Lalit Kumar Jain v. Union of India, 2021 SCC OnLine SC 396 - Synopsis
Ahir Mitra 15 Jul 2021

Lalit Kumar Jain v. Union of India.

2021 SCC OnLine SC 396

The Supreme Court affirmed the provisions of the Insolvency and Bankruptcy Code related to personal guarantor’s insolvency, which was enacted in 2019. The petitioners provided bank and financial institutions with guarantees in their capacities as directors, promoters, chairman, and managing directors of the businesses and the guarantees have been invoked, and procedures against the companies with which they are connected are pending.

 The cases that are now pending at various phases, such as insolvency filing, resolution plan completion, or resolution plan rejection. Many demand notices were issued to the petitioner after the impugned notification was published, suggesting insolvency proceedings under IB, Code, and recovery procedures began following the invocation of guarantees under part-III of Code.

The Petitioners claimed that the Union's power under Section 1(3) of the Code could not have been used to limit the Code's provisions to personal guarantors of corporate debtors. Section 2(e), Section 78, Sections 79, 94-187 (both inclusive); Section 239(2)(g), (h), & I Section 239(2)(m) to (zc); Section 239(2) (zn) to (zs); and Section 239(2) (zn) to (zs). The petitioner contained that the Central Government has acted more than the powers vested in it under section 1 (3) of the Insolvency and Bankruptcy Code.

The question of law in this is the case is that, the position and the liability of the personal guarantors in Insolvency and Bankruptcy Code,

The Court upheld the validity of the contested notification. The Court stated that the contested notice is not an example of excessive legislative power since the Code does not require that it be applied to all people at the same time. As a result, the power exercised in making the contested notification under Section 1(3) is not ultra vires. The Hon'ble Court further held that the personal guarantors and their corporate debtors had an "intrinsic" link.

The court, on the other hand, has repeatedly stated that involuntary conduct of the primary debtor resulting in the loss of security does not free a guarantor of obligation. The responsibility of the guarantor (in a scenario where the primary debtor's liability was discharged under the bankruptcy law or the company law) was considered in Maharashtra State Electricity Board (supra). It was held that the guarantor's responsibility persists as a result of the unambiguous promise and the creditor can collect it from the guarantor under Section 128 of the Contract Act because there is no discharge under Section 134 of that Act.

The Supreme Court of India has decided that a resolution plan does not ipso facto relieve a personal guarantor of her or his obligations under the guarantee contract. The endorsement of a resolution plan and the finality conferred on it by Section 31 does not, as this court has ruled, act as a discharge of the guarantor's responsibility. That an involuntary procedure, such as by operation of law or owing to liquidation or insolvency, does not free the surety/guarantor of his or her responsibility arising from an independent contract.

The contested notification is found to be legal and legitimate. It is also ruled that acceptance of a corporate debtor's resolution plan does not relieve the responsibilities of personal guarantors. The writ petitions for transferred cases and transfer petitions are consequently rejected in the terms set out above, with no judgment as to costs. The petition contesting the 15.11.2019 notification and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019 was dismissed by the court.

 

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