Effect Of Approval Of Resolution Plan On Personal Guarantor Or Surety.

Effect Of Approval Of Resolution Plan On Personal Guarantor Or Surety.
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The impugned notification

A series of writ petitions before the Supreme Court challenged the validity of the notification dated 15.11.2019 issued by the Ministry of Corporate Affairs (the impugned Notification) in exercise of the powers conferred under Section 1(3) of the Insolvency and Bankruptcy Code, 2016 (IBC and/or the Code) which notified the enactment of certain provisions of the Code in so far as they relate to Personal Guarantors.

The judgment in Lalit Kumar Jain vs. Union of India (2021 SCC OnLine SC 396) answers the cumulative question in all the writ petitions that dealt with similar grounds of challenge. The common issues addressed in relation to the validity of the impugned notification were two-fold:

  1. The power and authority of the central government in issuing such notification; and

  2. The correctness in imposing complementary liability upon a personal guarantor in the insolvency process against a corporate debtor.

The question of excessive legislation

As regards the question of excessive legislation, the petitioners made the following arguments:-

The notification is a case of excessive legislation, i.e., the executive acting beyond its jurisdiction and unconstitutional delegation of power.

There is no rational basis on which the personal guarantors of corporate debtors have been singled out or differentiated from other individuals under Part III of IBC.

The respondents defended the impugned notification primarily on the basis of the object and purpose behind the enactment of the provisions. The procedure of insolvency under the Code might be different for corporate debtors and personal guarantors, however, unification of the process enables the adjudicating authority to have a clear vision on the extent of debts, assets and resources of the corporate debtor as well as the personal guarantor.

On an analysis of the various notifications issued under the IBC and the decisions relied upon on behalf of the petitioners and respondents, the Court observed that the rationale behind enactment of the provisions from time-to-time in the manner as adopted by the Central Government was to fulfil the objectives of the Code in consonance with its priorities.

It was held that the impugned notification is valid and cannot be termed as an instance of impermissible legislative exercise in view of the fact that although personal guarantors are a part of the larger group of individuals, they shall be dealt with differently owing to their intrinsic connection with the corporate debtors.

Resolution plan and liability of personal guarantors

Advancing on the same flow of reasoning, the second question with regard to the co-existing liability between personal guarantors and corporate debtors was dealt with.

The view of the petitioners:

Swiss Ribbons vs. Union of India (2019) 4 SCC 17 and Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta 2019 SCC OnLine SC 1478 was relied on to argue that once a resolution plan has been approved, the liabilities of the corporate debtor are deemed to have been finalised and hence the personal guarantor cannot be held to be liable in separate resolution proceedings. Essar Steels held that an approved resolution plan shall be binding on all stakeholders. It is an established position that the IBC is meant to be a beneficial legislation for the corporate debtor providing it an opportunity of revival and not a recovery legislation for creditors.

Dr. Vishnu Kumar Agarwal vs. Piramal Enterprises Ltd. 2019 SCC OnLine NCLAT 542 held that two separate CIRP proceedings cannot be initiated for the same set of debts. In essence, the liabilities of the corporate debtor and the personal guarantor are co-extensive and an approved resolution plan in respect of a corporate debtor amounts to extinction of all outstanding claims.

The impugned notification in allowing provisions under Part II of the Code to be applicable to personal guarantors deprives them of their valuable substantive rights.

The respondents submitted:

  1. A predominant reason for insolvency of the corporate debtor are the personal guarantors themselves since they are, mostly, the in-charge of the affairs of the company.

  2. On the point of the liabilities of the corporate debtors being co-extensive with that of personal guarantors, the respondents argued that a discharge of the liability of corporate debtor on account of winding up or CIRP does not absolve the surety of its liability.

  3. The creditor has the right to proceed against the principal borrower and all sureties simultaneously. For assertion of such point, reliance was placed on State Bank of India vs. Index Port Registered AIR 1992 SC 1740 and Industrial Investment Bank of India vs. Biswanath Jhunjhunwala (2009) 9 SCC 478.

  4. Reliance was also placed on Maharashtra State Electricity Board Bombay vs. Official Liquidator, High Court, Ernakulum(1982) 3 SCC 358 which held that the rights of a creditor continue against a guarantor even in the event of liquidation or bankruptcy.

  5. Gouri Shankar Jain vs. Punjab National Bank 2019 SCC OnLine Cal 7288 held that the obligations of a surety under the relevant sections of the Indian Contract Act, 1872 cannot be discharged on account of admission of a Section 7 application under IBC.

  6. The impugned notification on this count is valid since the object of hybridization is to empower NCLT to deal with the insolvency and bankruptcy process of the corporate debtors as well as the corporate and personal guarantors simultaneously. This also arises from the fact that they are jointly and severally liable for the same debt

    The Court considered the submissions of the parties and answered the issue on whether or not the liabilities of personal guarantors would extinguish in view of the finality of the resolution plan.

    The court relied on State Bank of India vs. V. Rama krishnan (2018) 17 SCC 394which held that Section 31 of the IBC makes it clear that the guarantor cannot escape its liability. The sanction of a resolution plan and the finality thereof cannot operate as a discharge of the guarantor’s liability. Reliance was also placed on Maharashtra State Electricity Board which held that by reason of existence of an unequivocal guarantee, the liability of the guarantor continues.

    In view of the above discussion, it was held that approval of a resolution plan does not ispo facto absolve the personal guarantor of a corporate debtor of its responsibilities or liabilities under a contract of guarantee which is prima facie an independent contract.

    Conclusion

    The conclusions that can be derived from the above decision are:

    1. The impugned notification dated 15.11.2019 is valid in as far as the exercise of legislation is concerned. The Executive has not acted beyond the provisions of the Code and powers granted to it hereunder.

    2. The impugned notification does not differentiate between other individuals and personal guarantors without basis. The court considered the proper reasoning implemented by the government in arriving at such decision.

    3. The impugned notification also does not impose an additional liability on the personal guarantor even after the approval of a resolution plan since such liability can be read into the existing provisions of the IBC.

    4. The approval of a resolution plan or determination of the liabilities of a corporate debtor in the resolution process does not extinguish the liabilities of the personal guarantors. The resolution plan itself may consist of provisions binding the personal guarantors as against their debts.

    5. Thus, the impugned notification, as upheld by the Supreme Court, is legal and valid.

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