Supreme Court

Lalit Kumar Jain vs. Union of India and Ors.

MANU/SC/0352/2021

21.05.2021

Insolvency

Involuntary act of principal debtor, leading to loss of security, would not absolve a guarantor of its liability

The common question which arises in present cases concerns the vires and validity of a notification dated 15th November, 2019 issued by the Central Government (“the impugned notification”). The Petitioners contend that, the power conferred upon the Union under Section 1(3) of the Insolvency and Bankruptcy Code, 2016 (IBC) could not have been resorted to in the manner as to extend the provisions of the IBC only as far as they relate to personal guarantors of corporate debtors.

After publication of the impugned Notification, many Petitioners were served with demand notices proposing to initiate insolvency proceedings under the IBC. 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. The Central Government has no authority – legislative or statutory – to impose conditions on the enforcement of the IBC. 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.

The impugned Notification is not an instance of legislative exercise, or amounting to impermissible and selective application of provisions of the IBC. There is no compulsion in the IBC 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 the IBC- by Section 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 sanction of a resolution plan and finality imparted to it by Section 31 of IBC does not per se operate as a discharge of the guarantor’s liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. However, this court has indicated, time and again, that, an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability.

It is held that, approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the 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 the surety/guarantor of his or her liability, which arises out of an independent contract. The impugned notification is legal and valid. It is also held that, 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). The writ petitions, transferred cases and transfer petitions are accordingly dismissed.

Tags : Notification Guarantor Liability

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