The Lalit Kumar Jain v Union of India & Ors case turned out to be a landmark judgement that finally put to rest a longstanding legal storm and battle between a consolidation of corporates and the Union Government which began in the month of November in 2019.
The Apex Court through its judgement in this case has laid to rest the contentions raised by the Petitioners with respect to the liability of a personal guarantor and also further emphasised the constitutional authority of the Union Government with respect to the validity of the notifications and ordinances they release.
Quorum: Division Bench
Bench: Hon’ble Judges L. Nageswara Rao and S. Ravindra Bhat
Date of Decision: May 21, 2021
The said case arose because of a duly noted order issued by the Central Government in the form of a notification dated 15th November 2019[I]. The notification dealt with Part III of the Insolvency & Bankruptcy code of 2016 (IBC). This new notification broadly made changes with the concepts of guarantor and liability of a guarantor.
The Notification was brought into effect under Part III of the IBC that deals with the insolvency and bankruptcy of individuals and partnership firms in so far as it is applicable to personal guarantors of a corporate debtor. As per the Insolvency & Bankruptcy Code 2016, ‘Personal Guarantor’ means an individual who is the surety in a contract of guarantee to a corporate debtor.
Prior to the said notification, the right to prosecute or initiate the IBC code against personal guarantors was exclusively in the hand of the Debt Recovery Tribunal. With the present notification, this right & jurisdiction has been extended to banks as well thereby drastically increasing the personal risk and liability faced by the guarantor as well as increasing the accountability of the guarantor.
With this notification in place, insolvency proceedings can be initiated by the creditors against all individuals who stood as personal guarantors. While this move was celebrated by various groups of creditors, it came under direct fire & scrutiny of a large number of individuals who were serving as guarantors in various capacities to various corporates & companies.
Contentions of the Petitioners
The petitioners who immediately challenged these orders were individuals who were assuming the role of guarantors in various corporations & companies. They were of the firm belief that this notice will further increase the risk & liability they face as a guarantor.
Several of the petitioners themselves were individuals who were in positions such as Chairman, Directors, Promoters & Managing directors of the companies who stood as a personal guarantor for the company and through which was able to advance huge amount of monies for the company.
The petitioners held various contentions against the said notification. Arguments included that the Central Government has no statutory authority to enforce parts of the code to the whole notification being deemed ultra-vires.
The main Contentions are as follows:
- The power granted under Section 1(3) of the code to the government cannot be extended only to personal guarantors and corporate debtors. It is nothing but excessive delegation on the part of the union government.
- The power delegated under Section 1(3) of the code applies to various points in time new provisions can be brought into force and does not permit the government to notify parts of the code to apply to certain groups of people (Guarantors).
- The Governments view to enforce Sections 78, 79, 94 – 187 of the code only to guarantors and corporate debtors are invalid and impermissible in law.
- The notice makes no difference between a financial and an operational creditor (Swiss Ribbons Pvt. ltd vs UOI[II])
- The petitioners argued that not bringing into effect section 243 of the IBC and the subsequent issue of this notice created 2 self-contradictory insolvency procedures for an individual guarantor.
- The notification is ultra-vires because it does not speak about the Insolvency Resolution Process (IRP)
- It was also held that the liability of a personal guarantor is co-extensive to that of a principal debtor as per Section 128 of the Indian Contract Act, 1872. This was held in the Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta.[III]
Response of the Union Government
The UOI argued that in 2018, the IBC was amended to add three categories of debtors and Section 2(e) of the code specifically dealt with personal guarantors.
The government felt that if the said separation was not achieved, corporate debtors would have to be dealt with separately in IRP against promoters, chairman’s & directors who are the ones in most cases, a personal guarantor for the company and the individuals responsible for the companies insolvency.
The Attorney General who argued for the UOI relied upon the Black’s law dictionary and the judgement of “Cheettiam Veetil Ammad v. Taluk Land Board & Ors[IV]” defining the term ‘Provision” stated as per Section 2(e) as a distinct provision under the meaning of Section 1(3) and therefore the government’s action was intra-vires to bring it into force as well as parts of Part III of the code against guarantors.
It was argued that the government has the statutory powers to interpret the provisions of the IBC to provide flexibility to implement the provisions of the code to achieve the objectives of the code.
Judgement in Lalit Kumar Jain v Union of India
The apex court from the start held that the notification aimed at better implementation of the provisions of the IBC. The court held the opinion that the move by the Central government aimed at bringing personal guarantors who in most cases are promoters, directors etc. into the scope and mechanism of IRP.
Until now, these parties remained outside the scope of the IRP and went unchecked even though being responsible for insolvency in most cases. The court noted that the adjudicating authority would be the NCLT which would be able to give a bigger picture which in turn could help the creditors while initiating IRP.
In Para 11 of the Judgement, while giving the order, the court held that from the above discussion, it can be held that the mere approval of a resolution plan will not ipso facto discharge a guarantor from his or her liability.
The discharge of a borrower from the debt through an involuntary process will not absolve the surety of his/her liability which arises from an independent contract. In Para 112, the court held that the impugned notice/notification is valid & legal. All writ petitions filed on the matter were accordingly dismissed.
The decision of the Apex court in Lalit Kumar Jain v UOI & Ors is seen as a welcome judgement. The judgement allows for better and more transparent accountability on the part of the guarantors and holds them responsible and liable.
The creditor community is at many benefits from the same judgement because it has allowed them better access to the personal wealth of the same guarantors who in most cases are in top positions within the company but used to go unscathed and unharmed until now. The judgement is seen as one that furthers the objectives and goals of the Insolvency & Bankruptcy Code of 2016.
[I] Ministry of Corporate Affairs, S.O. 4126(E) (Notified on November 15, 2019).
[II] Swiss Ribbons Pvt. Ltd. v. Union of India, WRIT PETITION (CIVIL) NO. 99 OF 2018 (India)
[III] Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, CIVIL APPEAL NO. 8766-67 OF 2019 (India)
[IV] Cheettiam Veetil Ammad v. Taluk Land Board And Ors, 1979 AIR 1573 (India)