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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LALIT KUMAR JAIN
v.
UNION OF INDIA & ORS.
(Transferred case (Civil) No. 245 of 2020)
MAY 21, 2021
[L. NAGESWARA RAO AND S. RAVINDRA BHAT, JJ.]
Insolvency and Bankruptcy Code, 2016 – ss.1(3), 2(e), 5(22),
60, 179, 234, 235, 238 and 243 – Vires and validity of notification
dated 15.11.2019 issued by the Central Government – Whether the
impugned notification was an exercise of excessive delegation; and
inasmuch as it notified various provisions of the Code only in so
far as they related to personal guarantors to corporate debtors, it
was therefore, ultra vires – Held: The impugned notification was not
an instance of legislative exercise, nor amounted to impermissible
and selective application of provisions of the Code – 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 –
Sufficient indication in the Code- by s.2(e), s.5(22), s.60 and s.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 – Notifications u/
s.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 – 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
s.1(3) is therefore, not ultra vires; the notification is valid.
Insolvency and Bankruptcy Code, 2016 – Whether once a
resolution plan is accepted, the corporate debtor is discharged of
liability; and as a consequence, the guarantor whose liability is co-
[2021] 3 S.C.R. 1075
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extensive with the principal debtor, i.e. the corporate debtor, too is
discharged of all liabilities – Held: Approval of a resolution plan
relating to a corporate debtor does not ipso facto discharge a
personal guarantor (of the corporate debtor) of 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.
Maxims – Maxim “reddendo singular singulis” – Applicability
– Where a sentence in a statute contains several antecedents and
several consequences, they are to be read distributively, that is to
say, each phrase or expression is to be referred to its appropriate
object – When s.60(2) of the Code alludes to insolvency resolution
or bankruptcy, or liquidation of three categories, i.e. corporate
debtors, corporate guarantors (to corporate debtors) and personal
guarantors (to corporate debtors) they apply distributively, i.e. that
insolvency resolution, or liquidation processes apply to corporate
debtors and their corporate guarantors, whereas insolvency
resolution and bankruptcy processes apply to personal guarantors,
(to corporate debtors) who cannot be subjected to liquidation –
Insolvency and Bankruptcy Code, 2016 – s.60(2).
Dismissing the writ petitions, transferred cases and transfer
petitions, the Court
HELD:1.1. The Central Government followed a stage-by-
stage process of bringing into force the provisions of the Code,
regard being had to the similarities or dissimilarities of the subject
matter and those covered by the Code. [Para 81][1149-B]
1.2. Insolvency proceedings relating to individuals is
regulated by Part-III of the Code. Before the amendment of 2018,
all individuals (personal guarantors to corporate debtors, partners
of firms, partnership firms and other partners as well as
individuals who were either partners or personal guarantors to
corporate debtors) fell under one descriptive description under
the unamended Section 2(e). The unamended Section 60
contemplated that the adjudicating authority in respect of personal
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guarantors was to be the NCLT. Yet, having regard to the fact
that Section 2 brought all three categories of individuals within
one umbrella class as it were, it would have been difficult for the
Central Government to selectively bring into force the provisions
of part –III only in respect of personal guarantors. It was here
that the Central Government heeded the reports of expert bodies
which recommended that personal guarantors to corporate
debtors facing insolvency process should also be involved in
proceedings by the same adjudicator and for this, necessary
amendments were required. Consequently, the 2018 Amendment
Act altered Section 2(e) and subcategorized three categories of
individuals, resulting in Sections 2(e), (f) and (g). Given that the
earlier notification of 30.11.2016 had brought the Code into force
in relation to entities covered under Section 2(a) to 2(d), the
amendment Act of 2018 provided the necessary statutory backing
for the Central Government to apply the Code, in such a manner
as to achieve the objective of the amendment, i.e. to ensure that
adjudicating body dealing with insolvency of corporate debtors
also had before it the insolvency proceedings of personal
guarantors to such corporate debtors. The amendment of 2018
also altered Section 60 in that insolvency and bankruptcy
processes relating to liquidation and bankruptcy in respect of
three categories, i.e. corporate debtors, corporate guarantors of
corporate debtors and
personal guarantors to corporate debtors
were to be considered by the same forum, i.e. NCLT. [Paras 82,
83][1149-B-H]
2.1. In addition to amending Section 2, the same Amendment
also amended Section 60(2). Interestingly, though “personal
guarantor” was not defined, and fell within the larger rubric of
“individual” under the Code, the adjudicating authority for
insolvency process and liquidation of corporate persons including
corporate debtors and personal guarantors was the NCLT- even
under the unamended Code. The amendment of Section 60(2)
added a few concepts. The amendment inserted the expression
“or liquidation” before the words “or bankruptcy” and also
inserted the expression “of a corporate guarantor… as the case
may be, of” such corporate debtor. The interpretation of this
expression has to be contextual. There is no question of
liquidation of a personal guarantor, an individual. In such cases,
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the principle behind the maxim “reddendo singular singulis”
applies. [Paras 86, 87][1050-F-H; 1051-D-F]
2.2. When Section 60(2) alludes to insolvency resolution
or bankruptcy, or liquidation of three categories, i.e. corporate
debtors, corporate guarantors (to corporate debtors) and personal
guarantors (to corporate debtors) they apply distributively, i.e.
that insolvency resolution, or liquidation processes apply to
corporate debtors and their corporate guarantors, whereas
insolvency resolution and bankruptcy processes apply to personal
guarantors, (to corporate debtors) who cannot be subjected to
liquidation. [Para 88][1152-F-G]
2.3. Section 60 had previously, under the original Code,
designated the NCLT as the adjudicating authority in relation to
two categories: corporate debtors and personal guarantors to
corporate debtors. The 2018 amendment added another category:
corporate guarantors to corporate debtors. The amendment seen
in the background of the report, as indeed the scheme of the
Code (i.e., Section 2 (e), Section 5 (22), Section 29A, and Section
60), clearly show that all matters that were likely to impact, or
have a bearing on a corporate debtor’s insolvency process, were
sought to be clubbed together and brought before the same forum.
[Para 92][1154-F-G]
3. Sections 234 and 235 of the Code also reveal that the
scheme of the Code always contemplated that overseas assets of
a corporate debtor or its
personal guarantor could be dealt with
in an identical manner during insolvency proceedings, including
by issuing letters of request to courts or authorities in other
countries for the purpose of dealing with such assets located within
their jurisdiction. [Para 93][1155-G-H]
4. The impugned notification operationalizes the Code so
far as it relates to personal guarantors to corporate debtors: (1)
Section 79 pertains to the definitional section for the purposes of
insolvency resolution and bankruptcy for individuals before the
Adjudicating Authority. (2) Section 94 to 187 outline the entire
structure regarding initiation of the resolution process for
individuals before the Adjudicating Authority. [Para 94][1156-A-
B]
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5. The impugned notification authorises the Central
Government and the Board to frame rules and regulations on
how to allow the pending actions against a personal guarantor to
a corporate debtor before the Adjudicating Authority. The intent
of the notification, facially, is to allow for pending proceedings to
be adjudicated in terms of the Code. Section 243, which provides
for the repeal of the personal insolvency laws has not as yet been
notified. Section 60(2) prescribes that in the event of an ongoing
resolution process or liquidation process against a corporate
debtor, an application for resolution process or bankruptcy of
the personal guarantor to the corporate debtor shall be filed with
the concerned NCLT seized of the resolution process or
liquidation. Therefore, the Adjudicating Authority for personal
guarantors will be the NCLT, if a parallel resolution process or
liquidation process is pending in respect of a corporate debtor
for whom the guarantee is given. The same logic prevails, under
Section 60(3), when any insolvency or bankruptcy proceeding
pending against the personal guarantor in a court or tribunal and
a resolution process or liquidation is initiated against the corporate
debtor. Thus if A, an individual is the subject of a resolution
process before the DRT and he has furnished a personal guarantee
for a debt owed by a company B, in the event a resolution process
is initiated against B in an NCLT, the provision results in
transferring
the proceedings going on against A in the DRT to
NCLT. [Para 95][1156-C-F]
6. The non-obstante provision under Section 238 gives the
Code overriding effect over other prevailing enactments. This is
perhaps the rationale for not notifying Section 243 as far as
personal guarantors to corporate persons are concerned. Section
243(2) saves pending proceedings under the Acts repealed (PIA
and PTI Act) to be undertaken in accordance with those
enactments. As of now, Section 243 has not been notified. In the
event Section 243 is notified and those two Acts repealed, then,
the present notification would not have had the effect of covering
pending proceedings against individuals, such as personal
guarantors in other forums, and would bring them under the
provisions of the Code pertaining to insolvency and bankruptcy
of personal guarantors. The impugned notification, as a
consequence of the non obstante clause in Section 238, has the
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result that if any proceeding were to be initiated against personal
guarantors it would be under the Code. [Para 96][1156-G-H; 1157-
A-C]
7. 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 individuals is
“subject to” Section 60. Section 60(2) is without prejudice to
Section 60(1) and 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. [Para 99][1159-F-G; 1160-A-D]
8. It is clear that the 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
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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 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. 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. [Para
100][1160-D-F; 1161-A-C]
9. 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. 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. [Para 101][1161-C-G]
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10. 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. The impugned notification is legal and valid.
Also, 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). [Paras 111,112][1168-G-H;
1169-A-B]
State Bank of India v. V. Ramakrishnan (2018) 17 SCC
394 : [2018] 10 SCR 974; Committee of Creditors of
Essar Steel India Ltd. v. Satish Kumar Gupta (2019)
SCC Online SC 1478; Maharashtra State Electricity
Board Bombay v. Official Liquidator, High Court,
Ernakulum & Anr. (1982) 3 SCC 358 : [1983] 1 SCR 
561; Industrial Finance Corpn. of India Ltd. v.
Cannanore Spg. & Wvg. Mills Ltd. (2002) 5 SCC 54 :
[2002] 2 SCR 1093 and Punjab National Bank v. State
of UP (2002) 5 SCC 80 – relied on.
Swiss Ribbons (P.) Ltd. v. Union of India (2019) 4 SCC
17 : [2019] 3 SCR 535; Delhi Laws Act, 1912, In re v.
Part ‘C’ States (Laws) Act, 1950, [1951] SCR 747; State
of Tamil Nadu v. K. Sabanayagam (1998) 1 SCC 318 :
[1997] 5 Suppl.
SCR 345; Vasu Dev Singh & Ors. v.
Union of India & Ors. (2006) 12 SCC 753 : [2006] 8
Suppl. SCR 535; State of Bombay v. Narothamdas
Jethabhai, [1951] 2 SCR 51; Sardar Inder Singh v. State
of Rajasthan [1957] SCR 605; Hamdard Dawakhana
v. Union of India [1960] 2 SCR 671; Babulal Vardharji
Gurjar v. Veer Gurjar Aluminum Industries Pvt. Ltd. &
Anr. (2020) 15 SCC 1; Chettian Veettil Amman v. Taluk
Land Board (1980) 1 SCC 499 : [1979] 3 SCR 839;
Basant Kumar Sarkar v. Eagle Rolling Mills Ltd. [1964]
6 SCR 913; Bishwambhar Singh v. State of Orissa
[1954] SCR 842; Embassy Property Developments (P)
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Ltd. v. State of Karnataka (2020)13 SCC 308; J. Mitra
and Co. Pvt. Ltd. v. Assistant Controller of Patents
(2008) 10 SCC 368 : [2008] 12 SCR 419; Lalit Narayan
Mishra Institute of Economic Development v. State of
Bihar & Ors. Etc. (1988) 2 SCC 433 : [1988] 3 SCR 
311; Javed & Ors v. State of Haryana & Ors. (2003) 8
SCC 369 : [2003] 1 Suppl. SCR 947; Bank of Bihar
Ltd. v. Dr. Damodar Prasad & Anr. AIR [1969] 1 SCR
620; State Bank of India v. Index port Registered AIR
1992 SC 1740; Industrial Investment Bank of India v.
Biswanath Jhunjhunwala (2009) 9 SCC 478 : [2009]
13 SCR 391; Lachmi Narain v. Union of India (1976)
2 SCC 953 : [1976] 2 SCR 785; Raghubar Swarup v.
State of U.P AIR 1959 SC 909; ITC Bhadrachalam v.
Mandal Revenue Officer (1996) 6 SCC 634 : [1996] 5
 Suppl. SCR 643; Edward Mills v. State of Ajmer [1955]
1 SCR 735; Chairman Board of Mining Examination v.
Ramji AIR 1977 SC 965 : [1977] 2 SCR 904;
Directorate of Enforcement v. Dipak Mahajan (1994)
3 SCC 440 : [1994] 1 SCR 445; Arcelor Mittal v. Satish
Kumar Gupta (2019) 2 SCC 1 : [2018] 12 SCR 362;
Brij Sundar Kapoor v. First Additional Judge (1989) 1
SCC 561 : [1988] Suppl. SCR 558; Raghubir Sarup v.
State of UP AIR 1959 SC 909; Khargram Panchayat
Samiti v. State of West Bengal (1987) 3 SCC 82 : [1987]
2 SCR 1207; Koteswar Vittal Kamath v. K. Rangappa
Baliga & Co. (1969) 1 SCC 255 : [1969] 3 SCR 40;
Rajendra K. Bhutta v. Maharashtra Housing and Area
Development Authority (2020) 13 SCC 208;
Javed v.
State of Haryana (2003) 8 SCC 369 : [2003] 1 Suppl.
SCR 947; Pannalal Bansilal Pitti v. State of A.P. (1996)
2 SCC 498 : [1996] 1 SCR 603; and Vijay Kumar
Jain v. Standard Chartered Bank (2019) SCC OnLine
SC 103 – referred to.
Gouri Shankar Jain v. Punjab National Bank & Anr.
2019 SC Online Cal 7288; Kundanlal Dabriwala v.
Haryana Financial Corporation (2012) 171 Comp Cas
94; Dr. Vishnu Kumar Agarwal v. Piramal Enterprises
Ltd. (2019) SCC Online NCLAT 542 and Pegasus
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Aviation Finance Company vs. Kingfisher Airlines
Limited (2016) SCC OnLine Kar 5991– referred to.
R v. Burah 1878 (3) App. Cases 889 (Decision of Privy
Council); Jatindra Nath Gupta v. Province of Bihar
(Judgment of Federal Court), (1949-50) 11 FCR 595;
and Re Kaupthing Singer and Friedlander Ltd. (in
administration) (Decision of UK Supreme Court), 2012
(1) All ER 883 – referred to.
Bennion on Statutory Interpretation: A Code
(6th Edition, at page 257) – referred to.
Case Law Reference
[2018] 10 SCR 974
relied on
Para 8
[2019] 3 SCR 535
referred to
Para 12
[1951] SCR 747
referred to
Para 16
[1997] 5 Suppl. SCR 345 
referred to
Para 16
[2006] 8 Suppl. SCR 535 
referred to
Para 16
[1951] 2 SCR 51
referred to
Para 20
[1957] SCR 605
referred to
Para 20
[1960] 2 SCR 671
referred to
Para 20
(2020) 15 SCC 1
referred to
Para 23
[1979] 3 SCR 839 
referred to
Para 34
[1964] 6 SCR 913
referred to
Para 36
[1954] SCR 842
referred to
Para 36
(2020) 13 SCC 308
referred to
Para 39
[2008] 12 SCR 419 
referred to
Para 42
[1988] 3 SCR 311 
referred to
Para 42
[2003] 1 Suppl. SCR 947 
referred to
Para 42
[1969] 1 SCR 620
referred to
Para 43
AIR 1992 SC 1740
referred to
Para 43
[2009] 13 SCR 391  
referred to
Para 43
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[1983] 1 SCR 561 
relied on
Para 44
(2002) 5 SCC 80
relied on
Para 44
[2018] 10 SCR 974  
referred to
Para 45
[1976] 2 SCR 785
referred to
Para 47
AIR 1959 SC 909
referred to
Para 48
[1996] 5 Suppl. SCR 643 
referred to
Para 48
[1955] 1 SCR 735
referred to
Para 49
[1977] 2 SCR 904
referred to
Para 51
[1994] 1 SCR 445 
referred to
Para 51
[2018] 12 SCR 362
referred to
Para 51
[1988] 3 Suppl. SCR 558 
referred to
Para 55
AIR 1959 SC 909
referred to
Para 56
[1987] 2 SCR 1207
referred to
Para 56
[1969] 3 SCR 40
referred to
Para 59
(2020) 13 SCC 208
referred to
Para 88
[2003] 1 Suppl. SCR 947  
referred to
Para 90
[1996] 1 SCR 603 
referred to
Para 90
[2002] 2 SCR 1093 
relied on
Para 109
CIVIL ORIGINAL JURISDICTION: Transferred Case (Civil)
No. 245 of 2020.
Transfer Petition U/A139A R/W Article 142 of The Constitution
of India Seeking transfer of Writ Petition (C) No.4849 of 2020 from the
Delhi High Court to this Hon’ble Court.
With
W.P.(c) Nos. 117 of 2021, 1371 of 2020, 1420 of 2020, 1353 of
2020, T.P. (c) No. 1252 of 2020, W.P.(c) Nos. 1276 of 2020, 1287 of
2020, T.P. (c) Nos. 1285 of 2020, 1325 of 2020, W.P.(c) No. 1364 of
2020, T.C.(c) No. 257 of 2020, W.P.(c) Nos. 1434 of 2020, 38 of 2021,
1419 of 2020, T.P.(c) Nos. 1202 of 2020, 1220 of 2020, 1203 of 2020,
1193 of 2020, 1196 of 2020, 1289 of 2020, 1323 of 2020, 1333 of 2020,
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
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1292 of 2020, 1299 of 2020, 1331 of 2020, W.P.(c) No. 1342 of 2020,
T.P.(c) No. 1339 of 2020, W.P.(c) Nos. 1348 of 2020, 1344 of 2020,
1343 of 2020, T.C.(c) Nos. 250 of 2020, 251 of 2020, 247 of 2020, 253 of
2020, 252 of 2020, 248 of 2020, 254 of 2020, 246 of 2020, 256 of 2020,
249 of 2020, 255 of 2020, W.P.(c) Nos. 62 of 2021, 32 of 2021, 106 of
2021, 97 of 2021, 142 of 2021, 135 of 2021, 131 of 2021, 122 of 2021,
138 of 2021, 146 of 2021, 207 of 2021, 160 of 2021, 168 of 2021, 205 of
2021, 209 of 2021, 194 of 2021, 187 of 2021, 180 of 2021, 182 of 2021,
203 of 2021, 220 of 2021, 229 of 2021, 217 of 2021, 221 of 2021, 225 of
2021, 239 of 2021, 240 of 2021, 228 of 2021, 224 of 2021, 234 of 2021,
260 of 2021, 262 of 2021 AND 283 of 2021.
Tushar Mehta, SG., K. K. Venugopal, AG., K. V. Vishwanathan,
Rakesh Dwivedi, Gopal Subramanium, Dhruv Mehta, Harish Salve,
Sudipto Sarkar, P S Narsimha, Siddhartha Dave, Ritin Rai, Ramji
Srinivasan, Sr. Advs., Mohammed Akhil Nazeer, Kannu Aggarwal,
Navanjay Mahapatra, Arvind Kumar Sharma, Sanjay Kapur, Ms. Megha
Karnwal, V M Kannan, Sambit Panja, Arjun Bhatia, Ms. Monali,
Jayavardhan Singh, Hitesh Kumar Saini, Shankh Sengupta, Siddharth
Ranade, Vividh Tandon, Ms. Nishi Bhankharia, Ms. Kaazvin Kapadia,
Syed Jafar Alam, Ninad Laud, Sahil Tagotra, Vikas Mehta Apoorv Khator,
Sahil Monga, Arvind Kumar Gupta, Dr. Anindita Pujari, Ms. Purti Gupta,
Ms. Henna George, Om Narayan, Ms. Harpreet
Kaur, Arjun Sayal,
Shreyan Das, Zeeshan Hashmi, Salman Hashmi, Mithu Jain, Alok Dhir,
Ms. Jayashree Shukla Dasgupta, Ms. Varsha Banerjee, Ashu Kansal,
Ms. Swati Sharma, Ashish Pyasi, Milan Singh Negi, Karan Batura,
Mahesh Agarwal, Ms. Shally Bhasin, Ankur Saigal, Kamaldeep Dayal,
Prateek Gupta, Ms. Madhavi Agrawal, Ankit Banati, Ms. Saloni Mahajan,
E. C. Agrawala, Sandeep S Ladda, Soumik Ghosal, Gaurav Singh, Abhay
Anand Jena, Deepayan Mandal, S. R. Raghunathan, S. Santanam
Swaminadhan, Ms. Abhilasha Shrawat, Mrs. Aarthi Rajan, Vikram
Pooserla, Tadimalla Bhaskar Gowtham, Abhinay Reddy M., Nitish
Bandary, Jeevan Kumar Nandam, Keertivardhan Kommareddy, Ms.
Aahana Madhyala, Ms. Karishma Nedungadi, Ms. Achala Siri Doddala,
Ms. Shreya Devaki, Jyoti Kumar Singh, P. R. Rajhans, Mrs. Paroma
Sengupta, Sandeep Singh, Vishal Arun, Ms. Shivani, Ravindra S Chingale,
Yashraj Singh Deora, Ms. Sonal Mashankar, Ms. Shivangi Sud,
Ms. Prakriti Roy, M Srinivas R. Rao, Sarath S. Janardanan, Ms. Aditi
Tripathi, Ms. Sindoora VNL, Mukunda, Kailashnath PSS, Abid Ali Beeran
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P, Sandeep Singh, Krishna Dev Jagarlamudi, Anish R. Shah, Pradeep
Aggarwal, Ms. Soumya Sharma, Lal Pratap Singh, Umesh Pratap Singh,
Arjun Aggarwal, Ms. Ruchi Kohli, Rohit Sharma, Pranav Bhaskar,
Rounak Nayak, Atul Agarwal, Ms. Arju Chaudhary, Kumar Dushyant
Singh, Vikas Kumar, Manish Paliwal, M/s Corporate Legal Partners,
Sandeep Bajaj, Soayib Quershi, Ms. Nidhi Mohan Parashar, Ms. Aditi
Pundhir, Uttam Datt, Rajiv Singh, Ms. Srujana Suman Mund,
Ms. Sonakshi Singh, Rishi Raj Sharma, Ms. Pallavi Langar, Ms. Gauri
Rishi, Ms. Srishti Juneja, Yadav Narender Singh, V. Lakshmikumaran,
Ms. Charanya Lakshmikumaran, Yogendra Aldak, Gopal Machiraju,
Puneeth Ganpathy, Aditya Bhattacharya, Ms. Apeksha Mehta,
Ms. Mounica Kasturi, Ms. Ishita Mathur,  Malak Manish Bhatt,
Ms. Pallavi Singh, Ms. Sangya Gupta, Sidhartha Barua, Sharan Thakur,
Ms.  Aditi Gupta, Ms. Jasmine Damkewala, Ms. Ritika Sinha, Ms. Gunjan
Mathur, Ms. Vaishali Sharma, Dinesh Chander Trehan, Ms. Anindita
Roy Chowdhary, Ms. Vansala Rai, Raj Kanwar Singh, Shivam Singh,
Sahil Raveen, Manish Kumar, Ms. Aditi Mittal, Ayush Agarwala, Siddhant
Tripathi, Aditya Narayan Mahajan, Arnav Narain, Alok Kumar,
Ms. Somya Yadava, Ms. Drishti Harpalani, Uday Arora, G. N. Reddy,
Deepayan Mandal, Sandeep Singh, M. P. Vinod, Vinod Kumar, M. D.
Srinivasan, Ms. Avni Sharma, Dheeraj Nair, Ms. Anjali Anchayil,
Ms. Vishrutyi Sahni, Vinam Gupta, R. Sudhinder,  Nikhil Singh, Rahul
Dev, Ranjit Shetty, Ashok Mathur, D. Bharat
Kumar, Aman Shukla,
Hathindra Manda, Gopal Jha, Ms. Misha, Vaijayant Paliwal, Ms. Charu
Bansal, Ms. Jasveen Kaur, S. S. Shroff, Anoop Rawat, Ms. Mahima
Sareen, Ms. Moulshree Shukla, Ms. Prabh Simran Kaur, Shardul S.
Shroff, Ms. Praveena Gautam,  Pawan Shukla, Ms. Sweety Pandey,
Raja Ram, Vivek Sarin, Ms. Astha Sehgal, Satish C. Kaushik, Aakarshan
Aditya, M/S. Cyril Amarchand Mangaldas, Arun Aggarwal, Ms. Anshika
Aggarwal, Ms. Ekjot Bhasin, Mritunjay Kumar Sinha, Ankit, Ms. Kavita
Jha, Ms. Sandhya Iyer, Udit Naresh, O. P. Gaggar, Ms. Astha Prasad,
Aditya Gaggar, Ankit Anandraj Shah, Brijesh Kumar Tamber, Kinshuk
Chatterjee, Kushal Bansal, Ms. Srishti Gupta, Sujoy Chatterjee, Atul
Sharma, Abhishek Sharma, Ms. Ashly Cherian, Indraprateek Naidu,
Gautam Talukdar, Ateev Mathur, Ajay Monga, Amol Sharma, Gagan
Gupta, Abhishek Jebaraj, Ms. Nupur Raut, Vivek A. Vashi, Ms. Shilpa
Sengar, Biswajit Dubey, Madhav Kanoria, Ms. Surabhi Khattar, Prafful
Goyal, Ms. Vani Sharma, Sumit Attri, Advs. for the appearing parties.
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
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The Judgment of the Court was delivered by
S. RAVINDRA BHAT, J.
1. This judgment will dispose of common questions of law, which
arise in various proceedings preferred under Article 32 of the Constitution
of India, as well as transferred cases under Article 139A; those causes
were transferred to the file of this court, from various High Courts1, as
they involved interpretation of common questions of law, in relation to
provisions of the Insolvency and Bankruptcy Code, 2016 (hereafter “the
Code”).
I The Petitions and Common Grievances
2. The common question which arises in all these cases concerns
the vires and validity of a notification dated 15.11.2019 issued by the
Central Government2 (hereafter called “the impugned notification”). Other
reliefs too have been claimed concerning the validity of the Insolvency
and Bankruptcy (Application to Adjudicating Authority for Insolvency
Resolution Process for Personal Guarantors to Corporate Debtors) Rules,
2019 issued on 15.11.2019. Likewise, the validity of regulations challenged
by the Insolvency and Bankruptcy Board of India on 20.11.2019 are
also the subject matter of challenge. However, during the course of
submissions, learned counsel for the parties stated that the challenge
would be confined to the impugned notification.
3. All writ petitioners before the High Courts, arrayed as
respondents in the transferred cases before this Court, as well as the
petitioners under
Article 32 claim to be aggrieved by the impugned
notification. At some stage or the other, these petitioners (compendiously
termed as “the writ petitioners”) had furnished personal guarantees to
banks and financial institutions which led to release of advances to various
companies which they (the petitioners) were associated with as directors,
promoters or in some instances, as chairman or managing directors. In
many cases, the personal guarantees furnished by the writ petitioners
were invoked, and proceedings are pending against companies which
they are or were associated with, and the advances for which they
furnished bank guarantees. In several cases, recovery proceedings and
later insolvency proceedings were initiated. The insolvency proceedings
are at different stages and the resolution plans are at the stage of
1 Madhya Pradesh, Telengana, Delhi, etc.
2 S.O. 4126 (E) issued by the Ministry of Corporation Affairs, Central Government
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finalization. In a few cases, the resolution plans have not yet been approved
by the adjudicating authority and in some cases, the approvals granted
are subject to attack before the appellate tribunal.
4. All the writ petitioners challenged the impugned notification as
having been issued in excess of the authority conferred upon the Union
of India (through the Ministry of Corporate Affairs) which has been
arrayed in all these proceedings as parties. The petitioners contend that
the power conferred upon the Union under Section 1(3) of the Insolvency
and Bankruptcy Code, 2016 (hereafter referred to as “the Code”) could
not have been resorted to in the manner as to extend the provisions of
the Code only as far as they relate to personal guarantors of corporate
debtors. The impugned notification brought into force Section 2(e),
Section 78 (except with regard to fresh start process), 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 249.
5. After publication of the impugned notification, many petitioners
were served with demand notices proposing to initiate insolvency
proceedings under the Code. These demand notices were based on
various counts, including that recovery proceedings were initiated after
invocation of the guarantees. This led to initiation of insolvency resolution
process under Part-III of the Code against some of the petitioners. The
main argument advanced in
all these proceedings on behalf of the writ
petitioners is that the impugned notification is an exercise of excessive
delegation. It is contended that the Central Government has no authority
– legislative or statutory – to impose conditions on the enforcement of
the Code. It is further contended as a corollary, that the enforcement of
Sections 78, 79, 94-187 etc. in terms of the impugned notification of the
Code only in relation to personal guarantors is ultra vires the powers
granted to the Central Government.
6. It is argued that in terms of the proviso to Section 1(3) of the
Code, Parliament  delegated the power to enforce different provisions
of the Code at different points in time to the Central Government.
Section1(3) reads as under:
“It shall come into force on such date as the Central
Government may, by notification in the Official Gazette,
appoint:
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
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Provided that different dates may be appointed for different
provisions of this Code and any reference in any such provision
to the commencement of this Code shall be construed a
reference the commencement of that provision.”
7. The petitioners argue that 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. The
impugned notification, however, notified various provisions of the Code
only in so far as they relate to personal guarantors to corporate
debtors. It is therefore, ultra vires the proviso to Section 1(3) of the
Code.
8. It is argued that the provisions of the Code brought into effect
by the impugned notification are not in severable, as they do not specifically
or separately deal with or govern insolvency proceedings against personal
guarantors to corporate debtors. The provisions only deal with individuals
and partnership firms. It is urged that from a plain reading of the
provisions, it is not possible to carve out a limited application of the
provisions only in relation to personal guarantors to corporate debtors.
The Central Government’s move to enforce Sections 78, 79, 94 to 187,
etc. only in relation to personal guarantors to corporate debtors
is an
exercise of legislative power wholly impermissible in law and amounts
to an unconstitutional usurpation of legislative power by the executive.
The petitioners argue that the impugned notification, to the extent it brings
into force Section 2 (e) of the Code with effect from 01.12.2019 is hit by
non-application of mind. It is argued that Section 2(e) of the Code, as
amended by Act 8 of 2018, came into force with retrospective effect
from23.11.2017. This is duly noted by this court in the case of State
Bank of India v. V. Ramakrishnan3, which observed that:
“Though the original Section 2(e) did not come into force at
all, the substituted Section 2(e) has come into force w.e.f.
23.11.2017.”
It is urged that this court should, therefore, set aside the impugned
notification.
3 (2018) 17 SCC 394
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9. The petitioners also attack the impugned notification on the
ground that it suffers from non-application of mind, because the Central
Government failed to bring into effect Section 243 of the Code, which
would have repealed the Presidency Towns Insolvency Act, 1909 (“PTI
Act” hereafter) and the Provincial Insolvency Act, 1920 (“PIA”
hereafter). Prior to issuance of the impugned notification, insolvency
proceedings against an individual could be initiated only in terms of the
said two Acts. After enactment of the Code, insolvency proceedings
against personal guarantors to corporate debtors would lie before the
Adjudicating Authority, in terms of Section 60 of the Code, although they
would be governed by the said two Acts. With the enforcement of the
impugned provisions, rules and regulations, insolvency proceedings can
now be initiated against personal guarantors to corporate debtors under
Part III of the Code, and also under the PTI Act and the PIA. Since
Section 243 of the Code has not been brought into force, the petitioners
contend that the impugned notification has the illogical effect of creating
two self-contradictory legal regimes for in solvency proceedings against
personal guarantors to corporate debtors.
10. It is urged that the impugned notification is ultra vires the
provisions of the Code in so far as it notifies provisions of Part III of
the Code only in respect of personal guarantors to corporate debtors.
Part III of the Code governs
“Insolvency Resolution and Bankruptcy
for Individuals and Partnership Firms”. Also, Section 2(g) of the
Code defines an individual to mean “individuals, other than persons
referred to in clause (e)”. Section 2 (e) relates to personal guarantors
to corporate debtors. A joint reading of Section 2(e) with Section 2(g)
and Part III of the Code shows that personal guarantors to corporate
debtors are not covered by Part II, which only deals with individuals and
partnership firms, and personal guarantors to corporate debtors stand
specifically excluded from the definition of individuals. The petitioners
also rely on Section 95 of the Code4, which permits a creditor to invoke
insolvency resolution process against an individual only in relation to a
partnership debt. 
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
4 “95. Application by creditor to initiate insolvency resolution process.
(1) A creditor may apply either by himself, or jointly with other creditors,
or through resolution professional to the Adjudicating Authority for initiating
an insolvency resolution process under this section by submitting an application.
(2) A creditor may apply under sub-section (1) in relation to any
partnership debt owed to him for initiating an insolvency resolution process
against
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11. Part III of the Code does not contain any provision permitting
initiation of the insolvency resolution process (hereafter “IRP”) against
personal guarantors to corporate debtors. The impugned notification
which provides to the contrary, is ultra vires. It is further contended that
provisions of the Code brought into effect by the impugned notification
[Clause (e) of Section 2, Section 78 (except with regard to fresh start
process), Section 79, Section 94 to 187 (both inclusive), Clause (g) to
Clause (l) of sub-section (2) of Section 239, Clause (m) to (zc) of sub-
section (2) of Section 239, Clause (zn) to Clause (zs) of Sub-section (2)
of Section 239 and Section 249] when enforced only in respect of personal
guarantors to corporate debtors, are manifestly arbitrary; they are also
discriminatory because:
(i)
There is no intelligible differentia or rational basis on which
personal guarantors to corporate debtors have been singled
out for being covered by the impugned provisions, particularly
when the provisions of the Code do not separately apply to
one sub-category of individuals, i.e., personal guarantors to
corporate debtors. Rather, Part III of the Code does not apply
to personal guarantors to corporate debtors at all.
(a) anyone or more partners of the firm; or
(b) the firm.
(c)
(3) Where an application has been made against one partner in a firm,
any other application against another partner in the same firm
shall be presented
in or transferred to the Adjudicating Authority in which the first mentioned
application is pending for adjudication and such Adjudicating Authority may
give such directions for consolidating the proceedings under the applications
as it thinks just.
(4) An application under sub-section (1)shall be accompanied with details
and documents relating to:
(a) the debts owed by the debtor to the creditor or creditors  submitting
the application for insolvency resolution process as on the date of application;
(b) the failure by the debtor to pay the debt within a period of fourteen
days of the service of the notice of demand; and
(c) relevant evidence of such default or non-repayment of debt.
(5) The creditor shall also provide a copy of the application made under
sub-section (1) to the debtor.
(6)The application referred to in sub-section (1) shall be in such form
and manner and accompanied by such fee as may be prescribed.
(7)The details and documents required to be submitted under Sub-section
(4) shall be such as may be specified.”
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(ii) the provisions of Part III of the Code, which are partly brought
into effect by the impugned notification, provide a single
procedure for the insolvency resolution process of a personal
guarantor, irrespective of whether the creditor is a financial
creditor or an operational creditor. Treating financial creditors
and operational creditors on an equal footing in Part III of the
Code is in contrast to Part II of the Code, which provides
different sets of procedures for different classes of creditors.
12. The petitioners rely on Swiss Ribbons (P.) Ltd. v. Union of
India5, where this court upheld the difference in procedure for operational
creditors and financial creditors on the basis that there are fundamental
differences in the nature of loan agreements with financial creditors,
from contracts with operational creditors for supplying goods and services.
Financial creditors generally lend finance on a term loan or for working
capital that enables the corporate debtor to either set up and/or operate
its business. On the other hand, contracts with operational creditors are
relatable to supply of goods and services in the operation of business.
Financial contracts generally involve large sums of money.
13. The petitioners argue that the act of clubbing financial creditors
and operational creditors in relation to the procedure for insolvency
resolution of personal guarantors to corporate debtors amounts to treating
unequals equally and amounts to
collapsing the classification that is
carefully created by Parliament in Part II of the Code. They also argue
that the application of Sections 96 and 101 of the Code by the impugned
notification results in the illogical consequence of staying insolvency
proceedings against the corporate debtor, when insolvency proceedings
are initiated against the personal guarantor. It is pointed out that a combined
reading of Sections 99 and100 of the Code shows that the resolution
professional, while recommending the approval/rejection of the
application, and the Adjudicating Authority while accepting it, do not
have to consider whether the underlying debt owed by the corporate
debtor to the creditor stands discharged or extinguished.
14. It is argued that the liability of a guarantor is co-extensive
with that of the principal debtor (Section 128 of Indian Contract Act,
1872). Further, it is settled law that upon conclusion of insolvency
proceedings against a principal debtor, the same amounts to extinction
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
5 (2019) 4 SCC 17.
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of all claims against the principal debtor, except to the extent admitted in
the insolvency resolution process itself. This is clear from Section 31 of
the Code, which makes the resolution plan approved by the Adjudicating
Authority binding on the corporate debtor, its creditors and guarantors.
The petitioners also contend that 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.
15. It is argued that the impugned notification has resulted in
clothing authorities, the Committee of Creditors (CoC) and Resolution
Professionals (RPs) with powers beyond the enacted statute. They have
defined the term “guarantor” as a debtor who is a personal guarantor to
a corporate debtor and in respect of whom guarantee has been invoked
by the creditor and remains unpaid in full or part. The parent statute
does not define “guarantor”. It is pointed out that though Section 239(1)
of the Code empowers the Insolvency Board to make rules to carry out
the provisions of the Code, those rules cannot define a term that is not
defined in the Code, as it is likely to result in class legislation for one
category of guarantors, i.e., personal guarantors to corporate debtors.
The impugned notification
is therefore ultra vires the Code.
II Contentions of the Petitioners
16. Mr. Harish Salve, learned senior counsel appearing on behalf
of the petitioners, urged that Section 1(3) of the Code authorizes or
empowers the Central Government only to bring provisions of the Code
into force on such date by a notification in the Official Gazette. The
proviso to this Section categorically provides that different dates may be
appointed for bringing different provisions into force. Section 1(3) is an
instance of ‘conditional legislation’, where the legislature has enacted
the law, and the only function assigned to the executive is to bring the
law into operation at such time as it may decide. Such legislation is
termed as conditional, because the legislature has itself made the law in
all its completeness as regards “place, person, laws, powers”, leaving
nothing for an outside authority to legislate on. Therefore, no element of
legislation was left open to the government, and the only function assigned
to it being to bring the law into operation at such time as it might decide.
The central government has however, by the impugned notification
exceeded the power conferred upon it, and has in effect modified the
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provisions of Part III of the Code, which it was not authorized to do by
Parliament. Assuming that such powers were present under Section
1(3) of the Code, it would amount to an unconstitutional delegation of
power.It is argued that this court has repeatedly held that in conditional
legislation, the law is already complete in all respects, and as such the
outside agency i.e., the government, while exercising power under such
a provision, cannot legislate or in any manner add or alter the effect of
the law already laid down. Reliance is placed on Delhi Laws Act, 1912,
In re v. Part ‘C’ States (Laws) Act, 19506, State of Tamil Nadu v. K.
Sabanayagam7and Vasu Dev Singh & Ors. v. Union of India &
Ors8.The effect of the impugned notification translates into going beyond
the power to notify a date when the Code or its provisions should come
into force.
17. It is argued that Part III of the Code does not create any
distinction between an individual and a personal guarantor to a corporate
debtor. Part III provides for “Insolvency Resolution and Bankruptcy
for Individuals and Partnership Firms”, and thereafter refers to these
two categories of persons simply as debtors. The impugned notification
in substance modifies the text of the actual sections of Part III, despite
the absence of any element of legislation/legislative authority having been
conferred upon the Central Government. The words “only in so far as
they relate to personal guarantors to corporate
debtors” forming a
part of the impugned notification are attempted to be added like a rider
to each of the sections mentioned in the impugned notification, clearly
rendering such an exercise completely outside the scope and powers
conferred under Section 1(3) of the Code.
18. It was argued further by Mr. Salve, that the impugned
notification is ex facie in violation of the principles of delegation, inasmuch
as the Central Government has effected a classification of individuals-
and sought to ensure that insolvency issues of one category of individuals,
i.e. personal guarantors to corporate debtors, are considered along with
insolvency proceedings of corporate debtors. The distinction between
Part II and Part III, the forum and the remedies available to creditors of
individuals is no longer available to this category, i.e. personal guarantors,
whose insolvency issues are to be now considered along with insolvency
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
6 1951 SCR 747 at paras 39, 42 and 47.
7 (1998) 1 SCC 318 at para 14.
8 (2006) 12 SCC 753 at para 16.
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process of corporate debtors. It is argued that the power of classification
is legislative and that the impugned notification is an instance of the
executive acting beyond its jurisdiction. Mr. Salve relied upon observations
made by the Privy Council in R v Burah9 that laws cannot be said to
empower general legislative authority, on the executive, or to exercise
power not granted to it under the parent Act.
19. It was argued that the Central Government mistakenly assumed
that inclusion of personal guarantors in the definition provisions by
amending Section 2 and inserting section 2(e) automatically results in
amendment of section 1(3) of the Code. Section 2 provides that the
Code applies to the entities enumerated in the various sub-sections. The
amendment of 2018 added that the Code would apply to personal
guarantors to corporate debtors. Consequently, when provisions of the
Code are brought into force, they would apply to personal guarantors to
corporate debtors. The application of a provision depends upon its plain
language, and not upon the enumeration of entities to whom the Code
applies. The provisions which have been now brought into force by virtue
of the impugned notification do not limit themselves to personal guarantors
to corporate debtors, but apply generally to individuals and other entities.
However, to the extent that it limits their application to personal guarantors
alone, through the impugned
notification, it is illegal and beyond the powers
conferred by Parliament. It was urged that conditional legislation should
not be confused with delegation, which is a broader concept allowing
the executive to frame rules and flesh out gaps within the broad legislative
policy. That exercise is legislative. However, conditional legislation only
permits the executive government the power to designate the time when
the law is to be brought into force, or place or places where it operates,
but not which parts of an enactment can apply to which class of persons,
without any substantive legislative provision or guidance. The impugned
notification has the effect of amending the statutory scheme in the manner
it applies them to personal guarantors and is therefore, ultra vires the
Code.
20. Mr. P.S. Narasimha, learned senior counsel, who argued next,
contended further that in several judgments, this court has ruled that
conditional legislation is one where a legislative exercise is complete in
itself, and the only power and/or function to be delegated to the authority
(in this case the Central Government), is to apply the law to a specific
9 1878 (3) App. Cases 889.
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area or to determine the time and manner of carrying into effect such
law. He cited the decision in State of Bombay v. Narothamdas
Jethabhai10 in which this court observed as follows:
“……The section does not empower the Provincial Government
to enact a law as regards the pecuniary jurisdiction of the
new court and it can in no sense be held to be legislation
conferring legislative power on the Provincial Government”
Mr. Narasimha also cited Sardar Inder Singh v. State of
Rajasthan11 and Hamdard Dawakhana v. Union of India12 and urged
that when legislation is complete, and the executive is left to apply the
law to an area or determine the time and manner of carrying it out, that
is the only permissible task. However, the executive cannot perform its
task outside the power granted to it, choosing the subjects to which the
law is to apply.
21. Mr. Narasimha referred to the previous notifications, bringing
into force provisions of the Code on different dates. He submitted that
none of them brought into force some provisions for a limited sub-
category, or a class of individuals or entities. He referred to one notification
dated 30.11.2016 that brought into force certain provisions of Part II of
the Code, within which section 2(a) to 2(d) were also notified. However,
it was submitted that irrespective of the notification, Part II was brought
into force and it applied to every entity contemplated to be in its coverage.
Under the notification of 30.11.2016, the
inclusion of the four sub
categories described in section 2(a) to 2(d) became irrelevant, and Part
II of the Code applied uniformly to all categories of persons intended to
be covered by it by virtue of the definition of a corporate person under
Section 3(7) of the Act. The impugned notification however applies to
only a sub-category, namely, personal guarantors to corporate debtors,
among a homogeneous class of individuals; therefore, it is an
unprecedented exercise of conditional legislation power, clearly ultra
vires the parent enactment.
22. It was urged that even if it were assumed that the Central
Government had the power to issue the impugned notification and bring
Part III in force only with respect to personal guarantors to corporate
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
10 State of Bombay v. Narothamdas Jethabai 1951 2 SCR51, at para 37.
11 1957 SCR 605 at para 10.
12 1960 (2) SCR 671 at para 28.
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debtors, it is ultra vires the objects and purpose of the Code. Reliance
was placed on the Statement of Objects and Reasons of the Insolvency
and Bankruptcy Code (Amendment) Bill, 2017 in this regard.13
23. Learned counsel emphasized that this court has repeatedly
clarified that the object of the Code is to ensure a company’s revival and
continuation by protecting from its management and, as far as feasible,
to save it from liquidation, thereby maximizing its value. The Code is a
beneficial legislation which puts the corporate debtor back on its feet,
not being a mere recovery legislation for creditors. Observations in Swiss
Ribbons Pvt. Ltd. and Anr. v. Union of India & Ors.14 and Babulal
Vardharji Gurjar v. Veer Gurjar Aluminum Industries Pvt. Ltd. &
Anr.15 are relied upon for this purpose.
24. It was submitted that Parliament undoubtedly amended the
Code in 2018, defining “personal guarantor” as a species of individuals
to whom the law applied. However, the manner of its application
continued to be the same, i.e. to all individuals. Therefore, the resort to
conditional legislation power under Section 1(3) to bring into force certain
provisions selectively, in respect of some individuals, i.e. personal
guarantors and not all individuals, is ultra vires, and contrary to the
power conferred on Parliament. Illustratively, it is pointed out that the
application of the law itself is limited- for instance in the case of
Section
78 which applies to fresh start of insolvency proceedings- the Code is
limited then, in its application to one sub category of individuals (all of
whom are covered by the chapter, which is opened by Section 78) i.e.,
personal guarantors. This selective application is naked classification
exercised by the government conferred with conditional legislative
powers.
25. It was next argued that Part III of the Code relating to
individuals and partnership firms are outlined in various sections of the
13 “The Code prescribes for the insolvency resolution and for individuals and partnership
firms, which are proposed to be implemented in a phased manner on account of the
wider impact of these provisions. In the first phase, the provisions would be extended to
personal guarantors of corporate debtors to further strengthen the corporate insolvency
resolution process and a clear enabling provision for the purpose has been provided in
the Bill.”
14 Swiss Ribbons Pvt. Ltd. and Anr. vs. Union of India &Ors., (2019) 4 SCC 17, at  para
28; Babulal Vardharji Gurjar v. Veer Gurjar Aluminum Industries Pvt. Ltd. and Anr.
(2020) 15 SCC 1, at paras 21, 21.1.
15 (2020) 15 SCC 1 at paras 21, 21.1.
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Act. Of these chapters, I, III to VII, all of which have been notified are
operative components of the Code, relatable to individuals and partnership
firms. They can certainly be brought into force independently, whenever
the executive is of the opinion that it is appropriate to do so. However,
Section 2 cannot be used for this purpose, certainly not for bifurcating
individuals and partnership firms into subcategories and then to apply
Part II provisions exclusively to personal guarantors. It is argued that
Section 2 of the Code is not an operative component, but more merely a
descriptive component. Counsel argued that the nature of Section 2 is
similar to an amendable descriptive component. Elaborating, it was
submitted that an amendable descriptive component of an enactment is
one that describes the whole or some part of the Act, and was subject to
amendment when the Bill was introduced in Parliament in 2017. Section
2, in other words, is descriptive and merely declares the subjects to
which the code would apply. It certainly cannot clothe the executive
with power to apply the code selectively at its discretion to different
subjects.
26. Mr. Sudipto Sarkar, learned senior counsel, adopted the
arguments of Mr. Salve. He also relied on the decision of the Federal
Court in Jatindra Nath Gupta v. Province of Bihar16, especially the
following passage:
“The proviso contains the power to extend the Act for a period
of one year with modifications, if any. It
is one power and not
two severable powers. The fact that no modifications were
made in the Act when the power was exercised cannot help in
determining the true nature of the power. The power to extend
the operation of the Act beyond the period mentioned in the
Act prima facie is a legislative power. It is for the Legislature
to state how long a particular legislation will be in operation.
That cannot be left to the discretion of some other body. The
power to modify an Act of a Legislature, without any limitation
on the extent of the power of modification, is undoubtedly a
legislative power. It is not a power confined to apply the Act
subject to any restriction, limitation or proviso (which is the
same as an exception) only.”
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
16 (1949-50) 11 FCR 595.
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27. The other counsel, viz. Mr. Rohit Sharma, Ms. Pruthi Gupta,
Mr. Rishi Raj Sharma, and Mr. Manish Paliwal too, argued for other
petitioners. Pointing to the distinction between provisions in Part II of
the Code and those in Part III, it is argued that the procedure for initiation
of insolvency resolution against personal guarantors to corporate debtors
is the same as in relation to other individuals. The only difference is that
the forum to decide this would be the National Company Law Tribunal
(NCLT). In all other respects, in terms of Part III, the recovery process
for debt realization is identical for personal guarantors to corporate debtors,
as in the case of individuals. By separating the process in an artificial
manner, and subjecting the insolvency process of personal guarantors
who are also individuals, to adjudication by the NCLT, and furthermore,
virtually directing that the two proceedings, i.e. in relation to the corporate
debtor on the one hand, and the personal guarantor, on the other hand, to
be clubbed, is, in effect, a legislative exercise, unsupported by any express
provision of the Code. It is also submitted that the object of the Code is
to ensure a revival of corporate debtors. On the other hand, if an
application against a personal guarantor is admitted, a moratorium under
Section 101 of the Code automatically applies. This results in stay of all
pending proceedings or legal claims in respect
of all debts. Since the
debt of the personal guarantor is the same as the debt of the corporate
debtor, all pending proceedings, including the corporate insolvency
resolution plan initiated against a corporate debtor would be stayed on
admission of an application for initiation of the resolution plan against a
personal guarantor. This would in fact, amount to treating unequals as
equals by a sheer legislative fiat. In other words, argued counsel, the
moratorium which would operate in respect of pending resolution plans
of corporate debtors, upon the initiation of an application against personal
guarantors puts them on the same level, which the statute itself does not
permit.
28. It is submitted that by virtue of Section 140 of the Indian
Contract Act, a guarantor upon payment or performance of all that he is
liable for, is invested with all rights which the creditor had enjoyed against
the principal debtor. This provision enables the guarantor to exercise all
rights, which the creditor had against the principal debtor, which would
include the right to file a resolution plan against the corporate debtor
after conclusion of the latter’s resolution process. However, by virtue of
Section 29A of the Code, promoters of corporate debtors who in most
cases are personal guarantors, are barred from filing a resolution plan in
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the corporate resolution process of the corporate debtor. This places
them at a distinct disadvantage as compared with individuals who are
not personal guarantors. In this regard, the inability of such personal
guarantors to recover amounts from the corporate debtor in the insolvency
process, as well as at a later stage, if necessary, to initiate insolvency
process, has been affected by virtue of the impugned notification. It was
submitted that this court, in Committee of Creditors of Essar Steel
India Ltd. v. Satish Kumar Gupta17, ruled that
“Section 31 (1) of the Code makes it clear that once a
resolution plan is approved by the Committee of Creditors it
shall be binding on all stakeholders ... This is for the reason
that this provision ensures that the successful resolution
applicant starts running the business of the corporate debtor
on a fresh slate ...
All claims must be submitted to and decided by the resolution
professional so that a prospective resolution applicant knows
exactly what has to be paid in order that it may then take
over and run the business of the corporate debtor. This the
successful resolution applicant does on a fresh slate’’.
Counsel therefore argued that an approved resolution plan in
respect of a corporate debtor amounts to extinction of all outstanding
claims against that debtor; consequently, the liability of the guarantor,
which is co-extensive with that of the corporate debtor, would also be
extinguished.
29. It was
further argued that the resolution plans, duly approved
by the Committee of Creditors would propose to extinguish and discharge
the liability of the principal borrower to the financial creditor. Therefore,
the petitioners’ liability as guarantors under the personal guarantee would
stand completely discharged. Reliance is placed on the judgment of the
Punjab and Haryana High Court in Kundanlal Dabriwala v. Haryana
Financial Corporation18, which ruled that:
“on a fair reading of the provisions of the Contract Act, I am
inclined to hold that as the liability of the surety is co-extensive
with that of the principal debtor, if the latter’s liability is scaled
down in an amended decree, or otherwise extinguished in
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
17 2019 SCC Online SC 1478.
18 (2012) 171 Comp Cas 94.
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whole or in part by statute, the liability of the surety also is
pro tanto reduced or extinguished.”
30. Reliance was also placed on the judgment of the National
Company Law Appellate Tribunal (NCLAT) in Dr. Vishnu Kumar
Agarwal v. Piramal Enterprises Ltd19, where it was held that “for the
same set of debts, claim cannot be filed by same financial creditor
in two separate corporate insolvency resolution processes.”
III Arguments of the Union and other Respondents
31. Arguing for the Union of India, the Attorney General Mr. K.K.
Venugopal submitted that the Code was amended in 2018. It substituted
the pre-amended definition in Section 2(e) by introducing three different
classes of debtors, which were personal guarantors to corporate debtors
[Section 2(e)], partnership firms and proprietorship firms [Section 2 (f)]
and individuals [Section 2(g)]. The purpose of splitting the provision and
defining three separate categories of debtors was to cover three separate
sets of entities. Parliament wanted to deal with personal guarantors [under
Section 2(e)], differently from partnership firms and proprietorship firms
[under section 2(f),] and individuals other than persons referred to in
Section 2 (e) [under Section 2(g)]. The intention was to clearly distinguish
personal guarantors to corporate debtors from other individuals. This
was because Section 60 of the Code which deals with the adjudicating
authority for corporate
debtors too was partially amended in 2018. The
amendment to Section 60(2) added that it applied to insolvency
proceedings or liquidation/bankruptcy of a corporate guarantor or
personal guarantor as the case may be, to a corporate debtor. The result
of the amendment is that when a corporate debtor faces insolvency
proceedings, insolvency of its corporate guarantor too can be triggered.
Likewise, a personal guarantor to a corporate debtor, facing
insolvency, can be subjected to insolvency proceedings. All this is to be
resolved and decided by the NCLT. In other words, the amendment by
Section 60(2) too achieved a unified adjudication through the same forum
for resolution of issues and disputes concerning corporate resolution
processes, as well as bankruptcy and insolvency processes in relation to
personal guarantors to corporate debtors.
32. It was argued that Parliament felt compelled to separate
personal guarantors from other individuals such as partnership firms,
19 2019 SCC Online NCLAT 542.
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proprietorships and individuals. It was felt that if this separation, achieved
through the amendment of 2018 were not realized, the insolvency
resolution process of corporate debtors would have to be dealt with
separately and independently of its promoters, managing directors, and
directors who had furnished their personal guarantees to secure debts
of corporate debtors. If insolvency resolution proceedings against
corporate debtors were continued without this amendment, and without
the unification, (of the adjudicatory body)  on the default of the corporate
debtor to a debt owed to a financial creditor, the entire machinery of the
Code relating to the corporate debtor would work itself out, to the exclusion
of personal guarantors. This presented a peculiar problem, in that the
resolution applicant, wishing to bid for takeover of the corporate debtor
and operate it as a running concern would be faced with a huge liability,
and the personal guarantor in most cases would be one of the individuals
primarily responsible for the insolvency of the company, but would be
out of the resolution process and have to be separately proceeded with.
What therefore, has been effectuated by creating an independent
provision, by separating personal guarantors of corporate debtors and
by the same amendment, placing the personal guarantor’s debt before
one tribunal/forum namely the NCLT, is that such a forum would apply
the procedure in Part III, in regard to personal
guarantors for providing
repayment of the entire debt for which the guarantee is furnished in the
first place. If that debt is not repaid in the Part III, the personal guarantor
would not stand discharged, but on the other hand, would himself be
forced into bankruptcy proceedings.
33. It was submitted that though the procedure to be adopted by
the NCLT and rules of insolvency (in relation to personal guarantors,
under Part III of the Code) might be different from that relating to
corporate debtors, unifying both processes under one forum enables the
adjudicating body to have a clear vision of the extent of debt of the
corporate debtor, its available assets and resources, as also the assets
and resources of the personal guarantor. This would not have been viable,
had the insolvency resolution process of the personal guarantor continued
under Part III, before another body. The amendment, and the impugned
notification would ensure a more optimal resolution process, as resolution
applicants wishing to take over the management of corporate debtors,
would ultimately find the process of taking over more attractive; besides,
there will be more competition in regard to the bids proposed, and the
total debt servicing of the corporate debtor might be lowered if the
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
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personal guarantor’s assets are also taken into account to mitigate the
corporate debtor’s liabilities. The personal guarantor in such cases, who
provides assets which have been charged against the amount advanced
to his company would most probably not permit himself to be driven to
bankruptcy, and would therefore, be more likely to arrange for payment
of monies due from him to obtain a discharge by payment of the amount
outstanding to the bank or other financial creditor. In some cases, the
creditor bank may be even prepared to take a haircut or forego the
interest amounts so as to enable an equitable settlement of the corporate
debt, as well as that of the personal guarantor. This would result in
maximizing the value of assets and promoting entrepreneurship, which
is one of the main purposes of the Code.
34. The learned Attorney General submitted that the expression
“provision” has been defined in Black’s Law Dictionary (10th edition at
page 1420) as, “a clause in a statute, contract or other legal
instrument”/ He also relied upon the judgment in Chettian Veettil
Amman v. Taluk Land Board20 to the effect that:
“A provision is therefore a distinct rule or principle of law in
a statute which governs the situation covered by it. So an
incomplete idea, even though stated in the form of a section
of a statute, cannot be said to be a provision for, by its
incompleteness, it cannot really be said to provide a whole
rule
or principle for observance by those concerned. A
provision of law cannot therefore be said to exist if it is
incomplete, for then it provides nothing.”
He therefore urged that Section 2(e) being complete and distinct
is a provision within the meaning of Section 1(3), and the Central
government acted intra vires to bring it into force, as well as certain
provisions in Part III of the code.
35. It was argued that the executive has the power to bring into
force any one provision of a statute at different times for different
purposes, and that the government can exercise this power to commence
a provision for one purpose on one day and for the remaining purposes
on a later date. He relied upon the following extract from Bennion on
Statutory Interpretation: A Code (6th Edition, at page 257):
20 (1980) 1 SCC 499.
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“Where power is given to bring an Act into force by order, it
is usual to provide flexibility by enabling different provisions
to be brought into force at different times. Furthermore any
one provision may be brought into force at different times for
different purposes. [..]
Advantages. This method of commencement gives all the
advantages of extreme flexibility. Before a new Act is brought
into operation, any necessary regulations or other instruments
which need to be made under it can be drafted. […]”
36. The learned Attorney General relied upon two Constitution
bench decisions of this Court, which throw light on the power exercised
by the Central Government under provisions, which permit notification
of provisions bringing into force legislation in phases. The judgments
cited were Basant Kumar Sarkar v. Eagle Rolling Mills Ltd.21 and
Bishwambhar Singh v. State of Orissa22. He emphasized that often,
when new legislation is introduced, the impact it might have on the subject
matter needs to be studied and it would be to the benefit of all that a
stage by stage or region by region implementation is adopted. Furthermore
the discretion exercised by the executive government is not unfettered.
37. The Attorney General urged that what follows from the above
decisions is that Section 1(3) of the IBC has to be interpreted to give
flexibility to the Central Government to implement provisions of the Code
to meet the objectives of the enactment. He highlighted that
the Central
Government has in fact been enforcing the provisions of the Code in a
phased manner and brought to the Court’s notice that the provisions
were notified on 10 different dates. It was submitted that the Code brought
about a radical change in the existing laws applicable to debtor companies
in that a single default by the corporate debtor above a threshold limit
prescribed in the Code triggers an insolvency resolution process enabling
a creditor to demand repayment. Heavy emphasis is placed by the Code
on attempting resolution of the corporate debtor to maximize the value
of the company and ensure that it continues as the going concern in the
interests of the economy. It was keeping in mind these objectives that
the impugned notification was issued appointing 1st of December 2019
as the date on which certain provisions of the IBC were to come into
force, only so far as they relate to personal guarantors to corporate
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
21 (1964) 6 SCR 913.
22 1954 SCR 842.
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debtors. The submission that the impugned notification creates a
classification was refuted. He stated that it only brought into force sections
in Part III of the Code and Section 2(e) of the Code, from 1st December
2019. From that date, proceedings could be filed against personal
guarantors to corporate debtors under the Code. The proceedings would
be initiated before the NCLT, which would also be seized of resolution
proceedings against the corporate debtors.
38. The Attorney General submitted that the Amendment Act
brought about a classification after detailed deliberations and in the light
of the report of the Working Group on Individual Insolvency, Regarding
Strategy and Approach for implementation of Provisions of the Code to
Deal with Insolvency of Guarantors to Corporate debtors, and Individuals
having business. In this report of 2017, the working group recognized
the dynamics and the interwoven connection between the corporate
debtor and guarantor, who has extended his personal guarantee.
39. The Attorney General also relied upon the report of the
Bankruptcy Law Reforms Committee (“BLRC”) tasked with introducing
a comprehensive framework for insolvency in bankruptcy. That
committee recognized that personal guarantors were a category of entities
to whom individual insolvency proceedings applied, and acknowledged
the link between them and corporate debtors and found that under a
common Code, there could be
synchronous resolution. In this regard,
paras 3.4.3 and 6.1 of the report of the committee, dated November
2015, were relied upon.23 He pointed out that the synchronous resolution
23 The said extracts are as follows:
“3.4.3 Design of the proposed Code: A unified Code -
The Committee recommends that there be a single Code to resolve insolvency for all
companies, limited liability partnerships, partnership firms and individuals.
In order to ensure legal clarity, the Committee recommends that provisions in all
existing law that deals with insolvency of registered entities be removed and replaced by
this Code.
This has two distinct advantages in improving the insolvency and bankruptcy framework
in India. The first is that all the provisions in one Code will allow for higher legal clarity
when there arises any question of insolvency or bankruptcy. The second is that a
common insolvency and bankruptcy framework for individual and enterprise will enable
more coherent policies when the two interact. For example, it is common practice that
Indian bank stake a personal guarantee from the firm’s promoter when they enter into
a loan with the firm. At present, there are a separate set of provisions that guide
recovery on the loan to the firm and on the personal guarantee to the promoter. Under
a common Code, the resolution can be synchronous, less costly and help more efficient
recovery.”
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envisaged by the BLRC is found in the IBC in Section 5(22) and Section
60 (which fall in Part II of the Code), and Section 179 (which falls in
Part III of the Code) and submitted that- firstly, the term ‘personal
guarantors’ is defined in Part II of the Code which provides for insolvency
resolution and liquidation for corporate persons, Section 5(22) of the
IBC defines “personal guarantor” to mean “an individual who is the
surety in a contract of guarantee to a corporate debtor”. Secondly, by
reason of Section 60(1), the Adjudicating Authority, in relation to
insolvency resolution and liquidation for corporate persons (including
corporate debtors and their personal guarantors), shall be the NCLT.
Section 60(2) mandates that where a corporate insolvency resolution
process or liquidation proceeding of a corporate debtor is pending before
the NCLT, an application relating to the insolvency resolution or
bankruptcy of a personal guarantor of such corporate debtor shall be
filed before the NCLT. Section 60(4) vests the NCLT with all powers of
the Debt Recovery Tribunal (DRT) as contemplated under Part III of
the Code for the purpose of Section 60(2). Thirdly, under Section 179,
the DRT is the Adjudicating Authority for insolvency resolution for all
other categories of individuals and partnership firms. Section 179 itself
is “subject to Section 60”. It was argued that common oversight of
insolvency processes of the corporate debtor, its corporate guarantor,
and personal guarantors, through one forum, under the Code, (which, by
reason of Section 238, overrides all other laws), was the objective of the
amendment of 2018 and the impugned notification. The learned Attorney
General also pointed out to Section 30, which enacts that an Adjudicatory
authority approved resolution plan binds all stakeholders. However, at
the same time, in the event a resolution plan permits creditors to continue
proceedings against the personal guarantor, then such personal guarantors
would continue to be liable to discharge the debts owed to the creditor
by the corporate debtor, which would be limited of course to the extent
of debt that did not get repaid under the resolution plan. The Attorney
General also relied on Embassy Property Developments (P) Ltd. v.
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
“6.1 The applicability of the Code
The Committee considers the following categories of entities to whom the individual
insolvency and bankruptcy provisions shall apply:
Sole proprietorships where the legal personality of the proprietorship is not different
from the individual who owns it.
Personal guarantors
Consumer finance borrowers ….”
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State of Karnataka24 where this court had examined and dealt with the
interplay between Sections 5(22), 60 and 179 of the Code.
40. Mr. Tushar Mehta, Solicitor General of India, supported the
submissions of the Attorney General. He too stressed that different
provisions were brought into force on different dates. He highlighted
that Section 1(3) of the Code confers wide powers enabling the Central
Government to operationalize the Code in a subject-wise and (not
necessarily in a contiguous manner) – particular sections, provisions or
parts. He urged that the petitioner’s interpretation of the statute is unduly
narrow and would result in disrupting the Code. It was argued that Section
2 of the Code is not a definition clause – but rather acts as a lever to
provide a mechanism for a phased and limited interpretation of the Code.
He underlined, therefore, that Section 2 represents Parliamentary
classification as regards classes of debtors who fall under the Code.
The Solicitor General pointed out that before the 2018 amendment, Section
2(e) was generic and that the amendment classified three distinct types
of entities. The personal guarantors to corporate debtors are no doubt
individuals like others, but are in fact at the centre of insolvency of a
corporate debtor. He submitted that a predominant reason for the
insolvency of corporate debtors invariably is the role played by its directors,
etc., who are personal
guarantors and are or were, mostly at the helm of
affairs of the corporate debtor itself.
41. The Solicitor General submitted that Part-II of the Code applied
to all categories of corporate entities who are debtors. By virtue of Section
3(8), the corporate debtor is a corporate or juristic entity that owes a
debt to any person. Likewise, the corporate guarantor under Section
3(7) is a corporate person who has stood guarantee to a corporate debtor.
Before the impugned notification, proceedings in Part-II were confined
to corporate debtors and only another class, i.e. corporate guarantors.
Personal guarantors and corporate guarantors formed part of the same
class inasmuch as they were guarantors since they had furnished
guarantees to corporate debtors to secure their loans. Yet, personal
guarantors being individuals were not included in Part-III, for functional
and operational purposes. The Solicitor General submitted that Part-II
outlines the mechanism involved in regard to insolvency resolution
functionally and operationally designed for corporate bodies. This takes
into its sweep a resolution professional, committee of creditors as third
24 (2020)13 SCC 308.
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parties taking over the debtor and taking crucial decisions for insolvency
resolution. This statutory mechanism could not be applied to individuals
as there is no question of “take over” of individuals. Individuals, who
stand guarantee to corporate debtors and whose liability is co-terminus
with such corporate debtors were therefore, outside the field of the Code.
This resulted in an anomaly inasmuch as one set of guarantors to corporate
debtors, i.e. individuals or personal guarantors were outside the purview
of the Code whereas other set of guarantors, i.e. corporate guarantors
were subjected to the provisions of the Code and could also be proceeded
against in Part-II. As a result, a conscious decision was taken to enforce
Part-III and operationalize the mechanism suitably for a class of
individuals, i.e. personal guarantors. This decision was implemented
through the impugned notification.
42. Apart from reiterating the submission of the Attorney General
with regard to the flexibility in respect of notifying parts of the Code on
different dates, having regard to the difference in subject matter and
those governed by it, the learned Solicitor General also relied upon the
decision reported as J. Mitra and Co. Pvt. Ltd. v. Assistant Controller
of Patents25. He relied upon the report of the Working Group of Individual
Insolvency (Regarding Strategy and Approach for Implementation of
the Provisions of the Insolvency and Bankruptcy Code, 2016) to deal
with
insolvency of guarantors to corporate debtors and individuals having
business, which had highlighted that in the absence of notification of
provisions of the Code dealing with insolvency and bankruptcy of personal
guarantors to corporate debtors and creditors are unable to effectuate
the provisions of the Code and access remedies available under the
Code. He submitted that this court has repeatedly held in several decisions
that there is no compulsion that all provisions of law or an Act of
Parliament or any other legislation should be brought into force at the
same time. The legislature in its wisdom may clothe the executive with
discretion to bring into force different parts of a statute on different
dates, or in respect of different subject matters, or in different areas.
Reliance was placed upon Lalit Narayan Mishra Institute of Economic
Development v. State Of Bihar & Ors. Etc26 and Javed & Ors v.
State of Haryana & Ors27. It was submitted that the Central
Government, therefore, acted within its rights to confine the enforcement
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
25 (2008) 10 SCC 368.
26 (1988) 2 SCC 433.
27 (2003) 8 SCC 369.
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of the provisions of the Code to a class of individuals, i.e., to personal
guarantors, without altering the identity and structure of the Code. It
was submitted that this is permissible as it is within the larger power of
enforcement of the statute, which encompasses the discretion to enforce
the law in respect of a definite category, provided that such an act of
enforcement would not alter the character of the Code. It was therefore,
submitted that the enforcement of parts through the impugned notification
– only in respect of personal guarantors in no way alters the identity or
character of the Code.
43. The Solicitor General further submitted that the liability of a
guarantor is co-extensive, joint and several with that of the principal
borrower unless the contrary is provided by the contract. A discharge
which a principal borrower may secure by operation of law (for instance
on account of winding up or the process under the Code) does not
however absolve the surety from its liability. Section 128 of the Indian
Contract Act, 1872 (“Contract Act”) provides that the liability of a principal
debtor and a surety is co-extensive, unless provided to the contrary in
the contract. The word “co-extensive” is an objective for the word
‘extent’ and it can relate only to the quantum of the principal debt. The
Solicitor General relied on certain decisions in this regard.28 It is stated
that the creditor also has the liberty to
proceed against the principal
borrower and all sureties simultaneously; in this regard, he cited Bank
of Bihar Ltd. v. Dr. Damodar Prasad & Anr29. It is submitted that no
court or co-surety can limit such a right. For this proposition, reliance
was placed on State Bank of India v. Index port Registered30 and
Industrial Investment Bank of India v. Biswanath Jhunjhunwala31.
Counsel also submitted that a surety cannot alter or defer such a right of
the creditor. Hence, until the debt is paid off to the creditor in entirety,
the guarantor is not absolved of its joint and several liability to make
payment of the amounts outstanding in favour of the creditor.
44. The Solicitor General submitted that neither the guarantor’s
obligations are absolved nor discharged in terms of Sections 133 to 136
of the Indian Contract Act, 1872, on account of release/discharge/
composition or variance of contract which a principal borrower may
28 Gopilal J Nichani v. Trac Inds. and Components Ltd, AIR 1978 Mad. 134.
29 AIR 1969 (1) SCR 620.
30 AIR 1992 SC 1740.
31 (2009) 9 SCC 478.
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secure by way of operation of law for instance as under the Code.
The rights of a creditor against a guarantor continue even in the event of
bankruptcy or liquidation, stressed the Solicitor General, and relied on
Maharashtra State Electricity Board Bombay v. Official Liquidator,
High Court, Ernakulum & Anr.32, where this court considered the
interplay of Sections 128 and 134 of the Contract Act in the facts of the
case. In that case, a company whose advances were secured by a
guarantee went into liquidation. The court held that the fact the principal
debtor went into liquidation had no effect on the liability of the guarantor,
because the discharge secured of the principal borrower was by
“operation of law” and involuntary in nature. This was followed in Punjab
National Bank v. State of UP33. This court held that:
“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 Nos. 1,2
and 3 who stood guarantors arises out of the terms of the
deeds of 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 Nationalization 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.”
45. To a similar end, the judgment
of the Calcutta High Court in
Gouri Shankar Jain v. Punjab National Bank & Anr.34 were relied
on. It was held that none of the obligations of the surety under Section
133 to 139, 141 and 145 of the Contract Act are discharged on account
of admission of a Section 7 application. As such, a discharge is on account
of a statute and involuntary in nature. It was also argued that similarly, in
terms of Section 31 of the Code, a resolution plan approved by the
Adjudicating Authority is binding on all stakeholders including the
guarantors, and hence, the release/discharge/ composition or variance
of contract with the principal borrower in terms of a resolution plan, is
“statutorily” presumed to be consented by the guarantors in question.
Therefore, by way of approval of a resolution plan, any release/discharge
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
32 1982 (3) SCC 358.
33 (2002) 5 SCC 80.
34 2019 SC Online Cal 7288 at para 34 and 35.
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secured by the principal borrower or entering into a composition with
the principal borrower (reference to Section 135 of the Contract Act)
cannot discharge the guarantor in any manner what so ever. The judgment
of this court in State Bank of India v. V. Ramakrishnan &Ors.35 too
was relied on, where the court recognized that a guarantor cannot seek
a discharge of its liability on account of approval of a resolution plan, and
the terms of such a plan can provide for the continuation of the debt of
the guarantors. It was submitted that the continuation of a financial
creditor’s claim against a guarantor would not lead to double recovery
of a claim as the financial creditor would be able to recover only the
balance debt which remains outstanding and unrecovered from the
principal borrower. There are enough safeguards against double recovery
as provided under (a) the settled principle of contract law that
simultaneous remedy against the co-obligors does not permit the creditor
to recover more than the total debt owed to it, and (b) the provisions of
the Code itself. The Solicitor General relied on the acknowledged practice,
known as, the principle of “double dip” or the notion of dual nature of
recovery by a creditor for the same debt from two entities - be it principal
borrower and guarantor or co-guarantors or co-debtors. When a primary
obligor and a guarantor are liable on account of a single claim, the creditor
can
assert a claim for the full amount owed against each debtor until the
creditor is paid in full (that is it can double dip). This means that in case
a portion of debt is recovered from one of the entities, either principal
borrower or guarantor, the other would be liable for the unsatisfied amount
of the claim, the principal borrower being joint and several with the surety.
This principle is opposed to the principle prohibiting “double proof” in
which the same debt is pursued against the same estate twice, leading to
double payment. This right of double dip of a creditor was spoken of, in
recent judgment PAFCO 2916 INC. C/o Pegasus Aviation Finance
Company vs. Kingfisher Airlines Limited36, where the decree holders
initiated simultaneous execution proceedings against both the principal
debtor and the guarantor on the basis of the same decree, and the
Executing Court suo moto raised the issue of maintainability to hold that
both the execution petitions are not simultaneously maintainable. The
High Court of Karnataka disagreed and held that the decree holders
cannot be directed to amend their claims in each of the execution petitions
to only half the decretal amount. Reliance was also placed on the
35 2018(17) SCC 394.
36 2016 SCC OnLine Kar 5991.
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judgment of the UK Supreme Court in In Re Kaupthing Singer and
Friedlander Ltd. (in administration)37.
46. Mr. Rakesh Dwivedi, learned senior counsel, appearing for
the State Bank of India, urged that the substance of the petitioners’
argument is that Section 1(3) does not empower the Central Government
to enforce the provisions of Part III of the Code selectively to personal
guarantors of Corporate Debtors only. The petitioners highlight that Part
III applies to individuals and partnership firms in a composite manner,
and the impugned notification dated 15.11.2019 splits up that unity by
enforcing the provisions of Part III only upon personal guarantors of
corporate debtors. It is urged that the submission that Section 1(3) does
not confer the power of modification on the Central Government is
presented by characterizing Section 1(3) as conditional legislation. He
submits that Section 1(3) has two distinct dimensions. Parliament firstly
conferred on the Central Government not only the power to determine
the date on which the Code will come into force, but also empowers it to
appoint different dates for different provisions of the Code. It was
intended that all the provisions of the Code may not be enforced at once.
Given the width of impact and with an eye on the objectives set out in
the statement of objects and reasons and preamble, a staggered
enforcement was anticipated.
47. Mr. Dwivedi stated that nothing much depends on the
characterization of
Section 1(3) as conditional or delegated legislation.
Even conditional legislation involves a delegation of legislative power to
the authority concerned. Under Section 1(3), the Central Government is
only a delegate of the Parliament. In some cases, such provisions or
provisions of broadly similar nature have been described by this court as
conditional legislation, but equally in some cases such a power has been
described as delegated legislation by different judges. Reliance was
placed on Delhi Laws Act, 1912, In re v. Part ‘C’ States (Laws) Act,
1950 (supra) and Lachmi Narain v. Union of India38.
48. It was urged that provisions of diverse nature have been
characterized as conditional legislation by this court. The cases relied
upon by the Petitioners related to a challenge to the validity of legislative
provisions on the ground of excessive delegation of legislative power. In
In re Delhi Laws, the Central Government was expressly empowered
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
37 2012 (1) All ER 883 Paras 11, 12, 53-54.
38 (1976) 2 SCC 953, para 49.
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to enforce certain laws with “modifications and restrictions”. The
power of modification was held to be limited to such modifications as did
not affect the identity or structure or the essential purpose of the law.
This was a departure from the judgment of the Federal Court in Jatindra
Nath39. However, in the case of Lachmi Narain, the notification issued
by the Government was challenged, and this court held that the real
question was whether the delegate acts within the general scope of the
affirmative words which give the power, and without violating any express
conditions or restrictions by which that power is limited. While Jatindra
Nath involved extension of the life of a temporary Act, in the Delhi
Laws case, the power under consideration was to extend the laws of
Part C States to Part A States. Later, in Raghubar Swarup v. State of
U.P40, the State Government was conferred power by Section 2 of U.P.
Zamindari Abolition and Land Reforms Act, 1951, to extend the Act to
other areas in the State. It involved selection of geographical area for
applying the law. Similarly, in Tulsipur Sugar Company41, the power
was conferred to extend the U.P. Town Areas Act, 1914, to a notified
area.  Learned senior counsel argued that in Sardar Inder Singh (supra),
the power conferred on the executive to extend the life of a temporary
Act, even when no outer limit is prescribed, was upheld. In Bangalore
Woollen, Cotton and Silk
Mills v. Bangalore Corporation42, the power
conferred on the Municipal Corporation to levy octroi on “other articles
not specified in the Schedule” was upheld saying that it was more in the
nature of conditional legislation. Reliance was also place on ITC
Bhadrachalam v. Mandal Revenue Officer43, where the power to
exempt any class of non-agricultural land and was upheld saying:
“the power to bring an Act into force as well as the power to
grant exemption are both treated, without a doubt, as belonging
to the category of conditional legislation”.
Learned counsel therefore urged that the line of demarcation
between conditional and delegated legislation at times gets blurred.
49. While judging the validity of the legislations, this Court has
examined the sufficiency of the guidance afforded by the legislative
39 Jatindra Nath Gupta v. State of Bihar (1949-1950) 11 FCR 595.
40 AIR 1959 SC 909 at p. 913
41 (1980) 2 SCC 295.
42 (1961)3 SCR 698.
43 (1996) 6 SCC634.
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policy indicated in the relevant statute. For this, reliance was placed on
Edward Mills v. State of Ajmer44. All these establish that diverse
provisions apart from those which empower the executive to enforce
the Act or provisions of the Act have been characterized as conditional
legislation and their validity and scope has been determined in the light
of the text, context and purpose of the Act.
50. Learned counsel stated that a schematic, structural and
purposive construction of Section 1(3) of the Code needs to be adopted
to determine the scope of the power conferred on the Central
Government by Section 1(3) of the Code. The Petitioners apply the rule
of literal construction and seek to construe Section 1(3) in isolation,
without reference to the context, scheme or purpose of the Code. It is
submitted that the ambit of Section 1(3) should not be determined by
merely applying the doctrine of literal construction. All provisions of the
Code, including the enforcement provision should be construed in the
context of the entire enactment and the approach should be schematic,
structural and purposive. Furthermore, Section 1(3) should not be
construed in isolation. It is well settled that a statute has to be read as a
whole. The scope of the power under Section 1(3) of the Code cannot
be expounded without taking note of the scheme of the Code and the
other related provisions. Counsel relied on the following observations of
this court in State of West Bengal
v. Union of India45.
“In considering the true meaning of words or expression used
by the legislature the court must have regard to the aim, object
and scope of the statute to be read in its entirety. The court
must ascertain the intention of the legislature by directing its
attention not merely to the clauses to be construed but to the
entire Statute; it must compare the clause with the other parts
of the law, and the setting in which the clause to be interpreted
occurs.”
51. Legislative intent, it is urged, cannot be gathered by a bare
mechanical interpretation of words or mere literal reading. The words
are to be read and understood in the context of the scheme of the Act
and the purpose or object with which the power is conferred. As Iyer, J.
observed in Chairman Board of Mining Examination v. Ramji46 “to
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
44 (1955) I SCR 735.
45 (1964) I SCR 371, at para 69.
46 AIR 1977 SC 965 at p. 968.
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be literal in meaning is to see the skin and miss the soul. The judicial
key to construction is the composite perception of the deha and the
dehi of the provision”. This has been followed in Directorate of
Enforcement v. Dipak Mahajan47. Recently too, this court has moved
on to accept purposive interpretation of the statute as the correct
approach to ascertain legislative intent. If the given words can reasonably
bear a construction which effectuates the purpose or object then that
construction is to be preferred. In this regard, the decision in Arcelor
Mittal v. Satish Kumar Gupta48 and Swiss Ribbons (supra) were relied
on.
52. Mr. Dwivedi stated that the impugned notification does not
modify any provisions of the Code. By enforcing certain provisions of
the Code by its seven clauses‘‘only in so far as they relate to personal
guarantors to corporate debtors”, the notification does not modify
any legislative provision. It merely carries out the Parliamentary intention
as expressed by the scheme, structure and purpose of the Code. Section
1(3), Section 2, Section 3(23), Section 5(5)(a) and (22), Section 14(3),
Section 31(1) and in particular, Section 60 and Section 179 are indicative
of the fact that the scheme and structure of the Code involves a
parliamentary hybridization and legislative fusion of the provisions of
Part III, in so far as personal guarantors of corporate debtors are
concerned. The object of this
hybridization is to empower the NCLT to
deal with the insolvency resolution and bankruptcy process of the
corporate debtor along with the corporate guarantor and personal
guarantor of the corporate debtor. Parliament is conscious of the fact
that personal guarantors to corporate debtors are generally promoters
or close relatives of corporate debtors, and in many cases, the corporate’s
indebtedness was due to acts misfeasance and siphoning of funds done
by personal guarantors. Apart from this, personal guarantors to corporate
debtors have a contractually agreed debt alignment with such debtors.
They are coextensively as well as jointly and severally responsible for
the same debt. As Parliament created a legislative hybridization, Part III
of the Code had to be enforced by the Central Government under Section
1(3) with Parliamentary categorization through Section 2. The unifying
of the forum for insolvency resolution/bankruptcy of the corporate debtor
along with its personal guarantor is a Parliamentary dispensation and
47 (1994) 3 SCC 440.
48 (2019) 2 SCC 1, at para 27-29.
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determination. Therefore, Section 1(3) empowers the Central Government
to appoint different dates for different provisions.
53. Learned senior counsel highlighted Section 60(1), (2), (3) and
(4) and urged that Parliament had merged the provisions of Part III with
the process undertaken against the corporate debtors under Part II. The
process of Part II and the provisions of Part III were legislatively fused
for the purpose of proceedings against personal guarantors along with
the corporate debtors. He argued that Section 179, the corresponding
provision in Part III, begins by deploying the phrase “subject to the
provisions of Section 60”. Section 60(4) incorporates the provisions of
Part III, in relation to proceedings before the NCLT against personal
guarantors. Counsel cited Western Coalfield Ltd. v. Special Area
Development Authority49; Baleshwar Dayal v. Bank of India50, and
Nagpur Improvement Trust v. Vasantrao51. It was submitted that other
individuals and partnership firms do not figure in this Parliamentary
hybridization/fusion. Sections 2(e) and 2(g) when read together, would
indicate that personal guarantors are also individuals. Act 8 of 2018 has
brought about a trifurcation of the categories which were comprehended
in Section 2(e) as it stood before the amendment. Section 179 also
indicates that personal guarantors are individuals and Part III is applicable
to them. In fact, it is by operation of the provisions in Chapter III of Part
III that
personal guarantors get the benefit of interim moratorium [Section
96] and moratorium [Section 101]. Personal guarantors do not get
moratorium under Section 14. In this regard, reliance is placed on V.
Ramakrishnan (supra). It is contended that the hybridization achieved
by the impugned notification does not create any anomaly or problem in
enforcement.
54. It was lastly contended that Section 78 is declaratory and
states that Part III applies to individuals and partnership firms. It is made
applicable to the various categories of individuals and partnership firms.
Both Sections 2 and 78 carry the margin caption of “application”. Section
2 commences with”the provisions of this Code shall apply” to the six
categories and Section 78 also declares that “Part III shall apply”to
the mentioned categories. Section 2 embraces the whole Code including
Section 78 and other provisions enforced by the impugned notification,
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
49 (1982) 1SCC 125, paras 3, 17, 18.
50 (2016) 1 SCC 444. paras 6-8.
51 (2002) 7SCC 657, para 31.
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which clearly appoints the date of enforcement for Section 2(e) and
other provisions, and Chapter III of Part III. There is no vivisection or
dissection involved in the impugned notification.
55. Mr. K.V. Vishwanathan, learned senior counsel appearing for
some respondents, argued that an overall reading of the provisions of
the Code would show that personal guarantors to corporate debtors are
a distinct class of individuals (by virtue of Section 2 (e) and Section 60);
the classification is not achieved through the impugned notification, but
by the amending Act of 2018, by Parliament. It is emphasized that the
amendment ensured that the same forum (NCLT) deals with insolvency
processes of corporate debtors, and also deals with similar issues relating
to personal guarantors. The statute permits Part III application by NCLT
in relation to personal guarantors. All that the impugned notification
did was to operationalize these existing provisions of the Code. Learned
senior counsel cited Brij Sundar Kapoor v. First Additional Judge52
to refute the petitioners’ argument that the power under Section 1(3)
power is a one-time power. He also relied on Section 14 of the General
Clauses Act, 1897, which states that any power conferred by any Act or
Regulation can be exercised from time to time.53
56. Mr. Vishwanathan cited Raghubir Sarup v. State of UP54
and urged that the legislature acts within its rights in enacting a law and
leaving it to the executive to apply it to different geographical areas at
different times, depending upon various considerations. He also relied
on Khargram Panchayat Samiti v. State of West Bengal55 and argued
that the power to bring into force different provisions, or different parts
of a statute, on different dates, having regard to the subject matter, is
part of the incidental power conferred by Parliament under Section 1 (3)
of the Code.
57. Mr. Ritin Rai, learned senior counsel appearing for some
respondents, urged that there is an inter connectedness between corporate
52 1989 (1) SCC 561.
53 “14. Powers conferred to be exercisable from time to time—(1) Where, by any  Central
Act or Regulation made after the commencement of this Act, any power is conferred,
then unless a different intention appears that power may be exercised from time to time
as occasion requires.
(2) This section applies also to all Central Acts and Regulations made on or after the
fourteenth day of January, 1887.”
54 AIR 1959 SC 909.
55 1987 (3) SCC 82.
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debtors and personal guarantors, which was recognized by the 2018
amendment, evidenced by its Statement of Objects and Reasons. He
stated that the power under Section 1(3) of the Code has been properly
exercised. Mr. Rai submitted that like the impugned notification, another
notification was issued on 01-05-201856 bringing into effect provisions of
the Code in relation to a distinct class, i.e., financial service providers57.
This was achieved by bringing into force Sections 227 to 229 of the
Code. It was submitted that the discretion conferred on the executive, to
experiment, and bring into force a legislation in phases, is part of the
general pattern of legislative practice and it recognizes that it is not always
wise or possible to enforce provisions of a new law, together, at all places,
in respect of all that it seeks to cover.
IV The Provisions of the Code and the Impugned Notification
58. On 28th May, 2016, the Code was published in the official
gazette after its passage in Parliament. It has been hailed as a major
economic measure, aimed at aligning insolvency laws with international
standards. Parliament’s previous attempts to ensure recovery of public
debt, (through the Recovery of Debts due to Banks or Financial
Institutions Act, 1993, hereafter “RDBFI Act”) securitization (by the
Securitization and Reconstruction and Enforcement of Security Interests
Act, 2002 hereafter “SARFESI”) deal with certain facets of corporate
insolvency. These did
not result in the desired consequences. The aim of
the Code is to a) promote entrepreneurship and availability of credit; b)
ensure the balanced interests of all stakeholders and c) promote time-
bound resolution of insolvency in case of corporate persons, partnership
firms and individuals.
The relevant provisions of the code are extracted below:
“1. Short title, extent and commencement -
(1) This Code may be called the Insolvency and Bankruptcy
Code, 2016.
(2) It extends to the whole of India:
Provided that Part III of this Code shall not extend to the
State of Jammu and Kashmir.58
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
56 SO 1817 (E).
57 Defined separately under Section 2 (17) of the Code.
58 Proviso omitted by the Jammu and Kashmir Reorganisation (Adaptation of Central
Laws) Order, 2020 vide S.O. 1123(E), dated 18th March 2020 (w.e.f. 18-3-2020).
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(3) It shall come into force on such date1 as the Central
Government may, by notification in the Official Gazette,
appoint:
Provided that different dates may be appointed for different
provisions of this Code and any reference in any such provision
to the commencement of this Code shall be construed as a
reference to the commencement of that provision.
2. Application. - The provisions of this Code shall apply to -
(a) any company incorporated under the Companies Act, 2013
(18 of 2013) or under any previous company law;
(b) any other company governed by any special Act for the
time being in force, except in so far as the said provisions are
inconsistent with the provisions of such special Act;
(c) any Limited Liability Partnership incorporated under the
Limited Liability Partnership Act, 2008 (6 of 2009);
(d) such other body incorporated under any law for the time
being in force, as the Central Government may, by notification,
specify in this behalf;
(e) personal guarantors to corporate debtors;
(f) partnership firms and proprietorship firms; and
(g) individuals, other than persons referred to in clause (e).
3. Definitions – In this Code, unless the context otherwise
requires, -
***
(7) “corporate person” means a company as defined in clause
(20) of section 2 of the Companies Act, 2013 (18 of 2013), a
limited liability partnership, as defined in clause (n) of sub-
section (1) of section 2 of the Limited Liability
Partnership
Act, 2008 (6 of 2009), or any other person incorporated with
limited liability under any law for the time being in force but
shall not include any financial service provider;
(8) “corporate debtor” means a corporate person who owes
a debt to any person;
***
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(10) “creditor” means any person to whom a debt is owed
and includes a financial creditor, an operational creditor, a
secured creditor, an unsecured creditor and a decree-holder;
(11) “debt” means a liability or obligation in respect of a
claim which is due from any person and includes a financial
debt and operational debt;
***
(23) “person” includes—
(a) an individual;
(b) a Hindu Undivided Family;
(c) a company;
(d) a trust;
(e) a partnership;
(f) a limited liability partnership; and
(g) any other entity established under a statute, and includes
a person resident outside India;
***
4. Application. –
(1) This Part shall apply to matters relating to the insolvency
and liquidation of corporate debtors where the minimum
amount of the default is one crore rupees.59
Provided that the Central Government may, by notification,
specify the minimum amount of default of higher value which
shall not be more than one crore rupees.
5. Definitions. – In this part, unless the context otherwise
requires –
(1) “Adjudicating Authority”, for the purposes of this Part,
means National Company Law Tribunal constituted under
section 408 of the Companies Act, 2013 (18 of 2013);
***
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
59 W.e.f. 01.12.2016 vide Notification No. SO3594(E) dated 30.11.2016.
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(5) “corporate applicant” means—
(a) corporate debtor; or
(b) a member or partner of the corporate debtor who is
authorised to make an application for the corporate
insolvency resolution process under the constitutional
document of the corporate debtor; or
(c) an individual who is in charge of managing the operations
and resources of the corporate debtor; or
(d) a person who has the control and supervision over the
financial affairs of the corporate debtor;
(5A) “corporate guarantor” means a corporate person who
is the surety in a contract of guarantee to a corporate debtor;
***
(22) “personal guarantor” means an individual who is the
surety in a contract of guarantee to a corporate debtor”
59. Section 13 (Declaration of moratorium and public
announcement) provides that the Adjudicating Authority shall (a) declare
a moratorium for the purposes referred to under Section 14, (b) cause a
public announcement of the initiation of corporate insolvency resolution
process and call for the submission of claims under section 15, and (c)
appoint an interim resolution professional in the manner as laid down in
Section 16. A public announcement is to be made immediately after the
appointment of the interim resolution professional. Section 14
(Moratorium) provides that on the insolvency commencement date, the
Adjudicating Authority shall declare a moratorium prohibiting (a) the
institution or continuation of suits or proceedings
against the corporate
debtor including execution of a judgment, decree, order, etc; (b)
transferring, encumbering alienating or disposing of by the corporate
debtor any of its assets or any legal right or beneficial interest; (c) any
action to foreclose, recover or enforce any security interest created by
the corporate debtor in respect of its property including any action under
the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002; and (d) recovery of any
property by an owner or lessor where such property is occupied by, or in
the possession of the corporate debtor. Section 16 provides for the
appointment and tenure of an interim resolution professional.
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60. The highlight of the Code is the institutional framework it
envisions. This framework consists of the regulator (Insolvency and
Bankruptcy Board of India) insolvency professionals, information utilities
and adjudicatory mechanisms (NCLT and National Company Law
Appellate Tribunal-NCLAT). These institutions and structures are aimed
at promoting corporate governance and also enable a time bound and
formal resolution of insolvency. The major features of the Code include
a two-step process -insolvency resolution for corporate debtors where
the minimum amount of the default is  1,00,00,000/-. Two processes
are proposed by the Code: a) Insolvency resolution process (Sections 6
to 32 of the Code) - In this, the creditors play a crucial role in evaluating
and ultimately determining whether the debtor’s business can be continued
and if so, what are the choices for its revival; and b) Liquidation [Sections
33-54 Code] - If revival fails or is not a feasible option, then creditors
can resolve to wind up the company. Upon winding up, assets of the
debtor are to be distributed.
61.The insolvency resolution process under Section 6 can be
initiated by the financial creditor [Section 7 of the Code] or operational
creditor [subject to issuing a demand notice to the corporate debtor stating
the amount involved in the default, under Section 8, of the Code] against
the corporate debtor in the NCLT. Voluntary insolvency proceedings
may also be initiated by the defaulting
company, its employees or
shareholders [Section 10 of the Code]. Once the resolution process begins,
for the entire period, a moratorium is ordered by the NCLT on the debtor’s
operations. During this period, no judicial proceedings can be initiated.
There can also be no enforcement of securities, sale or transfer of assets
or termination of essential contracts against the debtor. The next step is
appointment of an Interim Resolution Professional under Section16 of
the Code. The resolution professional has to work under the broad
guidelines of the committee of creditors (or “COC”- in terms of Section
21 of the Code). The CoC includes all the financial creditors of the
corporate debtor, except all related parties and operational creditors.
Further, Section 22 of the Code provides that the CoC has to appoint the
resolution professional. This resolution professional can also be the interim
resolution professional. A vote of 75% of the voting share shall determine
the decisions of the committee to opt for either a revival or liquidation
(Section 30). The decision of the CoC is binding not only on debtors, but
also on all the other creditors. Different types of revival plans include
fresh finance, sale of assets, haircuts (i.e. acceptance by creditors of
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amounts lower than what is due to them), change of management etc.
The committee should approve the resolution plan forwarded by the
creditor. Only upon approval does the resolution professional forward
the plan to the adjudicating authority for final approval. The resolution
plan has to be approved by the NCLT; while doing so, it can consider
objections to the resolution plan by any party interested in voicing such
objections (i.e. operational creditors, financial creditors, etc).
62.Section 78(3) of the Code states that the adjudicating authority,
for the purpose of Part III (that deals with insolvency Resolution and
bankruptcy of individuals and partnership firms) would be the Debt
Recovery Tribunal(DRT) that was established under the RDBFI Act.
The adjudicating authority for corporate insolvency (companies, LLPs
and limited liability entities), on the other hand, is the NCLT. The appeal
from the NCLT lies to the National Company Law Appellate Tribunal
(NCLAT). The appeal from the DRT lies to the Debt Recovery Appellate
Tribunal (DRAT). This court hears appeals from both the NCLAT and
the DRAT.
63.The provisions of the Code were brought into force through
different notifications issued on different dates.The impugned notification
issued in the Gazette of India Extraordinary, by the Ministry of Corporate
Affairs, reads as follows:
“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;
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(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.
[F. No. 30/21/2018-Insolvency Section]
GYANESHWAR KUMAR SINGH, Jt. Secy.”
V Analysis and conclusions
64. The principal ground of attack in all these proceedings has
been that the executive government could not have selectively brought
into force the Code, and applied some of its provisions to one sub-category
of individuals, i.e., personal guarantors to corporate creditors. All the
petitioners in unison argued that the impugned notification, in seeking to
achieve that end, is ultra vires. This argument is premised on the nature
and content of Section 1(3), which the petitioners characterize to be
conditional legislation. Unlike delegated legislation, they say, conditional
legislation is a limited power which can be exercised once, in respect of
the subject matter or class of subject matters. As long as different dates
are designated for bringing into force the enactment, or in relation to
different areas, the executive acts within its powers. However, when it
selectively does so, and segregates the subject matter of coverage of
the enactment, it indulges in impermissible legislation. Reliance has been
placed on several judgments of this court, with respect to the limits of
such power- notably the decisions of the Privy Council in Burah, of the
Federal Court in Narothamdas Jethabai; In Re Delhi Laws Act,
1912,
Jatindranath Gupta, Hamdard Dawakhana, Sabanayagam and Vasu
Dev Singh.
65. In Burah, the question arose in the context of a law made by
the Indian Legislature removing the district of Garo Hills from the
jurisdiction of the civil and criminal courts and the law applied to them,
and to vest the administration of civil and criminal justice within the
same district in such officers as the Lieutenant-Governor of Bengal might
appoint for the purpose. By Section 9, the Lt. Governor was empowered
from time to time, by notification in the Calcutta Gazette, to extend,
mutatis mutandis, all or any of the provisions contained in the Act to the
Jaintia, Naga and Khasi Hills and to fix the date of application thereof as
well. By a notification, the Lt. Governor extended all the provisions,
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which was challenged by Burah, who was convicted of murder and
sentenced to death. The High Court of Calcutta upheld his contention
and held that Section 9 of the Act was ultra vires the powers of the
Indian Legislature as it was a delegate of the Imperial Parliament and as
such further delegation was not permissible. The Privy Council overturned
that verdict, and held:
“Legislation which does not directly fix the period for its own
commencement, but leaves that to be done by an external
authority, may with quite as much reason he called incomplete;
as that which does not itself immediately determine the whole
area to which it is to be applied, but leaves this to be done by
the same external authority. If it is an act of legislation on the
part of the external authority so trusted to enlarge the area
within which a law actually in operation is to be applied, it
would seem à fortiori to be an act of legislation to bring the
law originally into operation by fixing the time for its
commencement…..”
It was also observed that:
“Their Lordships agree that the Governor-General in Council
could not, by any form of enactment, create in India, and arm
with general legislative authority, a new legislative Power,
not created or authorized by the Councils Act. Nothing of
that kind has, in their Lordships’ opinion, been done or
attempted in the present case.” 
66. The next case cited was Jatindra Nath Gupta where the
validity of
Section 1(3) of the Bihar Maintenance of Public Order Act,
1948 was challenged on the ground that it empowered the Provincial
Government to extend the life of the Act for one year with such
modification as it could deem fit. The Federal Court held that the power
of extension with modification is not a valid delegation of legislative power
because it is an essential legislative function which cannot be delegated.
The court observed, inter alia, that:
“The proviso contains the power to extend the Act for a period
of one year with modifications, if any. It is one power and not
two severable powers. The fact that no modifications were
made in the Act when the power was exercised cannot help in
determining the true nature of the power. The power to extend
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the operation of the Act beyond the period mentioned in the
Act prima facie is a legislative power. It is for the Legislature
to state how long a particular legislation will be in operation.
That cannot be left to the discretion of some other body. The
power to modify an Act of a Legislature, without any limitation
on the extent of the power of modification, is undoubtedly a
legislative power. It is not a power confined to apply the Act
subject to any restriction, limitation or proviso (which is the
aim as an exception) only. It seems to me therefore that the
power contained in the proviso is legislative.”
67. In the case of In re Delhi Laws Act, 1912, a reference made
under Article 143 of the Constitution, saw a polyvocal court and a plurality
of judicial opinion by the seven judge bench of this court. Three provisions
were referred for the opinion of this court. Having regard to the majority
view, it was held that essential legislative functions could not be delegated,
and that the power to repeal an enactment, extended by the Central
Government, to a part C state, could not be delegated. The majority’s
conclusion was that the power of repeal is legislative. The observations
in some of the judgments are telling, and are reproduced below. Kania,
CJ observed as follows:
“53. It is common ground that no law creating such
bodies has been passed by the Parliament so far. Article 246
deals with the distribution of legislative powers between the
Centre and
the States but Part ‘C’ States are outside its
operation. Therefore on any subject affecting Part ‘C’ States,
Parliament is the sole and exclusive legislature until it passes
an Act creating a legislature or a council in terms of Article
240. Proceeding on the footing that a power of legislation
does not carry with it the power of delegation (as claimed by
the Attorney-General), the question is whether Section 2 of
the Part ‘C’ States (Laws) Act is valid or not. By that section
the Parliament has given power to the Central Government
by notification to extend to any part of such State (Part ‘C’
State), with such restrictions and modifications as it thinks
fit, any enactment which is in force in Part A State at the date
of the notification. The section although framed on the lines
of the Delhi Laws Act and the Ajmer-Merwara Act is restricted
in its scope as the executive Government is empowered to
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extend only an Act which is in force in any of the Part A
States. For the reasons I have considered certain parts of the
two sections covered by Questions 1 and 2 ultra vires, that
part of Section 2 of the Part ‘C’ States (Laws) Act, 1950, which
empowers the Central Government to extend laws passed by
any legislature of Part A State, will also be ultra vires. To the
extent the Central Legislature or Parliament has passed Acts
which are applicable to Part A States, there can be no objection
to the Central Government extending, if necessary, the
operation of those Acts to the Province of Delhi, because the
Parliament is the competent legislature for that Province. To
the extent however the section permits the Central Government
to extend laws made by any legislature of Part A State to the
Province of Delhi, the section is ultra vires.”
Mahajan, J had this to say:
“The section does not declare any law but gives the Central
Government power to declare what the law shall be. The
choice to select any enactment in force in any province at the
date of such notification clearly shows that the legislature
declared no principles or policies as regards the law to be
made on any subject. It may be pointed out that under the Act
of 1935 different provinces had the exclusive power of laying
down their policies in respect to subjects within their own
legislative field. What policy was to be adopted for Delhi,
whether that adopted in
the province of Punjab or of Bombay,
was left to the Central Government. Illustratively, the mischief
of such law-making may be pointed out with reference to what
happened in pursuance of this section in Ajmer-Merwara.
The Bombay Agricultural Debtors’ Relief Act, 1947, has been
extended under cover of this section to Ajmer-Merwara and
under the power of modification by amending the definition
of the word ‘debtor’ the whole policy of the Bombay Act has
been altered. Under the Bombay Act a person is a debtor
who is indebted and whose annual income from sources other
than agricultural and manly labour does not exceed 33 per
cent of his total annual income or does not exceed Rs 500,
whichever is greater. In the modified statutes “debtor” means
an agriculturist who owes a debt, and “agriculturist” means
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a person who earns his livelihood by agriculture and whose
income from such source exceeds 66 per cent of his total
income. The outside limit of Rs 500 is removed. The exercise
of this power amounts to making a new law by a body which
was not in the contemplation of the Constitution and was not
authorized to enact any laws. Shortly stated, the question is,
could the Indian Legislature under the Act of 1935 enact that
the executive could extend to Delhi laws that may be made
hereinafter by a legislature in Timbuctoo or Soviet Russia with
modifications. The answer would be in the negative because
the policy of those laws could never be determined by the law
making body entrusted with making laws for Delhi. The
Provincial Legislatures in India under the Constitution Act of
1935 qua Delhi constitutionally stood on no better footing
than the legislatures of Timbuctoo and Soviet Russia though
geographically and politically they were in a different
situation.
************
271. For reasons given for answering Questions 1 and 2 that
the enactments mentioned therein are ultra vires the
constitution in the particulars stated, this question is also
answered similarly. It might, however, be observed that in this
case express power to repeal or amend laws already
applicable in Part-C States has been conferred on the Central
Government. Power to repeal or amend laws is a power which
can only be exercised by an authority that has the power to
enact laws. It is a power
coordinate and coextensive with the
power of the legislature itself. In bestowing on the Central
Government and clothing it with the same capacity as is
possessed by the legislature itself the Parliament has acted
unconstitutionally.”
B.K. Mukherjea, J, held as follows:
“342. It will be noticed that the powers conferred by this section
upon the Central Government are far in excess of those
conferred by the other two legislative provisions, at least in
accordance with the interpretation which I have attempted to
put upon them. As has been stated already, it is quite an
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intelligible policy that so long as a proper legislative
machinery is not set up in a particular area, the Parliament
might empower an executive authority to introduce laws validly
passed by a competent legislature and actually in force in
other parts of the country to such area, with each modifications
and restrictions as the authority thinks proper, the
modifications being limited to local adjustments or changes
of a minor character. But this presupposes that there is no
existing law on that particular subject actually in force in
that territory. If any such law exists and power is given to
repeal or abrogate such laws either in whole or in part and
substitute in place of the same other laws which are in force
in other areas, it would certainly amount to an unwarrantable
delegation of legislative powers. To repeal or abrogate an
existing law is the exercise of an essential legislative power,
and the policy behind such acts must be the policy of the
legislature itself. If the legislature invests the executive with
the power to determine as to which of the laws in force in a
particular territory are useful or proper and if it is given to
that authority to replace any of them by laws brought from
other provinces with such modifications as it thinks proper,
that would be to invest the executive with the determination
of the entire legislative policy and not merely of carrying out
a policy which the legislature has
already laid down. Thus
the power of extension, which is contemplated by Section 2
of Part-C States (Laws) Act, includes the power of introducing
laws which may be in actual conflict with the laws validly
established and already in operation in that territory….”
68. It is apparent that the legislation which this court had to deal
with had virtually granted what was described as a carte blanche in
regard to whether to extend the provisions of any state Act, if so, which,
the power of modification, as well as the power of repeal. The judges
were agreed that within the broad remit of delegated legislative power,
as long as essential legislative powers were not delegated, the provisions
would not be ultra vires. However, the power to extend laws that
Parliament had not enacted (as it was competent to enact, in respect of
Part C states) as well as the power to repeal, was held to be legislative
in content. Therefore, the court held such power to be ultra vires. This
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is evident from the following Opinion of the court, recorded as a result
of the majority judgment:
“OPINION OF THE COURT
357. The Court held by a majority that the provisions contained
in Questions 1 and 2 are not ultra vires the legislatures which
passed the Act containing those provisions. As regards the
section mentioned on Question 3, the first part was held to be
intra vires, but the second portion, which is in the following
terms:
“provision may be made in any enactment so extended, for
the repeal or amendment of any corresponding law (other
than a Central Act) which is for the time being applicable to
that Part-C State”, is ultra vires the Indian Parliament which
passed the Act.”
69. In Narottamdas Jethabhai (supra) three issues were
involved; one of them concerned the question of empowering the
executive to designate a court to exercise jurisdiction upto  25,000/-,
i.e. Section 4 of the Bombay City Civil Courts Act60. The contention
successfully raised before the High Court was that once the legislature
had conferred jurisdiction upto a pecuniary limit of  10,000/- to the City
Civil Court, delegating the power to increase that jurisdiction was ultra
vires. The argument was repelled by a majority of judges (Mahajan,
Fazal Ali and B.K. Mukherjea, JJ). Fazal Ali, J stated that
“22. It is contended that this section is invalid, because
the Provincial Legislature has thereby delegated its
legislative powers to the Provincial Government which it
cannot
do. This contention does not appear to me to be
sound. The section itself shows that the Provincial
Legislature having exercised its judgment and determined
that the New Court should be invested with jurisdiction to
try suits and proceedings of a civil nature of a value not
exceeding Rs. 25,000, left it to the Provincial Government
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[S. RAVINDRA BHAT, J.]
60 “Subject to the exceptions specified in Section 3, the Provincial Government, may by
notification in the Official Gazette, invest the City Civil Court with jurisdiction to receive,
try and dispose of all suits and other proceedings of a civil nature, arising within the
Greater Bombay and of such value not exceeding Rs. 25,000 as may be specified in the
notification.”
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to determine when the Court should be invested with this
larger jurisdiction, for which the limit had been fixed. It is
clear that if and when the New Court has to be invested
with the larger jurisdiction, that jurisdiction would be due
to no other authority than the Provincial Legislature itself
and the court would exercise that jurisdiction by virtue of
the Act itself. As several of my learned colleagues have
pointed out, the case of Queen v. Burah [3 A.C. 889.], the
authority of which was not questioned before us, fully
covers the contention raised, and the impugned provision
is an instance of what the Privy Council has designated as
conditional legislation, and does not really delegate any
legislative power but merely prescribes as to how effect is
to be given to what the Legislature has already decided.
As the Privy Council has pointed out, legislation
conditional on the use of particular powers or on the
exercise of a limited discretion entrusted by the Legislature
to persons in whom it places confidence, is no uncommon
thing, and in many instances it may be highly convenient
and desirable.”
Mahajan, J observed as follows:
“The fixation of the maximum limit of the court’s pecuniary
jurisdiction is the result of exercise of legislative will, as
without arriving at this judgment it would not have been
able to determine the outside limit of the pecuniary
jurisdiction of the new court. The policy of the legislature
in regard to the pecuniary jurisdiction of the court that
was being set up was settled by Sections 3 and 4 of the Act
and it was to the effect that initially its pecuniary jurisdiction
will be limited to Rs. 10,000 and that in future if
circumstances make it desirable - and this was left to the
determination of the Provincial Government - it could be
given jurisdiction to hear cases up to the value of Rs.
25,000. It was also determined that the extension of the
pecuniary jurisdiction of the new court will be subject to
the provisions contained in the exceptions to Section 3. I
am therefore of the opinion that the learned Chief Justice
was not right in saying that the legislative mind was never
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applied as to the conditions subject to which and as to the
amount up to which the new court could have pecuniary
jurisdiction. All that was left to the discretion of the
Provincial Government was the determination of the
circumstances under which the new court would be clothed
with enhanced pecuniary jurisdiction. The vital matters of
policy having been determined, the actual execution of
that policy was left to the Provincial Government and to
such conditional legislation no exception could be taken.”
Again, the court upheld the exercise of executive discretion on
the ground that there was proper legislative framework and guidance to
the government, with respect to conferring jurisdiction upon the City
Civil Court, beyond the limit enacted by Section 3, and Section 4 was
enacted to achieve that objective.
70. In Sardar Inder Singh, the validity of an ordinance which
was extended by two notifications was involved. Section 4 of the original
ordinance enacted that as long as it (the ordinance) was in force:
“no tenant shall be liable to ejectment or dispossession from
the whole or a part of his holding in such area on any ground
whatsoever.”
The validity of this ordinance, enacted originally in 1949 (and in
force for two years), was extended twice, for two years each (by
notifications dated June 14, 1951 and June 20, 1953). The Legislative
Assembly of Rajasthan was constituted and came into being on March
29, 1952. Till then, the Rajpramukh was vested
with legislative authority.
On October 15, 1955, a new enactment, the Rajasthan Tenancy Act No.
III of 1955 came into force, and the relationship between landlords and
tenants was governed by it. Negativing the challenge to the extension of
the ordinance, this court ruled, (after considering Burah, In re Delhi
Laws Act and Jatindra Nath Gupta) that:
“In the present case, the preamble to the Ordinance clearly
recites the state of facts which necessitated the enactment of
the law in question, and Section 3 fixed the duration of the
Act as two years, on an understanding of the situation as it
then existed. At the same time, it conferred a power on the
Rajpramukh to extend the life of the Ordinance beyond that
period, if the state of affairs then should require it. When
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such extension is decided by the Rajpramukh and notified,
the law that will operate is the law which was enacted by the
legislative authority in respect of “ place, person, laws,
powers “, and it is clearly conditional and not delegated
legislation as laid down in The Queen v. Burah ([1878] 5 I.A.
178), and must, in consequence, be held to be valid. It follows
that we are unable to agree with the statement of the law in
Jatindra Nath Gupta v. The, State of Bihar([1949] F.C.R. 595)
that a power to extend the life of an enactment cannot validly
be conferred on an outside authority. In this view, the question
as to the permissible limits of delegation of legislative
authority on which the judgments in In re The Delhi Laws
Act, 1912 ([1951] S.C.R. 747), reveal a sharp conflict of
opinion does not arise for consideration, and we reserve our
opinion thereon.
It is next contended that the notification dated June 20, 1953,
is bad, because after the Constitution came into force, the
Rajpramukh derived his authority to legislate from Article
385, and that under that Article his authority ceased when
the Legislature of the State was constituted, which was in the
present case, on March 29, 1952. This argument proceeds on
a misconception as to the true character of a notification
issued under Section 3 of the Ordinance. It was not an
independent piece of legislation such as could be enacted
only by the then competent legislative
(1).authority of the State,
but merely an exercise of a power conferred by a statute which
had been previously enacted by the appropriate legislative
authority. The exercise of such a power is referable not to the
legislative competence of the Rajpramukh but to Ordinance
No- IX of 1949, and provided Section 3 is valid, the validity
of the notification is co- extensive with that of the Ordinance.
If the Ordinance did not come to an end by reason of the fact
that the authority of the Rajpramukh to legislate came to an
end-and that is not and cannot be disputed-neither did the
power to issue a notification which is conferred therein. The
true position is that it is in his character as the authority on
whom power was conferred under Section 3 of the Ordinance
that the Rajpramukh issued the impugned notification, and
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not as the legislative authority of the State. This objection
should accordingly be overruled.”
71. In Hamdard Dawakhana (supra), the validity of Section
3(d) of the Drug and Magic Remedies (Objectionable Advertisement)
Act, 1954 was in issue. Section 16(1) of that Act conferred power on
the government to frame rules, among others, by Section 16(2)(a) “to
specify any disease or condition to which the provisions of Section
3 shall apply” and by Section 16(2)(b) “prescribe the manner in which
advertisement of articles or things referred to in cl. (c) of sub-s. (1)
of Section 14 may be sent confidentially.” The Central Government
argued that Section 3(d), which empowered it to notify “any other
disease or condition which may be specified in the rules made under
this Act” was an instance of conditional legislation. The relevant
discussion on conditional legislation, in the judgment, is extracted below:
“The distinction between conditional legislation and
delegated legislation is this that in the former the delegate’s
power is that of determining when a legislative declared
rule of conduct shall become effective; Hampton & Co. v.
U.S. (1) and the latter involves delegation of rule making
power which constitutionally may be exercised by the
administrative agent. This means that the legislature having
laid down the broad principles of its policy in the legislation
can then leave the details to be supplied by the
administrative authority. In other words by
delegated
legislation the delegate completes the legislation by
supplying details within the limits prescribed by the statute
and in the case of conditional legislation the power of
legislation is exercised by the legislature conditionally
leaving to the discretion of an external authority the time
and manner -of carrying its legislation into effect as also
the determination of the area to which it is to extend.”
The court held that the impugned provision was impermissible
delegation as it lacked legislative guidance as regards the exercise
of executive power:
“The question for decision then is, is the delegation
constitutional in that the administrative authority has been
supplied with proper guidance. In our view the words
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impugned are vague. Parliament has established no
criteria, no standards and has not prescribed any principle
on which a particular disease or condition is to be specified
in the Schedule. It is not stated what facts or circumstances
are to be taken into consideration to include a particular-
condition or disease. The power of specifying diseases and
conditions as given in s. 3(d) must therefore be held to be
going beyond permissible boundaries of valid delegation.
As a consequence the Schedule in the rules must be struck
down.”
72. In Sabanayagam (supra) the vires of a notification issued
under Section 36 of the Payment of Bonus Act, exempting the concerned
statutory board from its coverage, was in issue. This court interpreted
the notification as one operating from the date of its issue, thus resulting
in the application of the Payment of Bonus Act for previous accounting
years. As to the nature of the power (to exempt), this court, after
considering various previous decisions, held that there are three broad
categories of conditional legislation, and elaborated as follows:
“In the first category when the Legislature has completed its
task of enacting a Statute, the entire superstructure of the
legislation is ready but its future applicability to a given area
is left to the subjective satisfaction of the delegate who being
satisfied about the conditions indicating the ripe time for
applying the machinery of the
said Act to a given area exercises
that power as a delegate of the parent legislative body. Tulsipur
Sugar Co. ‘s case (supra) is an illustration on this point. When
the Act itself is complete and is enacted to be uniformly applied
in future to all those who are to be covered by the sweep of
the Act, the Legislature can be said to have completed its task.
All that it leaves to the delegate is to apply the same uniformly
to a given area indicated by the parent Legislature itself but
at an appropriate time. This would be an act of pure and
simple conditional legislation depending upon the subjective
satisfaction of the delegate as to when the said Act enacted
and completed by the parent Legislature is to be made effective.
As the parent Legislature itself has laid down a binding course
of conduct to be followed by all and sundry to be covered by
the sweep of the legislation and as it has to act as a binding
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rule of conduct within that sweep and on the basis of which
all their future actions are to be controlled and guided, it can
easily be visualised that of the parent Legislature while it
enacted such law was not required to hear the parties likely
to be affected by the operation of the Act, is delegate
exercising an extremely limited and almost ministerial function
as an agent of the principal Legislature applying the Act to
the area at an appropriate time is also not supposed and
required to hear all those who are likely to be affected in
future by the binding code of conduct uniformly laid down to
be followed by all within the sweep of the Act as enacted by
the parent Legislature.
However, there may be second category of conditional
legislations wherein the delegate has to decide whether and
under what circumstances a completed Act of the parent
legislation which has already come into force is to be partially
withdraw from operation in a given area or in given cases so
as not to be applicable to a given class of persons who are
otherwise admittedly governed by the Act. When such a power
by way of conditional legislation is to be exercised by the
delegate a question may arise as to how the said power can
be exercised. In such an eventuality if the satisfaction
regarding the existence of condition precedent to the exercise
of such power depends upon pure subjective satisfaction of
the delegate and if such an exercise is not required to be
based on the
prima face proof of factual data for ad against
such an exercise and if such an exercise to uniformly apply
in future to a given common class of subjects to be governed
by such an exercise and when such an exercise is not to be
confined to individual cases only, then even in such category
of cases while exercising conditional legislative powers the
delegate may not be required to have an objective assessment
after considering rival versions on the data placed before it
for being taken into consideration by it in exercise of such
power of conditional legislation. For example if a tariff is
fixed under the Act and exemption power is conferred on the
delegate whether to grant full exemption or partial exemption
from the tariff rate it may involve such an exercise of
conditional legislative function wherein the exercise has to
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be made by the delegate on its own subjective satisfaction
and once that exercise is made whatever exemption is granted
or partially granted or partially withdrawn from time to time
would be binding on the entire class of persons similarly
situated and who will be covered by the seep of such
exemptions, partial or whole, and whether granted or
withdrawn, wholly or partially, and in exercise of such a
power there may be no occasion to hear the parties likely to
be affected by such an exercise. For example from a settled
tariff say if earlier 30% exemption is granted by the delegate
and then reduced to 20% all those who are similarly situated
and covered by the sweep of such exemption and its
modification cannot be permitted to say in the absence of
any statutory provision to that effect that they should be given
a hearing before the granted exemption is wholly or partially
withdrawn.
In the aforesaid first two categories of cases delegate who
exercises conditional legislation acting on its pure subjective
satisfaction regarding existence of conditions precedent for
exercise of such power may not be required to hear parties
likely to be affected by the exercise of such power. Where the
delegate proceeds to fill p the details of the legislation for the
future - which is part of the integrated action of policy-making
for the future, it is part of the future policy and is legislative.
But where he merely determines either
subjectively or
objectively - depending upon the “conditions” imposed in
the statute permitting exercise of power by the delegate - there
is no legislation involved in the real sense and therefore, in
our opinion, applicability of principles of fair play,
consultation or natural justice to the extent necessary cannot
be said to be foreclosed. Of course, the fact that in such cases
of `conditional legislation’ these principles are not foreclosed
does not necessarily mean that they are always mandated. In
a case of purely ministerial function or in a case where no
objective conditions are prescribed and the matter is left to
the subjective satisfaction of the delegate (as in categories
one and two explained above) no such principles of fair play,
consultation or natural justice could be attracted. That is
because the very nature of the administrative determination
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does not attract these formalities and not because the
determination is legislative in character. There may also be
situations where the persons affected are unidentifiable class
of persons or where public interest or interests of State etc.
preclude observations of such a procedure. (….)”
73. In another decision, Vasu Dev Singh, the court had to decide
upon the validity of a notification issued by the Administrator of
Chandigarh dated 7.11.2002, directing that the provision of the East Punjab
Urban Rent Restriction Act, 1949, (which was extended by Parliament
to Chandigarh by the East Punjab Urban Rent Restriction Act (Extension
to Chandigarh) Act 1974) was not applicable to buildings and rented
lands whose monthly rent exceeded 1500. The Administrator justified
the notification as an instance of conditional legislation since the power
under Section 3 enabled him to exempt provisions of the Act to classes
of buildings.61 This court disagreed with the contention that the exemption
was in the exercise of conditional legislative power:
“16. We, at the outset, would like to express our disagreement
with the contentions raised before us by the learned counsel
appearing on behalf of the respondents that the impugned
notification is in effect and substance a conditional legislation
and not a delegated legislation. The distinction between
conditional legislation and delegated legislation is clear and
unambiguous. In a conditional legislation the delegatee has
to apply the law to an area or to determine the time and
manner of carrying it into effect or at such time, as it decides
or to understand the rule of legislation, it would be a
conditional legislation. The legislature in such a case makes
the law, which is complete in all respects but the same is not
brought into operation immediately. The enforcement of the
law would depend upon the fulfilment of a condition and what
is delegated to the executive is the authority to determine by
exercising its own judgment as to whether such conditions
have been fulfilled and/or the time has come when such
legislation should be brought into force. The taking effect of
a legislation, therefore, is made dependent upon the
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
61 “3. Exemptions.—The Central Government may direct that all or any of the provisions
of this Act, shall not apply to any particular building or rented land or any class of
buildings or rented lands.”
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determination of such fact or condition by the executive organ
of the Government. Delegated legislation, however, involves
delegation of rule-making power of legislation and authorises
an executive authority to bring in force such an area by reason
thereof. The discretion conferred on the executive by way of
delegated legislation is much wider. Such power to make rules
or regulations, however, must be exercised within the four
corners of the Act. Delegated legislation, thus, is a device
which has been fashioned by the legislature to be exercised
in the manner laid down in the legislation itself. By reason of
Section 3 of the Act, the Administrator, however, has been
empowered to issue a notification whereby and whereunder,
an exemption is granted for application of the Act itself.”
After considering a large number of decisions, including those
where this court had upheld exemptions issued by different states based
on rent, this court concluded that there was insufficient justification for
the impugned exemption notification, and that it was ultra vires the power
conferred upon the Administrator:
“150. Moreover, the notification has not been issued for a
limited period. It will have, therefore, a permanent effect.
Submission of Mr Nariman that having regard to the provisions
of the General Clauses Act, the same can be modified,
amended at any time and withdrawn, cannot be accepted for
more than one reason. Firstly,
the respondent proceeded on
the basis that the said notification has been issued with a
view to give effect to the National Policy i.e. amendments must
be carried out until a new Rent Act is enacted. Whether the
Act would be enacted or not is a matter of surmises and
conjectures. It would be again a matter of legislative policy
which was not within the domain of the Administrator. Secondly,
the Administrator in following the National Policy proceeded
on the basis that the provisions of the Act must ultimately be
repealed. When steps are taken to repeal the Act either wholly
or in part, the intention becomes clear i.e. the same is not
meant to be given a temporary effect. When the repealed
provisions are sought to be brought back to the statute-book,
it has to be done by way of fresh legislation. (…) What can be
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done in future by another authority cannot be a ground for
upholding an executive act.”
74. A close reading of the decisions cited on behalf of the
petitioners would reveal that the power to extend laws has been upheld.
As B.K. Mukherjea observed, in In re Delhi Laws Act, 1912 (supra):
“it is quite an intelligible policy that so long as a proper
legislative machinery is not set up in a particular area, the
Parliament might empower an executive authority to introduce
laws validly passed by a competent legislature and actually
in force in other parts of the country to such area, with each
modifications and restrictions as the authority thinks proper,
the modifications being limited to local adjustments or changes
of a minor character.”
Lord Selborne, in Burah (supra)held such power to be
unexceptionable, saying that
“Legislation, conditional on the use of particular powers, or
on the executive of a limited discretion, entrusted by the
Legislature to persons in whom it places confidence is no
uncommon thing; and, in many circumstances, it may be highly
convenient”
In Jitendra Nath Gupta (supra), what the Federal Court held
objectionable was the conferment of power to extend provisions of an
enactment, beyond its expressed duration or time:
“It is for the Legislature to state how long a particular
legislation will be in operation. That cannot be left to the
discretion of some other body. The power to modify an Act of
a Legislature, without any limitation on
the extent of the power
of modification, is undoubtedly a legislative power.”
The plurality of judgments, as well as opinions rendered in In Re
Delhi Laws Act, 1912, makes that decision a somewhat complex reading.
Yet, the final per curiam opinion of the court was that the power to
extend, modify or repeal enactments of Part C States, in respect of
matters which the Parliament had not directly enacted, amounted to
excessive legislation. Additionally, exception was taken to the power to
repeal, being delegated, as it was an essential legislative power.
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75. In Sardar Inder Singh (supra), the extension of rent restriction
ordinances was in question; the court did not apply the rule in Jatindra
Nath Gupta (supra), and ultimately held that the true position was that
the Rajpramukh “in his character as the authority on whom power
was conferred under Section 3 of the Ordinance that the
Rajpramukh issued the impugned notification, and not as the
legislative authority of the State.” In Hamdard Dawakhana (supra),
the argument that Section 3 was conditional legislation was negatived
and it was held to be an instance of excessive delegation, where Parliament
did not indicate any guidance for inclusion of particular instances in the
schedule, leaving it to the executive government to decide the issue, in
what could be an arbitrary manner. Vasu Dev Singh (supra) was a
case where the court held that the power to exclude from application of
the enactment, based on the quantum of rent, was premised on the
Administrator’s opinion that the legislation would be repealed, having
regard to a National Policy. Moreover, the notification excluded the
application of the Act in relation to premises based on rent and had a
permanent character. This court held that the notification was an instance
of impermissible legislation by the executive. It is evident that the court
ruled in Jitendra Nath Gupta, In re Delhi Laws Act and Vasu Dev
Singh that the exercise of extending an enactment beyond
the time of
its designated application by the legislature; the power of extension,
modification and repeal of laws made by other legislative bodies; and
the limiting the application of an enactment based on a quantification (an
amount of rent) were legislative exercises, beyond the powers conferred.
They stricto sensu fall in the category of “general legislative authority,
a new legislative Power, not created or authorized” by the parent
legislation, (per Burah, supra). In Hamdard Dawakhana, the power
to include new drugs, was held to be uncanalized, i.e. without any
legislative guidance. The decision did not involve bringing into force
provisions of an enactment, or exclusion, but inclusion within its fold,
without any statutory guidance on new drugs. The case therefore
involved delegated legislation.
76. It would now be useful to analyse some decisions cited by the
respondents. In Bishwambhar Singh (supra) the power under Section
3(1) of the Orissa Estates Abolition (Amendment) Act, 1952 was involved.
The provision enabled the state to declare that an estate had – in terms
of notifications issued in that regard- vested in it, free from all
encumbrances. This court negatived the challenge to that provision:
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“77. The long title of the Act and the two preambles which
have been quoted above clearly indicate that the object and
purpose of the Act is to abolish all the rights, title and interest
in land of intermediaries by whatever name known. This is a
clear enunciation of the policy which is sought to be
implemented by the operative provisions of the Act. Whatever
discretion has been vested in the State Government under
Section 3 or Section 4 must be exercised in the light of this
policy and, therefore, it cannot be said to be an absolute or
unfettered discretion, for sooner or later all estates must
perforce be abolished. From the very nature of things a certain
amount of discretionary latitude had to be given to the State
Government. It would have been a colossal task if the State
Government had to take over all the estates at one and the
same time. It would have broken down the entire administrative
machinery. It could not be possible to collect sufficient staff
to take over and discharge the responsibilities. It would be
difficult to arrange for the requisite finance all at once. It
was, therefore, imperative to confer some discretion on the
State Government. It has not been suggested or shown that in
practice any discrimination has been made.”
In Basant Kumar Sarkar (supra), the power in question was
Section 1(3) of the Employees State Insurance Act, which enabled the
government to extend the enactment to establishments. This court
negatived that the
power was ultra vires:
“4. The argument is that the power given to the Central
Government to apply the provisions of the Act by notification,
confers on the Central Government absolute discretion, the
exercise of which is not guided by any legislative provision
and is, therefore, invalid. The Act does not prescribeany
considerations in the light of which the Central Government
can proceed to act under Section 1(3) and such un-canalised
power conferred onthe Central Government must be treated
as invalid. We are not impressed by this argument. Section
1(3) is really not an illustration of delegated legislation at
all; it is what can be properly described as conditional
legislation. The Act has prescribed a self-contained Code in
regard to the insurance of the employees covered by it; several
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remedial measures which the legislature thought it necessary
to enforce in regard to such workmen have been specifically
dealt with and appropriate provisions have been made to
carry out the policy of the Act as laid down in its relevant
sections. Section 3(1) of the Act purports to authorise the
Central Government to establish a Corporation for the
administration of the scheme of Employees’ State Insurance
by a notification. In other words, when the notification should
be issued and in respect of what factories it should beissued,
has been left to the discretion of the Central Government and
thatis precisely what is usually done by conditional legislation.
[......]
5. […] In the very nature of things, it would have been
impossible for the legislature to decide in what areas and in
respect of which factories the Employees’ State Insurance
Corporation should be established. It isobvious that a scheme
of this kind, though very beneficent, could not be introduced
in the whole of the country all at once. Such beneficial
measures which need careful experimentation have some times
to be adopted by stages and in different phases…”
77. The next decision cited was Lachmi Narain (supra). Here,
the Central Government was empowered by Section 2 of the Part C
States (Laws) (Act), 1950 to extend through a notification any enactment
in Part A States. The Central Government had issued a Notification in
1951 to extend the provisions
of the Bengal Finance (Sales Tax) Act to
the then Part C State of Delhi. In 1957, a notification in exercise of this
power under Section 2 was issued modifying the earlier notification
resulting in withdrawal of certain benefits. In the background of these
facts, a three-judge bench of this Court dealing with an argument on
whether the power to extend with or without modifications any enactment
was conditional or delegated legislation, made the following observations:
“49. Before proceeding further, it will be proper to say a few
words in regard to the argument that the power conferred by
Section 2 of the Laws Act is a power of conditional legislation
and not a power of ‘delegated’ legislation. In our opinion,
no useful purpose will be served to pursue this line of
argument because the distinction propounded between the two
categories of legislative powers makes no difference, in
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principle. In either case, the person to whom the power is
entrusted can do nothing beyond the limits which circumscribe
the power; he has to act – to use the words of Lord Selbourne
– “within the general scope of the affirmative words which
give the power” and without violating any “express conditions
or restrictions by  which that power is limited”. There is no
magic in a name. Whether you call it the power of  “conditional
legislation” as Privy Council called it in Burah’s case (supra),
or ‘ancillary legislation’ as the Federal Court termed it in
Choitram v. C. I. T., Bihar, or ‘subsidiary legislation’ as Kania,
C. J. Styled it, or whether you camouflage it under the veiling
name of ‘administrative or quasi-legislative power’ – as
Professor Cushman and other authorities have done it –
necessary for bringing into operation and effect an
enactment, the fact remains that it has a content, howsoever
small and restricted, of the law-making power itself. There is
ample authority in support of the proposition that the power
to extend and carry into operation an enactment with
necessary modifications and adaptations is in truth and reality
in the nature of a power of delegated legislation.”
After these observations, this court held that the power of
modification could not have been exercised by the Government in the
manner that it did, and observed as follows:
“60. The power given by Section 2 exhausts itself on extension
of the enactment; it cannot be
exercised repeatedly or
subsequently to such extension. It can be exercised only one,
simultaneously with the extension of the enactment. This is
one dimension of the statutory limits which circumscribe the
power. The second is that the power cannot be used for the
purpose other than that of extension. In the exercise of this
power, only such “restrictions and modifications can be validly
engrafted in the enactment sought to be extended, which are
necessary to bring it into operation and effect in the Union
territory. “Modifications” which are not necessary for, or
ancillary and subservient to the purpose of extension, are
not permissible. And, only such “modifications” can be
legitimately necessary for such purpose as are required to
adjust, adapt and make the enactment suitable to the peculiar
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
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local conditions of the Union territory for carrying it into
operation and effect. In the context of the section, the words
“restrictions and modifications” do not cover such alterations
as involve a change in any essential feature, of the enactment
or the legislative policy built into it. This is the third dimension
of the limits that circumscribe the power.
61. It is true that the word “such restrictions and modifications
as it thinks fit” if construed literally and in isolation, appear
to give unfettered power of amending and modifying the
enactment sought to be extended. Such a wide construction
must be eschewed lest the very validity of the section becomes
vulnerable on account of the vice of excessive delegation.
Moreover, such a construction would be repugnant to the
context and the content of the section, read as a whole, and
the statutory limits and conditions attaching to the exercise
of the power. We must, therefore, confine the scope of the
words “restrictions and modifications” to alterations of such
a character which keep the inbuilt policy, essence and
substance of the enactment sought to be extended, intact, and
introduce only such peripheral or insubstantial changes which
are appropriate and necessary to adapt and adjust it to the
local conditions of the Union territory.”
78. It would be useful at this stage to set out in tabular form, the
various dates on which the provisions of the Code were
brought into
force. The chart is set out below:

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79.  The above tabular chart reveals that the provisions relating to
the Insolvency and Bankruptcy Board of India were brought into force
at the earliest point of time, i.e., 05.08.2016. This was to enable the
setting up of the regulatory body so that it could commence its task of
examining the relevant issues and evolving standards to be embodied in
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rules and regulations. Thereafter, the notification dated 19.08.2016 brought
into force Chapter VII) of Part-IV and some provisions of Part-V –
relating to finance, acts, audit and miscellaneous provisions. These were
the provisions ancillary to the working of the Board. The next to be
brought into force were parts of Sections 196-197 and 223, again which
dealt with the Board’s functions, its funds etc. as well as Sections 244,
246-248 and 250-252. These were general provisions relating to the
provisions that amended various other enactments in terms of the
Schedules set out to the Code. The fourth notification dated 15.11.2016
brought into force those provisions relating to insolvency professional
agencies and some other provisions which amended other enactments.
80.  The notification of 30.11.2016 brought into force certain
provisions that had the effect of operationalizing the enactment in respect
of four distinct categories, i.e. companies incorporated under the
Companies Act, companies governed by special Act, LLPs and other
bodies incorporated under any law which the Central Government could
by notification specify. These provisions triggered the application of the
Code to corporate debtors as well as LLPs and other companies and
corporations. Significantly, provisions with regard to voluntary liquidation
or bankruptcy were excluded from application by this notification. Those
provisions were brought into force
by the eighth notification dated
01.04.2017, with effect from 15.05.2017. In the meanwhile, the notification
dated 09.12.2016 with effect from 15.12.2016, operationalized Sections
33 to 44 which deal with the liquidation process.
81. 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. Plainly, the Central Government was concerned with
triggering the insolvency mechanism processes in relation to corporate
persons at the earliest. Therefore, by the first three notifications, the
necessary mechanism such as setting up of the regulatory body, provisions
relating to its functions, powers and the operationalization of provisions
relating to insolvency professionals and agencies were brought into force.
These started the mechanism through which insolvency processes were
to be carried out and regulated by law. In the next phase, the part of the
Code dealing with one of its subjects, i.e., corporate persons [covered
by Section 2(a) to 2(d) of the Code] was brought into force. The entire
process for conduct of insolvency proceedings and provisions relating to
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such corporate persons were brought into force. The other notifications
brought into force certain consequential provisions, as well as provisions
which give overriding effect to the Code (as also the provisions that
amend or modify other laws). All these clearly show that the Central
Government followed a stage-by-stage process of bringing into force
the provisions of the Code, regard being had to the similarities or
dissimilarities of the subject matter and those covered by the Code.
82. As discussed in a previous part of this judgment, insolvency
proceedings relating to individuals is regulated by Part-III of the Code.
Before the amendment of 2018, all individuals (personal guarantors to
corporate debtors, partners of firms, partnership firms and other partners
as well as individuals who were either partners or personal guarantors
to corporate debtors) fell under one descriptive description under the
unamended Section 2(e). The unamended Section 60 contemplated that
the adjudicating authority in respect of personal guarantors was to be
the NCLT. Yet, having regard to the fact that Section 2 brought all three
categories of individuals within one umbrella class as it were, it would
have been difficult for the Central Government to selectively bring into
force the provisions of part –III only in respect of personal guarantors.
It was here that the Central Government heeded the reports of expert
bodies which recommended that personal guarantors to
corporate debtors
facing insolvency process should also be involved in proceedings by the
same adjudicator and for this, necessary amendments were required.
Consequently, the 2018 Amendment Act altered Section 2(e) and
subcategorized three categories of individuals, resulting in Sections 2(e),
(f) and (g). Given that the earlier notification of 30.11.2016 had brought
the Code into force in relation to entities covered under Section 2(a) to
2(d), the amendment Act of 2018 provided the necessary statutory backing
for the Central Government to apply the Code, in such a manner as to
achieve the objective of the amendment, i.e. to ensure that adjudicating
body dealing with insolvency of corporate debtors also had before it the
insolvency proceedings of personal guarantors to such corporate debtors.
83. The amendment of 2018 also altered Section 60 in that
insolvency and bankruptcy processes relating to liquidation and bankruptcy
in respect of three categories, i.e. corporate debtors, corporate guarantors
of corporate debtors and personal guarantors to corporate debtors were
to be considered by the same forum, i.e. NCLT.
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84. Section 2, i.e., (application provision of the Code, in relation to
different entities), as originally enacted, did not contain a separate category
of personal guarantors to corporate debtors. Instead, personal guarantors
were part of a category or group of individuals, to whom the Code applied
(i.e. individuals, proprietorship and partnership firms, per Section 2(e)
which stated “partnership firms and individuals”). The Code
envisioned that the insolvency process outlined in provisions of Part III
was to apply to them. The Statement of Objects and Reasons for the
Amendment Bill of 2017, which eventually metamorphosized into the
Amendment Act, stated that the Code provided for insolvency resolution
for individuals and partnership firms
“which are proposed to be implemented in a phased manner
on account of the wider impact of these provisions. In the
first phase, the provisions would be extended to personal
guarantors of corporate debtors to further strengthen the
corporate insolvency resolution process and a clear enabling
provision for the purpose has been provided in the Bill.”
85. The amendment introduced Section 2(e) i.e. personal
guarantors to corporate debtors, as a distinct category to whom the
Code applied. Now, the amendment was brought into force
retrospectively, on 23 November, 2017. Section 1 of the Amendment
Act states:
“Section 1. (1) This Act may be called the Insolvency and
Bankruptcy Code
(Amendment) Act, 2018.
(2) It shall be deemed to have come into force on the 23rd
day of November, 2017.”
86. In addition to amending Section 2, the same Amendment also
amended Section 60(2). Interestingly, though “personal guarantor” was
not defined, and fell within the larger rubric of “individual” under the
Code, the adjudicating authority for insolvency process and liquidation
of corporate persons including corporate debtors and personal guarantors
was the NCLT- even under the unamended Code. The amendment of
Section 60(2) added a few concepts. This is best understood on a
juxtaposition of the unamended and the amended provisions: The
unamended Section 60 (2) read as follows:
“(2) Without prejudice to sub-section (1) and
notwithstanding anything to the contrary contained in this
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Code, where a corporate insolvency resolution process or
liquidation proceeding of a corporate debtor is pending
before a National Company Law Tribunal, an application
relating to the insolvency resolution or bankruptcy
proceeding of a personal guarantor of the corporate
debtor shall be filed before the National Company Law
Tribunal.”
The amended Section 60 (2) reads as follows:
“(2) Without prejudice to sub-section (1) and
notwithstanding anything to the contrary contained in this
Code, where a corporate insolvency resolution process or
liquidation proceeding of a corporate debtor is pending
before a National Company Law Tribunal, an application
relating to the insolvency resolution or liquidation or
bankruptcy of a corporate guarantor or personal
guarantor, as the case may be, of such corporate debtor
shall be filed before the National Company Law Tribunal”
87. The amendment inserted the expression “or liquidation”
before the words “or bankruptcy” and also inserted the expression
“of a corporate guarantor… as the case may be, of” such corporate
debtor. The interpretation of this expression has to be contextual. There
is no question of liquidation of a personal guarantor, an individual. In
such cases, this court has ruled that the principle behind the maxim
“reddendo singular singulis” applies. This court had, in Koteswar Vittal
Kamath v. K. Rangappa Baliga& Co62 quoted Black’s Interpretation
of Laws, to explain the meaning of that maxim:
“Where a
sentence in a statute contains several antecedents
and several consequences, they are to be read
distributively, that is to say, each phrase or expression is
to be referred to its appropriate object.”
Koteswar Vittal Kamath was concerned with the interpretation
of the proviso to Article 304(b) of the Constitution of India which provided
that:
“Provided that no Bill or amendment for the purposes of
clause (b) shall be introduced or moved in the Legislature
of a State without the previous sanction of the President.”
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
62 (1969) 1 SCC 255.
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The term “no Bill or amendment” was construed distributively.
The Court held
“In our opinion, the High Court did not correctly
appreciate the position. The language of the proviso cannot
be interpreted in the manner accepted by the High Court
without doing violence to the rules of construction. If both
the words “introduced” or “moved” are held to refer to
the Bill, it must necessarily be held that both those words
will also refer to the word “amendment”. On the face of it,
there can be no question of introducing an amendment.
Amendments are moved and then, if accepted by the House,
incorporated in the Bill before it is passed. There is further
an indication in the Constitution itself that wherever a
reference is made to a Bill, the only step envisaged is
introduction of the Bill. There is no reference to such a
step as a Bill being moved. The Articles, of which notice
may be taken in this connection, are Articles 109, 114,
117, 198 and 207. In all these articles, whatever prohibition
is laid down relates to the introduction of a Bill in the
Legislature. There is no reference at any stage to a Bill
being moved in a House. The language thus used in the
Constitution clearly points to the interpretation that, even
in the proviso to Article 304, the word “introduced” refers
to the Bill, while the word “moved” refers to the
amendment.”
88. Recently, in Rajendra K. Bhutta v. Maharashtra Housing
and Area Development
Authority63, this principle and Koteshwar Vittal
Kamath were cited and applied. Therefore, it is held that when Section
60(2) alludes to insolvency resolution or bankruptcy, or liquidation of
three categories, i.e. corporate debtors, corporate guarantors (to
corporate debtors) and personal guarantors (to corporate debtors) they
apply distributively, i.e. that insolvency resolution, or liquidation processes
apply to corporate debtors and their corporate guarantors, whereas
insolvency resolution and bankruptcy processes apply to personal
guarantors, (to corporate debtors) who cannot be subjected to liquidation.
89. The case law cited on behalf of the petitioners shows a certain
pattern. In many cases (In re Delhi Laws Act, Jitendra Kumar Gupta)
63 (2020) 13 SCC 208.
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this court had held that the power to extend the law, existing or future,
that had not been enacted by the competent legislature, and the power
of repeal, as well as the power to extend the life of the law, were instances
of excessive delegation of legislative power. In Narottamdas Jethabhai
(supra), this court upheld the extension of pecuniary jurisdiction of city
civil courts beyond the statutorily prescribed limit, because there was a
provision enabling it, and the executive confined the exercise of its power
to extend the jurisdiction, within the limits enacted. Hamdard
Dawakhana was an instance of grant of un-canalized power (without
legislative guidance) of inclusion in the schedule to the Act, acts falling
within its application; it was clearly a case of excessive delegation. In
Lachmi Narain (supra), this court held that the power of modification
cannot be used at any time, but has to be resorted to initially by the
executive, at the time a law is extended and applied. The observations in
Bishwambhar Singh and Basant Kumar Sarkar (supra) reveal that
the executive is tasked with implementing the Act in stages, as it “would
have been impossible for the legislature to decide in what areas”
and in respect of what subject matters (in that case, factories and
establishments) the provisions can apply. Crucially, it was held that “a
scheme of this kind, though very beneficent, could not be introduced
in the whole of the country all at once.”Further, held
this court, such
provisions may “need careful experimentation have some times to be
adopted by stages and in different phases.”
90. The theme of gradual implementation of law or legal principles,
was also spoken about in Javed v. State of Haryana64 by this court,
which held that there is no constitutional imperative that a law or policy
should be implemented all at once:
“16. A uniform policy may be devised by the Centre or by a
State. However, there is no constitutional requirement that any
such policy must be implemented at one go. Policies are
capable of being implemented in a phased manner. More so,
when the policies have far-reaching implications and are
dynamic in nature, their implementation in a phased manner
is welcome for it receives gradual willing acceptance and
invites lesser resistance.”
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
64 (2003) 8 SCC 369.
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Similar observations were made in Pannalal Bansilal
Pitti v. State of A.P.65 where the court held that imposition of a uniform
law, in some areas, or subjects may be counterproductive and contrary
to public purpose. Sabanayagam (supra) too emphasized discretion to
extend an enactment, having regard to the time, area of operation, and
its applicability when it was emphasized that such power is “limited
and almost ministerial function as an agent of the principal
Legislature applying the Act to the area at an appropriate time”
91. The close proximity, or inter-relatedness of personal guarantors
with corporate debtors, as opposed to individuals and partners in firms
was noted by the report of the Working Group, which remarked that it:
“recognizes that dynamics, the interwoven connection between
the corporate debtor and a guarantor (who has extended his
personal guarantee for the corporate debtor) and the
partnership firms engaged in business activities may be on
distinct footing in reality, and would, therefore, require
different treatment, because of economic considerations. Assets
of the guarantor would be relevant for the resolution process
of the corporate debtor. Between the financial creditor and
the corporate debtor, mostly the guarantee would contain a
covenant that as between the guarantor and the financial
creditor, the guarantor is also a principal debtor,
notwithstanding that he is guarantor to a corporate
debtor.”
(Emphasis supplied)
92. As noticed earlier, Section 60 had previously, under the original
Code, designated the NCLT as the adjudicating authority in relation to
two categories: corporate debtors and personal guarantors to corporate
debtors. The 2018 amendment added another category: corporate
guarantors to corporate debtors. The amendment seen in the background
of the report, as indeed the scheme of the Code (i.e., Section 2 (e),
Section 5 (22), Section 29A, and Section 60), clearly show that all matters
that were likely to impact, or have a bearing on a corporate debtor’s
insolvency process, were sought to be clubbed together and brought
before the same forum. Section 5 (22) which is found in Part II
(insolvency process provisions in respect of corporate debtors) as it was
originally, defined personal guarantor to say that it”means an individual
65 (1996) 2 SCC 498.
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who is the surety in a contract of guarantee to a corporate debtor.”
There are two more provisions relevant for the purpose of this judgment.
They are Sections 234 and 235 of the Code; they read as follows:
“234. (1) The Central Government may enter into an
agreement with the Government of any country outside India
for enforcing the provisions of this Code.
(2) The Central Government may, by notification in the Official
Gazette, direct that the application of provisions of this Code
in relation to assets or property of corporate debtor or debtor,
including a personal guarantor of a corporate debtor, as the
case may be, situated at any place in a country outside India
with which reciprocal arrangements have been made, shall
be subject to such conditions as may be specified.
235. (1) Notwithstanding anything contained in this Code or
any law for the time being in force if, in the course of
insolvency resolution process, or liquidation or bankruptcy
proceedings, as the case may be, under this Code, the
resolution professional, liquidator or bankruptcy trustee, as
the case may be, is of the opinion that assets of the corporate
debtor or debtor, including a personal guarantor of a
corporate debtor, are situated in a country outside India with
which reciprocal arrangements have been made under section
234, he may make an application to the Adjudicating Authority
that evidence or action relating to such assets is required in
connection with such process or
proceeding.
(2) The Adjudicating Authority on receipt of an application
under sub-section (1) and, on being satisfied that evidence
or action relating to assets under sub-section (1) is required
in connection with insolvency resolution process or liquidation
or bankruptcy proceeding, may issue a letter of request to a
court or an authority of such country competent to deal with
such request.”
93. These two provisions also reveal that the scheme of the Code
always contemplated that overseas assets of a corporate debtor or its
personal guarantor could be dealt with in an identical manner during
insolvency proceedings, including by issuing letters of request to courts
or authorities in other countries for the purpose of dealing with such
assets located within their jurisdiction.
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
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94. The impugned notification operationalizes the Code so far as
it relates to personal guarantors to corporate debtors:
(1) Section 79 pertains to the definitional section for the purposes
of insolvency resolution and bankruptcy for individuals before the
Adjudicating Authority.
(2) Section 94 to 187 outline the entire structure regarding initiation
of the resolution process for individuals before the Adjudicating
Authority.
95. The impugned notification authorises the Central Government
and the Board to frame rules and regulations on how to allow the pending
actions against a personal guarantor to a corporate debtor before the
Adjudicating Authority. The intent of the notification, facially, is to allow
for pending proceedings to be adjudicated in terms of the Code. Section
243, which provides for the repeal of the personal insolvency laws has
not as yet been notified. Section 60(2) prescribes that in the event of an
ongoing resolution process or liquidation process against a corporate
debtor, an application for resolution process or bankruptcy of the personal
guarantor to the corporate debtor shall be filed with the concerned NCLT
seized of the resolution process or liquidation. Therefore, the Adjudicating
Authority for personal guarantors will be the NCLT, if a parallel resolution
process or liquidation process is pending in respect of a corporate debtor
for whom the guarantee is given. The same logic prevails,
under Section
60(3), when any insolvency or bankruptcy proceeding pending against
the personal guarantor in a court or tribunal and a resolution process or
liquidation is initiated against the corporate debtor. Thus if A, an individual
is the subject of a resolution process before the DRT and he has furnished
a personal guarantee for a debt owed by a company B, in the event a
resolution process is initiated against B in an NCLT, the provision results
in transferring the proceedings going on against A in the DRT to NCLT.
96.This court in V. Ramakrishnan (supra), noticed why an
application under Section 60(2) could not be allowed. At that stage, neither
Part III of the Code nor Section 243 had not been notified. This meant
that proceedings against personal guarantors stood outside the NCLT
and the Code. The non-obstante provision under Section 238 gives the
Code overriding effect over other prevailing enactments. This is perhaps
the rationale for not notifying Section 243 as far as personal guarantors
to corporate persons are concerned.  Section 243(2) saves pending
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proceedings under the Acts repealed (PIA and PTI Act) to be undertaken
in accordance with those enactments. As of now, Section 243 has not
been notified. In the event Section 243 is notified and those two Acts
repealed, then, the present notification would not have had the effect of
covering pending proceedings against individuals, such as personal
guarantors in other forums, and would bring them under the provisions
of the Code pertaining to insolvency and bankruptcy of personal
guarantors. The impugned notification, as a consequence of the non
obstante clause in Section 238, has the result that if any proceeding
were to be initiated against personal guarantors it would be under the
Code.
97. In the opinion of this court, there was sufficient legislative
guidance for the Central Government, before the amendment of 2018
was made effective, to distinguish and classify personal guarantors
separately from other individuals. This is evident from Sections 5(22),
60, 234, 235 and unamended Section 60. In V. Ramakrishnan (supra)
this court noted the effect of various provisions of the Code, and how
they applied to personal guarantors:
“22. We are afraid that such arguments have to be turned
down on a careful reading of the sections relied upon. Section
60 of the Code, in sub-section (1) thereof, refers to insolvency
resolution and liquidation for both corporate debtors and
personal guarantors, the adjudicating authority for which
shall be the National Company
Law Tribunal, having territorial
jurisdiction over the place where the registered office of the
corporate person is located. This sub-section is only important
in that it locates the Tribunal which has territorial jurisdiction
in insolvency resolution processes against corporate debtors.
So far as personal guarantors are concerned, we have seen
that Part III has not been brought into force, and neither has
Section 243, which repeals the Presidency Towns Insolvency
Act, 1909 and the Provincial Insolvency Act, 1920. The net
result of this is that so far as individual personal guarantors
are concerned, they will continue to be proceeded against
under the aforesaid two Insolvency Acts and not under the
Code. Indeed, by a Press Release dated 28-8-2017, the
Government of India, through the Ministry of Finance,
cautioned that Section 243 of the Code, which provides for
LALIT KUMAR JAIN v. UNION OF INDIA & ORS.
[S. RAVINDRA BHAT, J.]
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the repeal of the said enactments, has not been notified till
date, and further, that the provisions relating to insolvency
resolution and bankruptcy for individuals and partnerships
as contained in Part III of the Code are yet to be notified.
Hence, it was advised that stakeholders who intend to pursue
their insolvency cases may approach the appropriate
authority/court under the existing enactments, instead of
approaching the Debts Recovery Tribunals.
23. It is for this reason that sub-section (2) of Section 60
speaks of an application relating to the “bankruptcy” of a
personal guarantor of a corporate debtor and states that any
such bankruptcy proceedings shall be filed only before the
National Company Law Tribunal. The argument of the learned
counsel on behalf of the respondents that “bankruptcy”
would include SARFAESI proceedings must be turned down as
“bankruptcy” has reference only to the two Insolvency Acts
referred to above. Thus, SARFAESI proceedings against the
guarantor can continue under the SARFAESI Act. Similarly, sub-
section (3) speaks of a bankruptcy proceeding of a personal
guarantor of the corporate debtor pending in any court or
tribunal, which shall stand transferred to the adjudicating
authority dealing with the insolvency resolution process or
liquidation proceedings of such corporate debtor. An
“Adjudicating Authority”, defined under Section 5(1) of the
Code, means the National Company Law
Tribunal constituted
under the Companies Act, 2013.
24. The scheme of Sections 60(2) and (3) is thus clear — the
moment there is a proceeding against the corporate debtor
pending under the 2016 Code, any bankruptcy proceeding
against the individual personal guarantor will, if already
initiated before the proceeding against the corporate debtor,
be transferred to the National Company Law Tribunal or, if
initiated after such proceedings had been commenced against
the corporate debtor, be filed only in the National Company
Law Tribunal. However, the Tribunal is to decide such
proceedings only in accordance with the Presidency Towns
Insolvency Act, 1909 or the Provincial Insolvency Act, 1920,
as the case may be. It is clear that sub-section (4), which