Lalit Kumar Jain v. Union of India (2021)

Part III of the Code governs insolvency and bankruptcy of individuals and partnership firms, but it was not brought into force all at once. By a notification dated 15 November 2019 the Central Government, exercising its power under s. 1(3), brought certain provisions into force so far as they relate to personal guarantors to corporate debtors. That selective commencement, and the liability of a guarantor once the principal debtor's plan has been approved, are the two central questions of Unit 3, and this is the decision that settles both.

Personal guarantors to corporate debtors challenged the notification of 15 November 2019 in a number of High Courts and before the Supreme Court. The Court had earlier directed that no further petitions involving a challenge to that notification be entertained by any High Court, observing that the Code was at a nascent stage and that it was better for the interpretation of its provisions to be taken up so as to avoid confusion and authoritatively settle the law. The petitions were accordingly heard together.

• The notification bringing Part III into force in its application to personal guarantors to corporate debtors was upheld.
• The sanction of a resolution plan, and the finality imparted to it by s. 31, does not per se operate as a discharge of the guarantor's liability.
• The liability of a guarantor is not discharged merely on the discharge of the corporate debtor.

The guarantee point turns on the source of the principal debtor's discharge. Under the general law of guarantee a surety is discharged where the creditor, by his own act or agreement, releases the principal debtor. But when a resolution plan is approved, the corporate debtor is discharged by operation of law, not at the instance of the creditor and not by any release the creditor chose to give. A creditor who votes for a plan is not agreeing to release the surety; he is participating in a statutory process whose outcome the statute fixes. The foundation of the rule discharging a surety is therefore absent.

The same conclusion is reached from s. 31 itself. The sub-section makes a plan binding on stakeholders including guarantors, which is why guarantors are bound by what the plan provides. Being bound by a plan is not the same as being released from an independent contract of guarantee, and nothing in s. 31 says that the guarantee is extinguished.

The commencement point rests on the intimate link between the two insolvencies. A personal guarantee to a corporate debtor is not a free-standing personal debt; it is the security on which the corporate borrowing was advanced. Bringing Part III into force first for that class is therefore not arbitrary selection but a rational sequencing, and it is the reason the Code groups the corporate debtor's process and the guarantor's process before a single forum.

1. On the commencement of Part III, state that the provisions were brought into force for personal guarantors to corporate debtors by the notification of 15 November 2019, and that the notification was upheld.
2. On discharge, give the two-step reasoning: the corporate debtor is discharged by operation of law, so the creditor has done no act releasing the surety; and s. 31 binds a guarantor to the plan without extinguishing the guarantee.
3. Link it to the forum rules. Where a process is pending against the corporate debtor, insolvency proceedings against the personal guarantor lie before the same Tribunal and not before the Debts Recovery Tribunal, and a bankruptcy proceeding against the guarantor already begun elsewhere is transferred.
4. Extend the principle where the facts allow. Initiation of proceedings against one borrower does not discharge co-borrowers; but if an amount has already been realised from one, the liability of the other is only for the balance, because there can be no question of realising the debt twice.
5. What it does not decide. It does not decide that the machinery of ss. 95 to 100 is fair — that is the subject of the next case — nor what the interim moratorium under s. 96 covers.

Section 96 has since been amended by the insertion of a sub-section providing that the section shall not apply where an application is filed for initiating an insolvency resolution process in respect of a personal guarantor to a corporate debtor. The interim moratorium cases in this unit must be read against that change.