Supreme Court Rules That The Issuance Of Impugned Notification Under Section 1(3) Of The Ibc By The Central Government Is Valid

Case title:

Lalit Kumar Jain vs. Union of India

Date of Order:

21 May 2021

Bench:

L. Nageswara Rao, S. Ravindra Bhat

Parties:

Petitioners- Lalit Kumar Jain

Respondents- Union of India

SUBJECT

Part III of the Insolvency and Bankruptcy Code, 2016 regulates insolvency proceedings relating to individuals. 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. In a notification released on November 15, 2019, the Union Ministry of Corporate Affairs ("MCA") outlined provisions of Part III of the Insolvency and Bankruptcy Code 2016 ("the Code") relating to the bankruptcy and insolvency resolution processes for personal guarantors of corporate debtors. This notification empowered banks to initiate insolvency proceedings against promoters, guarantors, etc. of defaulter companies. The intention was to make promoters, directors, or sometimes the managing director or chairperson responsible for loans taken by the firm.

IMPORTANT PROVISIONS

• Section 1(3), Insolvency and Bankruptcy Code, 2016
• Section 60(2), Insolvency and Bankruptcy Code, 2016
• Section 243, Insolvency and Bankruptcy Code, 2016

OVERVIEW

• The Ministry of Home Affairs issued a notification dated 15.11.2019, whose validity was challenged by the Insolvency and Bankruptcy Board of India on 20.11.2019.
• Many petitioners were sent demand notices to initiate insolvency proceedings against them, once the notification was published.
• This led to the initiation of an insolvency resolution process under Part III of the Code against some petitioners.
• The petitioners argued that the impugned notification was an exercise of excessive delegation. They also argued that the central government has no statutory authority to enforce provisions of the code.
• Several writ petitions were filed contending that the notification was issued in excess of the authority conferred upon the Union of India.

ISSUE RAISED

• Is the Central Government notification dated 15.11.2019 valid?

ARGUMENTS ADVANCED BY THE PETITIONERS

• Mr. Harish Salve represented the petitioners in this case.
• The counsel argued that the power granted to the central government under Section 1(3) of the Code is an instance of “conditional legislation” where the legislature frames a law and leaves it to the executive for implementation.
• Counsel contended that the Central Government exceeded the power conferred upon it, and had in effect modified Part III of the Code, which it was not authorized to do by Parliament. 
• The case of Delhi Laws Act, 1912, In re v. Part 'C' States (Laws) Act, [1951 SCR 747] was cited to further point out that the legislature cannot delegate the power to the executive to amend any laws.
• It was submitted that the enforcement of Sections 78, 79, 94-187, etc., concerning personal guarantors, was ultra vires of the powers granted to the Central Government.
• Such enforcement was also argued to be discriminatory as there is no intelligible differentia for a reasonable classification between personal guarantors and corporate debtors.
• Learned counsel, Mr. Narasimha further submitted that the Code ensures a company’s revival and continuation by protecting and saving it from liquidation, thereby maximizing its value. The Code is a beneficial legislation that puts the corporate debtor back on its feet, rather than just being recovery legislation for creditors. 
• Reliance was placed on Babulal Vardharji Gurjar v. Veer Gurjar Aluminum Industries Pvt. Ltd. & Anr [(2020) 15 SCC].

ARGUMENTS ADVANCED BY THE RESPONDENT

• Attorney General Mr. K.K. Venugopal represented the Union of India and other respondents.
• It was urged that Parliament needed to separate personal guarantors from other individuals such as partnership firms, proprietorships, and individuals. This is so that the insolvency resolution process of corporate debtors would not have to be dealt with separately and independently of its promoters, managing directors, directors, etc.
• The counsel cited the cases Basant Kumar Sarkar v. Eagle Rolling Mills Ltd [(1964) 6 SCR 913] and Bishwambhar Singh v. State of Orissa [1954 SCR 842], where the court reiterated the power of the central government to allow notification of provisions bringing into force legislation in phases.
• It was submitted that the interpretation of Section 1(3) of the Code should be flexible enough to permit the central government to implement laws to meet the objectives of the Act. 
• It was submitted that the Central Government had the authority to confine the enforcement of the provisions of the Code to a class of individuals (personal guarantors), without altering the identity and structure of the Code.

JUDGEMENT ANALYSIS

• The supreme court of India dismissed the writ petitions, transferred cases, and transfer petitions, and held the impugned notification valid.
• The court ruled that the notification was an instance of impermissible legislation by the executive.
• It was submitted that the decision did not involve bringing into force provisions of an enactment, or exclusion, but inclusion within its fold, without any statutory guidance. The case, therefore, involved delegated legislation.
• The court cited the case of Vasu Dev Singh & Ors vs Union of India & Ors [Appeal (civil) 4688 of 2006] where the court differentiated between conditional legislation and delegated legislation.
• The bench consisting of L. Nageswara Rao, and S. Ravindra Bhat held that the impugned notification empowered the Central Government and the Board to frame rules and regulations. This was to permit pending actions against a personal guarantor to a corporate debtor before the Adjudicating Authority. The bench noted that this notification intended to allow pending proceedings to be adjudicated in terms of the Code.
• Placing reliance on Sections 5(22), 60, 234, 235, and unamended Section 60, it was also ruled that there was sufficient legislative guidance for the Central Government before the amendment of 2018 was made effective. This guidance was to distinguish and classify personal guarantors separately from other individuals.

CONCLUSION

This landmark judgment helped in the interpretation and analysis of various questions of law related to the Insolvency and Bankruptcy Code, 2016. The Supreme Court ruled that the notification was not ultra vires as it was not excessive legislation. It was also observed that the stage-wise implementation of the IBC is valid. Furthermore, it was interpreted from Section 60(2) of the IBC that personal guarantors are within the scope of liquidation or bankruptcy.