[Breaking] Supreme Court upholds provisions of Insolvency and Bankruptcy Code on insolvency of personal guarantors

The Supreme Court on Friday upheld the provisions of the Insolvency and Bankruptcy Code (IBC) relating to insolvency of personal guarantors, that were brought into force in 2019 (Lalit Kumar Jain v. Union of India)..A Bench of Justices L Nageswara Rao and Ravindra Bhat delivered the judgment after the apex court transferred to itself petitions challenging a notification dated November 15, 2019, enforcing certain provisions of the IBC relating to insolvency of personal guarantors..The notification had also enacted a number of Rules on the insolvency resolution process for personal guarantors to corporate debtors..The top court held that 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 judgment said. .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 corporate persons, does not lead to incongruity, the Court said. "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," the Court ruled. .The Court also held that the November 2019 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," the court said. .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.reads judgment.The Insolvency and Bankruptcy Board of India (IBBI) had sought the transfer of all the matters pending before the High Courts to the Supreme Court so as to avoid conflicting rulings by different courts..All those pending writ petitions challenged the constitutional validity of Part III of the IBC, which deals with insolvency resolution for individuals and partnership firms..The top court, while transferring all the petitions to itself in October last year, had stated that the IBC was at a nascent stage and that it was better for the Court to take up the interpretation of the provisions of the Code so as to avoid any confusion, and to authoritatively settle the law."Considering the importance of the issues raised in the Writ Petitions which need finality of judicial determination at the earliest, it is just and proper that the Writ Petitions are transferred from the High Courts to this Court," the Supreme Court had noted in its order. .Writ petitions were filed in the Delhi High Court and other High Courts challenging the 2019 notification and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019 as well as a number of similar Rules.The petitioners also sought that Sections 95, 96, 99, 100, 101 of the IBC be declared unconstitutional in so far as they apply to personal guarantors of corporate debtors..Vide the 2019 notification, the Union Ministry of Corporate Affairs had brought into force the following provisions of the IBC insofar as they related to personal guarantors to corporate debtors:i. Clause (e) of Section 2;ii. Section 78 (except with regard to fresh start process) and Sections 79;ii. Sections 94 to 187 (both inclusive);iv. Clause (g) to Clause (i) of sub-section (2) of Section 239v. Clause (m) to Clause (zc) of sub-section (2) of Section 239;vi. Clause (zn) to Clause (zs) of sub-section (2) of Section 240;andvii. Section 249..[Read Judgment]