be such as may be specified." 4. "The Code prescribes for t....