Insolvency and Bankruptcy Code, 2016 – ss.1(3), 2(e), 5(22), 60, 179, 234, 235, 238 and 243 – Vires and validity of notification dated 15.11.2019 issued by the Central Government – Whether the impugned notification was an exercise of excessive delegation; and inasmuch as it notified various provisions of the Code only in so far as they related to personal guarantors to corporate debtors, it was therefore, ultra vires – Held: The impugned notification was not an instance of legislative exercise, nor amounted to impermissible and selective application of provisions of the Code – 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 – Sufficient indication in the Code- by s.2(e), s.5(22), s.60 and s.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 – Notifications u/s.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 – 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 s.1(3) is therefore, not ultra vires; the notification is valid. Insolvency and Bankruptcy Code, 2016 – Whether once a resolution plan is accepted, the corporate debtor is discharged of liability; and as a consequence, the guarantor whose liability is co1075 extensive with the principal debtor, i.e. the corporate debtor, too is discharged of all liabilities – Held: Approval of a resolution plan relating to a corporate debtor does not ipso facto discharge a personal guarantor (of the corporate debtor) of his liabilities under the contract of guarantee – 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. Maxims – Maxim “reddendo singular singulis” – Applicability – Where a sentence in a statute contains several antecedents and several consequences, they are to be read distributively, that is to say, each phrase or expression is to be referred to its appropriate object – When s.60(2) of the Code alludes to insolvency resolution or bankruptcy, or liquidation of three categories, i.e. corporate debtors, corporate guarantors (to corporate debtors) and personal guarantors (to corporate debtors) they apply distributively, i.e. that insolvency resolution, or liquidation processes apply to corporate debtors and their corporate guarantors, whereas insolvency resolution and bankruptcy processes apply to personal guarantors, (to corporate debtors) who cannot be subjected to liquidation – Insolvency and Bankruptcy Code, 2016 – s.60(2). Dismissing the writ petitions, transferred cases and transfer petitions, the Court
HELD:1.1. The Central Government followed a stage-bystage 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. [Para 81][1149-B]
1.2. Insolvency proceedings relating to individuals is regulated by Part-III of the Code. Before the amendment of 2018, all individuals (personal guarantors to corporate debtors, partners of firms, partnership firms and other partners as well as individuals who were either partners or personal guarantors to corporate debtors) fell under one descriptive description under the unamended Section 2(e). The unamended Section 60 contemplated that the adjudicating authority in respect of personal guarantors was to be the NCLT. Yet, having regard to the fact that Section 2 brought all three categories of individuals within one umbrella class as it were, it would have been difficult for the Central Government to selectively bring into force the provisions of part –III only in respect of personal guarantors. It was here that the Central Government heeded the reports of expert bodies which recommended that personal guarantors to corporate debtors facing insolvency process should also be involved in proceedings by the same adjudicator and for this, necessary amendments were required. Consequently, the 2018 Amendment Act altered Section 2(e) and subcategorized three categories of individuals, resulting in Sections 2(e), (f) and (g). Given that the earlier notification of 30.11.2016 had brought the Code into force in relation to entities covered under Section 2(a) to 2(d), the amendment Act of 2018 provided the necessary statutory backing for the Central Government to apply the Code, in such a manner as to achieve the objective of the amendment, i.e. to ensure that adjudicating body dealing with insolvency of corporate debtors also had before it the insolvency proceedings of personal guarantors to such corporate debtors. The amendment of 2018 also altered Section 60 in that insolvency and bankruptcy processes relating to liquidation and bankruptcy in respect of three categories, i.e. corporate debtors, corporate guarantors of corporate debtors and personal guarantors to corporate debtors were to be considered by the same forum, i.e. NCLT. [Paras 82, 83][1149-B-H]
2.1. In addition to amending Section 2, the same Amendment also amended Section 60(2). Interestingly, though “personal guarantor” was not defined, and fell within the larger rubric of “individual” under the Code, the adjudicating authority for insolvency process and liquidation of corporate persons including corporate debtors and personal guarantors was the NCLT- even under the unamended Code. The amendment of Section 60(2) added a few concepts. The amendment inserted the expression “or liquidation” before the words “or bankruptcy” and also inserted the expression “of a corporate guarantor… as the case may be, of” such corporate debtor. The interpretation of this expression has to be contextual. There is no question of liquidation of a personal guarantor, an individual. In such cases, the principle behind the maxim “reddendo singular singulis” applies. [Paras 86, 87][1050-F-H; 1051-D-F]
2.2. When Section 60(2) alludes to insolvency resolution or bankruptcy, or liquidation of three categories, i.e. corporate debtors, corporate guarantors (to corporate debtors) and personal guarantors (to corporate debtors) they apply distributively, i.e. that insolvency resolution, or liquidation processes apply to corporate debtors and their corporate guarantors, whereas insolvency resolution and bankruptcy processes apply to personal guarantors, (to corporate debtors) who cannot be subjected to liquidation. [Para 88][1152-F-G]
2.3. Section 60 had previously, under the original Code, designated the NCLT as the adjudicating authority in relation to two categories: corporate debtors and personal guarantors to corporate debtors. The 2018 amendment added another category: corporate guarantors to corporate debtors. The amendment seen in the background of the report, as indeed the scheme of the Code (i.e., Section 2 (e), Section 5 (22), Section 29A, and Section 60), clearly show that all matters that were likely to impact, or have a bearing on a corporate debtor’s insolvency process, were sought to be clubbed together and brought before the same forum. [Para 92][1154-F-G]
3. Sections 234 and 235 of the Code also reveal that the scheme of the Code always contemplated that overseas assets of a corporate debtor or its personal guarantor could be dealt with in an identical manner during insolvency proceedings, including by issuing letters of request to courts or authorities in other countries for the purpose of dealing with such assets located within their jurisdiction. [Para 93][1155-G-H]
4. The impugned notification operationalizes the Code so far as it relates to personal guarantors to corporate debtors: (1) Section 79 pertains to the definitional section for the purposes of insolvency resolution and bankruptcy for individuals before the Adjudicating Authority. (2) Section 94 to 187 outline the entire structure regarding initiation of the resolution process for individuals before the Adjudicating Authority. [Para 94][1156-AB]
5. The impugned notification authorises the Central Government and the Board to frame rules and regulations on how to allow the pending actions against a personal guarantor to a corporate debtor before the Adjudicating Authority. The intent of the notification, facially, is to allow for pending proceedings to be adjudicated in terms of the Code. Section 243, which provides for the repeal of the personal insolvency laws has not as yet been notified. Section 60(2) prescribes that in the event of an ongoing resolution process or liquidation process against a corporate debtor, an application for resolution process or bankruptcy of the personal guarantor to the corporate debtor shall be filed with the concerned NCLT seized of the resolution process or liquidation. Therefore, the Adjudicating Authority for personal guarantors will be the NCLT, if a parallel resolution process or liquidation process is pending in respect of a corporate debtor for whom the guarantee is given. The same logic prevails, under Section 60(3), when any insolvency or bankruptcy proceeding pending 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. [Para 95][1156-C-F]
6. 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 notified and those two Acts repealed, then, the present notification would not have had the effect of covering pending proceedings against individuals, such as personal guarantors in other forums, and would bring them under the provisions of the Code pertaining to insolvency and bankruptcy of personal guarantors. The impugned notification, as a consequence of the non obstante clause in Section 238, has the result that if any proceeding were to be initiated against personal guarantors it would be under the Code. [Para 96][1156-G-H; 1157A-C]
7. 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 individuals 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 the purpose of sub-section (2)”. Section 60
(4) thus (a) vests all the powers of DRT with NCLT and (b) also vests NCLT with powers under Part III. Parliament therefore merged the provisions of Part III with the process undertaken against the corporate debtors under Part II, for the purpose of Section 60(2), i.e., proceedings against personal guarantors along with corporate debtors. Section 179 is the corresponding provision in Part III. It is “subject to the provisions of Section 60”. Section 60 (4) clearly incorporates the provisions of Part III in relation to proceedings before the NCLT against personal guarantors. [Para 99][1159-F-G; 1160-A-D]
8. It is clear that the Parliamentary intent was to treat personal guarantors differently from other categories of individuals. The intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as the possibility of two separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals, for whom the Adjudicating authority was common with the corporate debtor to whom they had stood guarantee. The fact that the process of insolvency in Part III is to be applied to individuals, whereas the process in relation to corporate debtors, set out in Part II is to be applied to such corporate persons, does not lead to incongruity. On the other hand, there appear to be sound reasons why the forum for adjudicating insolvency processes – the provisions of which are disparate- is to be common, i.e through the NCLT. The NCLT would be able to consider the whole picture, as it were, about the nature of the assets available, either during the corporate debtor’s insolvency process, or even later; this would facilitate the CoC in framing realistic plans, keeping in mind the prospect of realizing some part of the creditors’ dues from personal guarantors. [Para 100][1160-D-F; 1161-A-C]
9. 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. There is sufficient indication in the Code- 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 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. 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. [Para 101][1161-C-G]
10. 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. 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. Also, 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). [Paras 111,112][1168-G-H; 1169-A-B]
State Bank of India v. V. Ramakrishnan (2018) 17 SCC
394 : [2018] 10 SCR 974; Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019) SCC Online SC 1478; Maharashtra State Electricity Board Bombay v. Official Liquidator, High Court, Ernakulum & Anr. (1982) 3 SCC 358 : [1983] 1 SCR 561; Industrial Finance Corpn. of India Ltd. v. Cannanore Spg. & Wvg. Mills Ltd. (2002) 5 SCC 54 : [2002] 2 SCR 1093 and Punjab National Bank v. State of UP (2002) 5 SCC 80 – relied on.
Swiss Ribbons (P.) Ltd. v. Union of India (2019) 4 SCC
17 : [2019] 3 SCR 535; Delhi Laws Act, 1912, In re v. Part ‘C’ States (Laws) Act, 1950, [1951] SCR 747; State of Tamil Nadu v. K. Sabanayagam (1998) 1 SCC 318 : [1997] 5 Suppl. SCR 345; Vasu Dev Singh & Ors. v. Union of India & Ors. (2006) 12 SCC 753 : [2006] 8 Suppl. SCR 535; State of Bombay v. Narothamdas Jethabhai, [1951] 2 SCR 51; Sardar Inder Singh v. State of Rajasthan [1957] SCR 605; Hamdard Dawakhana v. Union of India [1960] 2 SCR 671; Babulal Vardharji Gurjar v. Veer Gurjar Aluminum Industries Pvt. Ltd. & Anr. (2020) 15 SCC 1; Chettian Veettil Amman v. Taluk Land Board (1980) 1 SCC 499 : [1979] 3 SCR 839; Basant Kumar Sarkar v. Eagle Rolling Mills Ltd. [1964]
6 SCR 913; Bishwambhar Singh v. State of Orissa [1954] SCR 842; Embassy Property Developments (P) Ltd. v. State of Karnataka (2020)13 SCC 308; J. Mitra and Co. Pvt. Ltd. v. Assistant Controller of Patents (2008) 10 SCC 368 : [2008] 12 SCR 419; Lalit Narayan Mishra Institute of Economic Development v. State of Bihar & Ors. Etc. (1988) 2 SCC 433 : [1988] 3 SCR 311; Javed & Ors v. State of Haryana & Ors. (2003) 8 SCC 369 : [2003] 1 Suppl. SCR 947; Bank of Bihar Ltd. v. Dr. Damodar Prasad & Anr. AIR [1969] 1 SCR 620; State Bank of India v. Index port Registered AIR 1992 SC 1740; Industrial Investment Bank of India v. Biswanath Jhunjhunwala (2009) 9 SCC 478 : [2009]
13 SCR 391; Lachmi Narain v. Union of India (1976)
2 SCC 953 : [1976] 2 SCR 785; Raghubar Swarup v. State of U.P AIR 1959 SC 909; ITC Bhadrachalam v. Mandal Revenue Officer (1996) 6 SCC 634 : [1996] 5 Suppl. SCR 643; Edward Mills v. State of Ajmer [1955]
1 SCR 735; Chairman Board of Mining Examination v. Ramji AIR 1977 SC 965 : [1977] 2 SCR 904;
Directorate of Enforcement v. Dipak Mahajan (1994)
3 SCC 440 : [1994] 1 SCR 445; Arcelor Mittal v. Satish Kumar Gupta (2019) 2 SCC 1 : [2018] 12 SCR 362; Brij Sundar Kapoor v. First Additional Judge (1989) 1 SCC 561 : [1988] Suppl. SCR 558; Raghubir Sarup v. State of UP AIR 1959 SC 909; Khargram Panchayat Samiti v. State of West Bengal (1987) 3 SCC 82 : [1987]
2 SCR 1207; Koteswar Vittal Kamath v. K. Rangappa Baliga & Co. (1969) 1 SCC 255 : [1969] 3 SCR 40; Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority (2020) 13 SCC 208; Javed v. State of Haryana (2003) 8 SCC 369 : [2003] 1 Suppl. SCR 947; Pannalal Bansilal Pitti v. State of A.P. (1996)
2 SCC 498 : [1996] 1 SCR 603; and Vijay Kumar Jain v. Standard Chartered Bank (2019) SCC OnLine SC 103 – referred to.
Gouri Shankar Jain v. Punjab National Bank & Anr. 2019 SC Online Cal 7288; Kundanlal Dabriwala v. Haryana Financial Corporation (2012) 171 Comp Cas 94; Dr. Vishnu Kumar Agarwal v. Piramal Enterprises Ltd. (2019) SCC Online NCLAT 542 and Pegasus
Aviation Finance Company vs. Kingfisher Airlines Limited (2016) SCC OnLine Kar 5991– referred to. R v. Burah 1878 (3) App. Cases 889 (Decision of Privy Council); Jatindra Nath Gupta v. Province of Bihar (Judgment of Federal Court), (1949-50) 11 FCR 595; and Re Kaupthing Singer and Friedlander Ltd. (in administration) (Decision of UK Supreme Court), 2012
(1) All ER 883 – referred to.
Bennion on Statutory Interpretation: A Code
(6th Edition, at page 257) – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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