LALIT KUMAR JAIN versus UNION OF INDIA & ORS.
[2021] 3 S.C.R. 1075, Supreme Court of India, 2021
Outcome: Dismissed (Dismissed)
Segment: Ratio
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states that the Tribunal shall be vested with all the powers of
the Debts Recovery Tribunal, as contemplated under Part III
of this Code, for the purposes of sub-section (2), would not
take effect, as the Debts Recovery Tribunal has not yet been
empowered to hear bankruptcy proceedings against
individuals under Section 179 of the Code, as the said Section
has not yet been brought into force. Also, we have seen that
Section 249, dealing with the consequential amendment of
the Recovery of Debts Act to empower Debts Recovery
Tribunals to try such proceedings, has also not been brought
into force. It is thus clear that Section 2(e), which was brought
into force on 23-11-2017 would, when it refers to the
application of the Code to a personal guarantor of a
corporate debtor, apply only for the limited purpose contained
in Sections 60(2) and (3), as stated hereinabove. This is what
is meant by strengthening the Corporate Insolvency Resolution
Process in the Statement of Objects of the Amendment Act,
2018.”
98. This court was clearly cognizant of the fact that the amendment,
in so far as it inserted Section 2(e) and altered Section 60(2), was aimed
at strengthening the corporate insolvency process. At the same time,
since the Code was not made applicable to individuals (including personal
guarantors), the court had no occasion to consider what would be the
effect of exercise of power under Section 1(3) of the Code, bringing into
force such provisions in relation
to personal guarantors.
99. The argument that the insolvency processes, application of
moratorium and other provisions are incongruous, and so on, in the opinion
of this court, are insubstantial. The insolvency process in relation to
corporate persons (a compendious term covering all juristic entities
which have been described in Sections 2 [a] to [d] of the Code) is entirely
different from those relating to individuals; the former is covered in the
provisions of Part II and the latter, by Part III. Section 179, which defines
what the Adjudicating authority is for individuals66  is “subject to” Section
60. Section 60(2) is without prejudice to Section 60(1) and
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
66 “179. (1) Subject to the provisions of section 60, the Adjudicating Authority, in relation
to insolvency matters of individuals and firms shall be the Debt Recovery Tribunal
having territorial jurisdiction over the place where the individual debtor actually and
voluntarily resides or carries on business or personally works for gain and can entertain
an application under this Code regarding such person.
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notwithstanding anything to the contrary contained in the Code,
thus giving overriding effect to Section 60(2) as far as it provides that
the application relating to insolvency resolution, liquidation or bankruptcy
of personal guarantors of such corporate debtors shall be filed before
the NCLT where proceedings relating to corporate debtors are pending.
Furthermore, Section 60(3) provides for transfer of proceedings relating
to personal guarantors to that NCLT which is dealing with the
proceedings against corporate debtors. After providing for a common
adjudicating forum, Section 60(4) vests the NCLT “with all the powers
of the DRT as contemplated under Part III of this Code for the
purpose of sub-section (2)”. Section 60 (4) thus (a) vests all the powers
of DRT with NCLT and (b) also vests NCLT with powers under Part
III. Parliament therefore merged the provisions of Part III with the
process undertaken against the corporate debtors under Part II, for the
purpose of Section 60(2), i.e., proceedings against personal guarantors
along with corporate debtors. Section 179 is the corresponding provision
in Part III. It is “subject to the provisions of Section 60”. Section 60
(4) clearly incorporates the provisions of Part III in relation to proceedings
before the NCLT against personal guarantors.
100. It is clear from the above analysis 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 fact that the process of insolvency in Part III is to be
(2) The Debt Recovery Tribunal shall, notwithstanding anything contained in
any other law for the time being in force, have jurisdiction to entertain or dispose of—
(a) any suit or proceeding by or against the individual debtor;
(b) any claim made by or against the individual debtor;
(c) any question of priorities or any other question whether of law or facts,
arising out of or in relation to insolvency and bankruptcy of the individual debtor or
firm under this Code.
(3) Notwithstanding anything contained in the Limitation Act, 1963 or in
any other law for the time being in force, in computing the period of limitation
specified for any suit or application in the name and on behalf of a debtor for which
an order of moratorium has been made under this Part, the period during which
such moratorium is in place shall be excluded”
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applied to individuals, whereas the process in relation to corporate debtors,
set out in Part II is to be applied to such corporate persons, does not lead
to incongruity. 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. As was emphasized
during the hearing, 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.
101. In view of the above discussion, it is held that the impugned
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. There is sufficient indication in the Code- by Section 2(e), Section
5(22), Section 60 and Section 179 indicating that personal guarantors,
though forming part of the larger grouping of individuals, were to be, in
view of their intrinsic connection with corporate debtors, dealt with
differently, through the same adjudicatory process and by the same forum
(though not insolvency
provisions) as such corporate debtors. The
notifications under Section 1(3), (issued before the impugned notification
was issued) disclose that the Code was brought into force in stages,
regard being had to the categories of persons to whom its provisions
were to be applied. The impugned notification, similarly 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. It is held that the impugned notification was
issued within the power granted by Parliament, and in valid exercise of
it. The exercise of power in issuing the impugned notification under Section
1(3) is therefore, not ultra vires; the notification is valid.
102. The other question which parties had urged before this court
was that the impugned notification, by applying the Code to personal
guarantors only, takes away the protection afforded by law; reference
was made to Sections 128, 133 and 140 of the Contract Act; the petitioners
submitted that once a resolution plan is accepted, the corporate debtor is
discharged of liability. As a consequence, the guarantor whose liability is
co-extensive with the principal debtor, i.e. the corporate debtor, too is
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
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discharged of all liabilities. It was urged therefore, that the impugned
notification which has the effect of allowing proceedings before the NCLT
by applying provisions of Part III of the Code, deprives the guarantors
of their valuable substantive rights.
103. Section 31 of the Code, inter alia, provides that:
“31. (1) If the Adjudicating Authority is satisfied that the
resolution plan as approved by the committee of creditors
under sub-section (4) of section 30 meets the requirements as
referred to in sub-section (2) of section 30, it shall by order
approve the resolution plan which shall be binding on the
corporate debtor and its employees, members, creditors,
guarantors and other stakeholders involved in the resolution
plan.”
The relevant provisions of the Indian Contract Act are extracted
below:
“128. Surety’s liability.—The liability of the surety is co-
extensive with that of the principal debtor, unless it is
otherwise provided by the contract.
129. “Continuing guarantee”.—A guarantee which extends
to a series of transactions, is called a “continuing guarantee”.
130. Revocation of continuing guarantee.—A continuing
guarantee may at any time be revoked by the surety, as to
future transactions, by notice to the creditor.
131. Revocation of continuing guarantee by surety’s death.—
The death of the surety operates, in the absence of any contract
to the contrary, as a revocation of a continuing guarantee,
so far
as regards future transactions.
133. Discharge of surety by variance in terms of contract.—
Any variance, made without the surety’s consent, in the terms
of the contract between the principal 1 [debtor] and the
creditor, discharges the surety as to transactions subsequent
to the variance.
134. Discharge of surety by release or discharge of principal
debtor.—The surety is discharged by any contract between
the creditor and the principal debtor, by which the principal
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debtor is released, or by any act or omission of the creditor,
the legal consequence of which is the discharge of the
principal debtor.
******************
140. Rights of surety on payment or performance.—Where a
guaranteed debt has become due, or default of the principal
debtor to perform a guaranteed duty has taken place, the
surety upon payment or performance of all that he is liable
for, is invested with all the rights which the creditor had
against the principal debtor.
141. Surety’s right to benefit of creditor’s securities.—A surety
is entitled to the benefit of every security which the creditor
has against the principal debtor at the time when the contract
of suretyship is entered into, whether the surety knows of the
existence of such security or not; and if the creditor loses, or,
without the consent of the surety, parts with such security, the
surety is discharged to the extent of the value of the security.”
104.  All creditors and other classes of claimants, including financial
and operational creditors, those entitled to statutory dues, workers, etc.,
who participate in the resolution process, are heard and those in relation
to whom the CoC accepts or rejects pleas, are entitled to vent their
grievances before the NCLT. After considering their submissions and
objections, the resolution plan is accepted and approved. This results in
finality as to the claims of creditors, and others, from the company (i.e.
the company which undergoes the
insolvency process). The question
which the petitioners urge is that in view of this finality, their liabilities
would be extinguished; they rely on Sections 128, 133 and 140 of the
Contract Act to urge that creditors cannot therefore, proceed against
them separately.
105. In Vijay Kumar Jain v. Standard Chartered Bank67, this
court, while dealing with the right of erstwhile directors participating in
meetings of Committee of Creditors observed that:
“we find that Section 31(1) of the Code would make it clear
that such members of the erstwhile Board of Directors, who
are often guarantors, are vitally interested in a resolution plan
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
67  2019 SCC OnLine SC 103
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as such resolution plan then binds them. Such plan may scale
down the debt of the principal debtor, resulting in scaling
down the debt of the guarantor as well, or it may not. The
resolution plan may also scale down certain debts and not
others, leaving guarantors of the latter kind of debts exposed
for the entire amount of the debt. The regulations also make
it clear that these persons are vitally interested in resolution
plans as they affect them”
106. The rationale for allowing directors to participate in meetings
of the CoC is that the directors’ liability as personal guarantors persists
against the creditors and an approved resolution plan can only lead to a
revision of amount or exposure for the entire amount. Any recourse
under Section 133 of the Contract Act to discharge the liability of the
surety on account of variance in terms of the contract, without her or his
consent, stands negated by this court, in V. Ramakrishnan where it was
observed that the language of Section 31 makes it clear that the approved
plan is binding on the guarantor, to avoid any attempt to escape
liability under the provisions of the Contract Act. It was observed that:
“25. Section 31(1), in fact, makes it clear that the guarantor
cannot escape payment as the resolution plan, which has been
approved, may well include provisions as to payments to be
made by such guarantor.…”
And further that:
“26.1 Section 14 refers only to debts due
by corporate debtors,
who are limited liability companies, and it is clear that in the
vast majority of cases, personal guarantees are given by
Directors who are in management of the companies. The object
of the Code is not to allow such guarantors to escape from
an independent and co-extensive liability to pay off the entire
outstanding debt, which is why Section 14 is not applied to
them. However, insofar as firms and individuals are
concerned, guarantees are given in respect of individual debts
by persons who have unlimited liability to pay them. And such
guarantors may be complete strangers to the debtor — often
it could be a personal friend. It is for this reason that the
moratorium mentioned in Section 101 would cover such
persons, as such moratorium is in relation to the debt and not
the debtor.”
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107. In Committee of Creditors of Essar Steel (I) Ltd. v. Satish
Kumar Gupta68 (the ”Essar Steel case”) this court refused to interfere
with proceedings initiated to enforce personal guarantees by financial
creditors; it was observed as follows:
“106. Following this judgment in V. Ramakrishnan
case [SBI v. V. Ramakrishnan, (2018) 17 SCC 394], it is
difficult to accept Shri Rohatgi’s argument that that part of
the resolution plan which states that the claims of the
guarantor on account of subrogation shall be extinguished,
cannot be applied to the guarantees furnished by the erstwhile
Directors of the corporate debtor. So far as the present case
is concerned, we hasten to add that we are saying nothing
which may affect the pending litigation on account of
invocation of these guarantees. However, NCLAT judgment
being contrary to Section 31(1) of the Code and this Court’s
judgment in V. Ramakrishnan case [SBI v. V. Ramakrishnan,
(2018) 17 SCC 394], is set aside.”
108. It is therefore, clear that the sanction of a resolution plan and
finality imparted to it by Section 31 does not per se operate as a discharge
of the guarantor’s liability. As to the nature and extent of the liability,
much would depend on the terms of the guarantee itself. However, this
court has indicated, time and again, that an involuntary act of the principal
debtor leading to loss of security, would not absolve a guarantor of its
liability. In Maharashtra State Electricity Board (supra)
the liability
of the guarantor (in a case where liability of the principal debtor was
discharged under the insolvency law or the company law), was
considered. It was held that in view of the unequivocal guarantee, such
liability of the guarantor continues and the creditor can realize the same
from the guarantor in view of the language of Section 128 of the Contract
Act as there is no discharge under Section 134 of that Act. This court
observed as follows:
“7. Under the bank guarantee in question the Bank has
undertaken to pay the Electricity Board any sum up to
Rs 50,000 and in order to realise it all that the Electricity
Board has to do is to make a demand. Within forty-eight hours
of such demand the Bank has to pay the amount to the
Electricity Board which is not under any obligation to prove
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
68 (2020) 8 SCC 531.
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any default on the part of the Company in liquidation before
the amount demanded is paid. The Bank cannot raise the plea
that it is liable only to the extent of any loss that may have
been sustained by the Electricity Board owing to any default
on the part of the supplier of goods i.e. the Company in
liquidation. The liability is absolute and unconditional. The
fact that the Company in liquidation i.e. the principal debtor
has gone into liquidation also would not have any effect on
the liability of the Bank i.e. the guarantor. Under Section
128 of the Indian Contract Act, the liability of the surety is
coextensive with that of the principal debtor unless it is
otherwise provided by the contract. A surety is no doubt
discharged under Section 134 of the Indian Contract Act by
any contract between the creditor and the principal debtor
by which the principal debtor is released or by any act or
omission of the creditor, the legal consequence of which is
the discharge of the principal debtor. But a discharge which
the principal debtor may secure by operation of law in
bankruptcy (or in liquidation proceedings in the case of a
company) does not absolve the surety of his liability
(see Jagannath Ganeshram Agarwala v. Shivnarayan
Bhagirath [AIR 1940 Bom 247; see also In re Fitzgeorge Ex
parte Robson [(1905) 1 KB 462] ).”
109. This legal position was noticed and approved later in Industrial
Finance Corpn. of India Ltd. v.
Cannanore Spg. & Wvg. Mills Ltd.69
An earlier decision of three judges, Punjab National Bank v. State of
U.P.70 pertains to the issues regarding a guarantor and the principal debtor.
The court observed as follows:
“The appellant had, after Respondent 4’s management was
taken over by U.P. State Textile Corporation Ltd. (Respondent
3) under the Industries (Development and Regulation) Act,
advanced some money to the said Respondent 4. In respect of
the advance so made, Respondents 1, 2 and 3 executed deeds
of guarantee undertaking to pay the amount due to the bank
as guarantors in the event of the principal borrower being
unable to pay the same.
69 (2002) 5 SCC 54
70 (2002) 5 SCC 80
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LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
Subsequently, Respondent 3 which had taken over the
management of Respondent 4 became sick and proceedings
were initiated under the Sick Textile Undertakings
(Nationalisation) Act, 1974 (for short ‘the Act’). The appellant
filed suit for recovery against the guarantors and the principal
debtor of the amount claimed by it.
The following preliminary issue was, on the pleadings of the
parties, framed:
‘Whether the claim of the plaintiff is not maintainable in view
of the provisions of Act 57 of 1974 as alleged in para 25 of
the written statement of Defendant 2?’
The trial court as well as the High Court, both came to the
conclusion that in view of the provisions of Section 29 of the
Act, the suit of the appellant was not maintainable.
We have gone through the provisions of the said Act and in
our opinion the decision of the courts below is not correct.
Section 5 of the said Act provides for the owner to be liable
for certain prior liabilities and Section 29 states that the said
Act will have an overriding effect over all other enactments.
This Act only deals with the liabilities of a company which is
nationalized and there is no provision therein which in any
way affects the liability of a guarantor who is bound by the
deed of guarantee executed by it. The High Court has referred
to a decision of this Court in Maharashtra SEB v. Official
Liquidator, High Court, Ernakulam [(1982) 3 SCC 358 :
AIR
1982 SC 1497] where the liability of the guarantor in a case
where liability of the principal debtor was discharged under
the insolvency law or the company law, was considered. It
was held in this case that in view of the unequivocal guarantee
such liability of the guarantor continues and the creditor can
realize the same from the guarantor in view of the language
of Section 128 of the Contract Act as there is no discharge
under Section 134 of that Act.
In our opinion, the principle of the aforesaid decision of this
Court is equally applicable in the present case. The right of
the appellant to recover money from Respondents 1, 2 and 3
who stood guarantors arises out of the terms of the deed of
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guarantee which are not in any way superseded or brought
to a naught merely because the appellant may not be able to
recover money from the principal borrower. It may here be
added that even as a result of the Nationalisation Act the
liability of the principal borrower does not come to an end. It
is only the mode of recovery which is referred to in the said
Act.”
110. In Kaupthing Singer and Friedlander Ltd. (supra) the
UK Supreme Court reviewed a large number of previous authorities on
the concept of double proof, i.e. recovery from guarantors in the context
of insolvency proceedings. The court held that:
“The function of the rule is not to prevent a double proof of
the same debt against two separate estates (that is what
insolvency practitioners call “double dip”). The rule prevents
a double proof of what is in substance the same debt being
made against the same estate, leading to the payment of a
double dividend out of one estate. It is for that reason
sometimes called the rule against double dividend. In the
simplest case of suretyship (where the surety has neither given
nor been provided with security, and has an unlimited liability)
there is a triangle of rights and liabilities between the principal
debtor (PD), the surety (S) and the creditor (C). PD has the
primary obligation to C and a secondary obligation to
indemnify S if and so far as S discharges PD’s liability, but if
PD is insolvent S may not enforce
that right in competition
with C. S has an obligation to C to answer for PD’s liability,
and the secondary right of obtaining an indemnity from PD.
C can (after due notice) proceed against either or both of PD
and S. If both PD and S are in insolvent liquidation, C can
prove against each for 100p in the pound but may not recover
more than 100p in the pound in all.”
111.  In view of the above discussion, it is held that 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.
As held by this court, 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

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absolve the surety/guarantor of his or her liability, which arises out of an
independent contract.
112.  For the foregoing reasons, it is held that the impugned
notification is legal and valid. It is also held that approval of a resolution
plan relating to a corporate debtor does not operate so as to discharge
the liabilities of personal guarantors (to corporate debtors). The writ
petitions, transferred cases and transfer petitions are accordingly
dismissed in the above terms, without order on costs.
Devika Gujral
Matters dismissed.
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]