Resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee

In the matter of Lalit Kumar Jain. Vs. Union of India & Ors. in Transferred Case (Civil) No. 245/ 2020 decided on 21.05.2021 by the Supreme Court.

Facts: The vires of the following notification dated 15.11.2019 issued by the central government was challenged by several petitions
“NOTIFICATION
New Delhi. the 15th November, 2019
S.O. 4126(E).- ln exercise of the powers conferred by sub-section (3) of section I of the Insolvency and Bankruptcy Code. 2016 (31 of 2016). the Central Government hereby appoints the 1st day of December,2019 as the date on which the following provisions of the said Code only in so far as they relate to personal guarantors to corporate debtors. shall come into force:
(1) clause (e) of section 2;
(2) section 78 (except with regard to fresh start process) and section 79;
(3) sections 94 to 187 (both inclusive);
(4) clause (g) to clause (i) of sub-section (2) of section 239;
(5) clause (m) to clause (zc) of sub-section (2) of section 239;
(6) clause (zn) to clause (zs) of’ sub-section (2) of section 240; and
(7) Section 249.”

The impugned notification was challenged interalia on the following grounds – (a) The power delegated under Section 1(3) is only as regards the point(s) in time when different provisions of the Code can be brought into effect and that it does not permit the Central Government to notify parts of provisions of the Code, or to limit the application of the provisions to certain categories of persons; (b) The liability of a guarantor is co-extensive with that of the principal. Further, it is settled law that upon conclusion of insolvency proceedings against a principal debtor, the same amounts to extinction of all claims against the principal debtor, except to the extent admitted in the insolvency resolution process itself. However, the impugned notification allows creditors to unjustly enrich themselves by claiming in the insolvency process of the guarantor without accounting for the amount realized by them in the corporate insolvency resolution process of the corporate debtor under Part II of the Code. It is therefore, untenable.

Held: Noting the pattern of notification of the various provision of the IBC, the Supreme Court observed that it is quite evident that the method adopted by the Central Government to bring into force different provisions of the Act had a specific design: to fulfill the objectives underlying the Code, having regard to its priorities. The impugned notification 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. Therefore, the exercise of power in issuing the impugned notification under Section 1(3) is, not ultra vires. It was further held the impugned notification cannot be said to be impermissible or amounting to selective application of the Code.
The Court held that the legislative 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. This way, 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.
Regarding the issue, whether approval of resolution plan of the corporate debtor would extinguish the liability against the personal guarantors as well. It was held 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.