It is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e., by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract. (Para 111)
LALIT KUMAR JAIN V/s UNION OF INDIA & ORS.
CASE (CIVIL) NO. 245/2020
Decided on May 21,2021
A Bench of Justice L Nageswara Rao and Justice Ravindra Bhatdelivered the judgment after the apex court transferred to itself petitions challenging a notification dated November 15, 2019, enforcing certain provisions of the IBC relating to insolvency of personal guarantors.
The apex court transferred to itself petitions challenging a notification dated November 15, 2019, introducing certain provisions to the IBC relating to insolvency of personal guarantors. The notification had also enacted a number of Rules on the insolvency resolution process for personal guarantors to corporate debtors. The Insolvency and Bankruptcy Board of India (IBBI) had sought the transfer of all the matters pending before the High Courts to the Supreme Court so as to avoid conflicting rulings by different courts. All those pending writ petitions challenged the constitutional validity of Part III of the IBC, which deals with insolvency resolution for individuals and partnership firms. Writ petitions were filed in the Delhi High Court and other High Courts challenging the 2019 notification and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019 as well as a number of similar Rules.
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 Government.
The court observed that “In view of the above discussion, it is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e., by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.” (Para 111)
The court held that “For the foregoing reasons, it is held that the impugned notification is legal and valid. It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors). The writ petitions, transferred cases and transfer petitions are accordingly dismissed in the above terms, without order on costs.” (Para 112)
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Saptarshi Mukhopadhyay
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