Lalit Kumar Jain v. Union of India

Supreme Court of India, 21 May 2021, 2 judges

The Central Government's notification of 15 November 2019 bringing the Insolvency and Bankruptcy Code into force for personal guarantors to corporate debtors is valid, and approval of a resolution plan does not by itself discharge a personal guarantor.

Facts

By notification dated 15 November 2019 issued under Section 1(3) of the Insolvency and Bankruptcy Code, 2016, the Central Government brought into force Section 2(e), Sections 78, 79, 94 to 187 and related provisions, only so far as they relate to personal guarantors to corporate debtors. The petitioners had given personal guarantees to banks for loans to companies with which they were associated; many companies were in insolvency proceedings and some resolution plans had been approved. After demand notices were served on them, the guarantors challenged the notification in several High Courts and under Article 32. The cases were transferred to and heard by the Supreme Court.

Questions before the Court

Was the notification, which applied provisions of the Code only to personal guarantors to corporate debtors, beyond the power delegated by Section 1(3) and an impermissible exercise of legislative power?
Does approval of a resolution plan for the corporate debtor under Section 31 discharge the personal guarantor's liability under the contract of guarantee?

What the Court held

Parliament intended to treat personal guarantors as a separate category of individuals, given their close connection with corporate debtors. Sections 2(e), 5(22), 60 and 179 show they were to be dealt with through the same forum, the NCLT, as the corporate debtor.
Nothing in the Code required it to be applied to all individuals at once. The Code had been brought into force in stages by category, and the notification was a valid exercise of power under Section 1(3), not legislative action or selective application.
A resolution plan approved under Section 31 binds guarantors, but its sanction does not by itself discharge the guarantor's liability, which depends on the terms of the guarantee.
Release of the principal borrower by an involuntary process, by operation of law, liquidation or insolvency, does not absolve the surety, whose liability arises from an independent contract. The petitions were dismissed.

Why it matters

The judgment upholds the extension of the Code's individual insolvency provisions to personal guarantors to corporate debtors and confirms that the NCLT is their common forum. It settles that approval of a corporate debtor's resolution plan does not ipso facto discharge personal guarantors, so creditors may proceed against them under the guarantee.

In the Court's words

Copied from the official judgment; each passage links to its page.

“In view of the above discussion, it is held that the impugned notification is not an instance of legislative exercise, or amounting to impermissible and selective application of provisions of the Code. There is no compulsion in the Code that it should, at the same time, be made applicable to all individuals, (including personal guarantors) or not at all.”

S. Ravindra Bhat, J.Page 74 of the judgment

“It is therefore, clear that the sanction of a resolution plan and finality imparted to it by Section 31 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.”

S. Ravindra Bhat, J.Page 78 of the judgment

“In view of the above discussion, 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.”

S. Ravindra Bhat, J.Page 81 of the judgment

Provisions interpreted

Related judgments

Follows Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019)“this court refused to interfere with proceedings initiated to enforce personal guarantees by financial creditors” (page 78)

Case and bench

Parties: Lalit Kumar Jain v. Union of India & Ors.
Case: Transferred Case (Civil) No. 245 of 2020, with connected writ petitions, transferred cases and transfer petitions
Decided: 21 May 2021
Bench: L. Nageswara Rao, S. Ravindra Bhat
Opinions: Unanimous. Judgment delivered by S. Ravindra Bhat, J.

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