THE NATIONAL LAW INSTITUTE UNIVERSITY

PROJECT
On
Lalit Kumar Jain
v
Union of India
<https://main.sci.gov.in/supremecourt/
2020/26016/26016_2020_37_1501_28029_Judgement_21-May-2021.pdf> accessed 13
September 2021, decided on 21 May 2021

submitted by
Manvi Bansal
Enrolment Number: A-2325
Roll Number: 2021BALLB28
I Semester
B.A. L.L.B. (Hons.)

Submitted to
Prof. (Dr.) Ghayur Alam
Date of submission: 15 November 2021
 DECLARATION

I, Manvi Bansal, D/O Manoj Bansal Roll Number 2021BALLB 28 Enrolment Number A-
2325 do hereby declare that this Case Analysis of “Lalit Kumar Jain v Union of
India, 2021” is an outcome of my own independent research endeavour and has been carried
out under the guidance of Prof. (Dr.) Ghayur Alam. Literature relied on by me for the
purpose of this Project has been fully and completely acknowledged in the footnotes and
bibliography. The Project is not plagiarized and all reasonable steps have been taken to avoid
plagiarism. Similarity Index as per the Turnitin Report is____%. In case, my project is found
to be plagiarized, the course teacher shall have the full liberty to ask me to revise the Project.
If I fail to comply with the instructions of the teacher, my project may be referred to the
Committee Against Use of Unfair Means and I will comply with the decision of the said
Committee.

i
 ACKNOWLEDGMENT

For the completion of this project, I would like to extend my warm gratitude
towards those, without whose guidance and help, this project might not have been
completed on time. I acknowledge my deep gratitude towards:

Prof. (Dr.) Vijaykumar, Vice chancellor, National Law Institute University Bhopal,
for providing me with the means to make the project.

Our Common Law teacher Prof. (Dr.) Ghayur Alam, who provided me with the
opportunity to analyse this case, which helped me to understand the details and
implications of the judgement.

I am also thankful to the NLIU library which helped me to access the necessary
resources required for the study of this project topic.

Lastly, I would also like to thank my family and friends, who gave me the
encouragement and the required support to complete my project work.

ii
 LIST OF ABBREVIATIONS

SERIAL ABBREVIATION FULL FORM

NO.
1 IBBI Insolvency and Bankruptcy
Board of India

2 SC Supreme Court

3 IBC 2016 Insolvency and Bankruptcy

Code, 2016

4 S. Section

5 NCLT National Company Law

Tribunal

iii
 LIST OF CASES

S.NO. CASE NAME CITATION Pg NO.

1 State of Bombay v Narothamdas 1951 2 SCR 51 8

Jethabhai

2 State of Tamil Nadu v K. 2006 12 SCC 753 8

Saanayagam,

3 Delhi Laws Act, 1912, In re v Part 1951 SCR 747 8

'C' States (Laws) Act, 1950

4 Swiss Ribbons (P.) Ltd. v. Union of 4 SCC 17. 9

India, 2019 4 SCC 17.

5 Committee of Creditors of Essar SCC OnLine SC 1478. 9

Steel India Ltd. v Satish Kumar
Gupta, 2019

6 Maharashtra State Electricity Board . 1982 AIR 1497, 1983 SCR (1) 10
Bombay v Official Liquidator, High 561
Court, Ernakulum & Anr

7 Basant Kumar Sarkar v Eagle 1964 6 SCR 913 11

Rolling Mills Ltd.

8 Bishwambhar Singh v State of 1954 SCR 842 11

Orissa,.

9 Vasu Dev Singh & Ors. v Union of 1998 1 SCC 318 8

India & Ors

iv
 TABLE OF STATUTES
SR NO. Name of Statute Pg. no.

1 Insolvency and Bankruptcy Code, 2016 2,3,4,5,6,7,8,9,10,11,12,13

2 Indian Contract act, 1872 10

3 Presidency Towns Insolvency Act, 1909

4 Provincial Insolvency Act, 1920

v
 TABLE OF CONTENTS

 Name and Date of the Judgement ………..………. 1

 Name of the Judges ………………………..……... 1

 Size of the Bench…………………………………. 1

 Number and Types of Opinions …………………. 1

 Name of the Judge who Delivered the Judgement. 1

 Concrete Facts of the Case………………….......... 2

 Material Facts of the Case……………………... 5

 Immaterial Facts of the Case…………...…………… 6

 Generalization of Material Facts to an Abstract 7

Level………………………………………………

 Questions of Law Involved in the Case. …………. 8

 Arguments Advanced by the Appellant................... 8

 Arguments Advanced by the Respondent……….... 10

 Arguments by the Interveners/ Amicus…............... 11

 Judgement in Parsonam…………………………... 12

 Judgement in Rem………………………………... 13
 NAME AND DATE OF THE JUDGEMENT
Lalit Kumar Jain v Union of India
21 May 2021

NAME OF THE JUDGES

S. Ravindra Bhat, JJ, Nageswara Rao

SIZE OF THE BENCH

Division Bench

NUMBER AND TYPES OF OPINIONS

One opinion – Unanimous Judgement

NAME OF THE JUDGE WHO DELIVERED THE JUDGEMENT

Justice S. Ravindra Bhat , Justice , Nageswara Rao

Dissenting Opinion
There is no Dissenting Opinion

Name of Judges who delivered Dissenting opinion

There is no dissenting opinion

Amicus curiae
There are no Amicus curiae present in this case

1
CONCRETE FACTS OF THE CASE

1. The Ministry Of Corporate Affairs issued a notification in official gazette on 15th

November 2019 implementing provisions of Part III of IBC 20161. This particular
provision dealt with personal guarantors to corporate debtors in bankruptcy and
insolvency resolution proceedings.

2. This new announcement makes significant modifications to the principles of

guarantor and his liability. Banks were allowed to file bankruptcy procedures against
the personal guarantor of corporate creditors as a result of this notification.

3. According to the IBC 2016 a personal guarantor is a person who guarantees to repay
a borrower's debt if the borrower defaults on their existing debt in form of surety.

4. Prior to the abovementioned announcement, the Debt Recovery Tribunal had sole
authority to prosecute the IBC 2016 law against personal guarantors. But after this
notification has been issued , this power has been extended to banks and creditors as
well, increasing the guarantor's accountability.

5. The Ministry Of Corporate Affairs issued the notification with an intent of making
personal guarantor liable accountable for the debts their company took out on their
personal guarantee. This was because the guarantor often furnished their guarantee as
director, chairman , promoters to the financial institutions making them escape the
liability . Due to which banks suffered huge collateral loss.

1
Insolvency and Bankruptcy Code, 2016 (Part III)
2
6. Many demand notices were sent to petitioner after the impugned notification was
published, initiating insolvency proceedings under IB, Code. Also, recovery actions
commenced following the invocation of guarantees as given in the part III of IBC
2016. (Para NO. 2 & 3 )

7. The Impugned Notification sparked a series of challenges to its constitutionality

before multiple High Courts since it targeted the entrepreneurs of the country's largest
insolvent enterprises.

8. On October 29, 2020 SC issued an injunction which prohibited the High Courts from
taking up any writ petition related to the impugned notification and it transferred all
the ongoing cases to itself.

9. The Supreme Court presided over the case while using its authority under Article
139A to transfer cases and to resolve a common point of law under Article 32
concerning the interpretation of a Code provision. This was done to avoid conflicting
decisions by multiple High Courts and to clarify the issue definitively.

10. Several petitions were filed before the Supreme Court, with the exception of Lalit
Kumar Jain v Union of India, which took the lead and it turned out to be a landmark
decision that ultimately put an end to a long-running legal dispute started in
November 2019 between a conglomerate of corporations and the Union Government
regarding the liability of personal guarantors.

11. The main bone of contention against the Disputed Notification was that the Central
Government overstepped its authority . It lacked the authority to enforce certain
sections of the Code, and hence creating a sub-category of people known as personal
guarantors is ultra – vires to which court held that the impugned notification is valid
and is in furtherance of law.

3
12. The laws pertaining to the Insolvency and Bankruptcy Board of India were brought
into force in phases part by part .On 05.08.2016 a notification was issued in order to
allow the regulatory body to be established so that it could begin its work of
investigating pertinent issues and developing standards that would be enshrined in
rules and regulations. Following that, the notification of 19.08.2016 made Chapter
VII) of Part IV and several sections of Part V – related to finance, actions, audit, and
other provisions – effective. ( Para NO. 79)

13. It is clear that the Central Government's strategy for enforcing certain parts of the Act
has a particular goal in mind: to achieve the Code's objectives while keeping its
priorities in furtherance of the code.( Para NO. 81)

14. Earlier personal guarantors were to be regulated under NCLT and all the other
stakeholder were adjudicated under Debt Recovery Tribunal . But the 2018
Amendment made changes in the S.60 of the code and streamlined the resolution
process. Now, all the stakeholder i.e., (corporate debtors, corporate guarantors of
corporate debtors and personal guarantors of corporate debtors) were under the same
forum that is NCLT.

15. After the release of notification, IBBI challenged its validity and constitutionality on
20 November 2019.

4
MATERIAL FACTS OF THE CASE

1. The Ministry of Corporate affairs issued a notification in official gazette on 15

November 2019 which broadly dealt with part III of the IBC 2016.

2. According to this notification even banks and other financial institutions can
initiate an insolvency proceeding against the personal guarantor.

3. The personal guarantor often furnished their guarantee as director, chairman ,

promoters to the financial institutions making them escape the liability . Due to
which banks suffered huge collateral loss.

4. The court held that the notification issued was valid under S. 1(3) of the code and
is not ultra – vires . It further stated that the central government didn’t overstep its
authority as there is no compulsion in the code.

5. The Apex court held that there was an “intrinsic” connection between personal
guarantor and their corporate debtor. ( Para NO. 101)

6. Many notifications were issued earlier also related the provisions of code which
clearly states that Central government’s strategy is to realize and implement the
objectives of the code while keeping in mind its priorities.

7. NCLT will be the adjudicatory authority which will now govern corporate
debtors, corporate guarantors of corporate debtors and personal guarantors of
corporate debtors. Earlier it used to regulate only personal guarantor.

5
IMMATERIAL FACTS OF THE CASE

1. After the release of notification, IBBI challenged its validity and constitutionality
on 20 November 2019.

2. On October 29, 2020 SC issued an injunction which prohibited the High Courts
from taking up any writ petition related to the impugned notification and it
transferred all the ongoing cases to itself.

3. Several petitions were filed after the notification was issued majority of which
were dismissed.

4. Prior to the abovementioned announcement, the Debt Recovery Tribunal had sole
authority to prosecute the IBC 2016 law against personal guarantors.

5. Recovery actions commenced following the invocation of guarantees as given in

the part III of IBC 2016.

6. Many notifications were issued earlier also related the provisions of code.

7. The Apex court hence dismissed all the transfer petitions on the basis of rule
stated in the judgement .

8. It didn’t talk about the costs in the judgment.

6
GENERALISATION OF MATERIAL FACTS TO AN ABSTRACT LEVEL

1. Notification issued by corporate ministry, notification issued by executive

organ, notification issued by the parliament.

2. insolvency proceedings against the personal guarantor can be issued by the

creditor, insolvency proceedings against the personal guarantor can be issued
by the bank, insolvency proceedings against the personal guarantor can be
issued by any financial institution.

3. The personal guarantor often furnished their guarantee as director, The

personal guarantor often furnished their guarantee as manager, The personal
guarantor often furnished their guarantee as head of the company.

4. Adjudicating authority will be the NCLT, Adjudicating authority will be the

tribunal, Adjudicating authority will be the central government.

5. The Impugned Notification sparked a series of challenges to its

constitutionality before multiple High Courts, The Impugned Notification
sparked a series of challenges to its constitutionality before the judiciary, The
Impugned Notification sparked a series of challenges to its constitutionality
before government.

7
 QUESTIONS OF LAW INVOLVED IN THE CASE

1.  After the resolution plan is approved what will be the liability of personal guarantor
to the corporate debtor ?

2. What is the validity of the notification issued by Ministry of Corporate Affairs on 15

November 2019?

3. What is the extent to which liability of personal guarantor is related to with that of
corporate debtor?

4. Whether the Central Government overstepped its authority in S. 1(3) of the code by
creating a sub- category of personal guarantor?

ARGUMENTS ADVANCED BY THE PETITIONERS

1. The Central Government overstepped its authority and hence is ultra vires. (Para
No. 4) The petitioners argued before the court that Section 1(3) of the IBC constituted
by legislature as conditional legislation rather than delegated legislation. The only
function of executive here was to put the law into effect whenever it is approved by
legislature. That is the reason they made the law in entirety leaving no room for
executive to legislate. 2

The petitioner also supported their argument by citing a catena of cases .3 One of them
was Delhi Laws Act, 1912, In re v Part ‘C’ States (Laws) Act, 1950 4 in which the
central Government was given power to repeal the laws which were ultra vires to the
constitution.

The petitioners claimed that the Central Government overstepped its authority in issuing
the Notification and changed the terms of Part III of the IBC, which was unconstitutional.

2
State of Bombay v. Narothamdas Jethabhai, 1951 2 SCR 51
3
 State of Tamil Nadu v. K. Sa-banayagam, 1998 1 SCC 318; and Vasu Dev Singh & Ors. v. Union of India &
Ors., 2006 12 SCC 753.
4
Delhi Laws Act, 1912, In re v. Part 'C' States (Laws) Act, 1950, 1951 SCR 747
8
 2. Both financial creditor and operational creditors are treated the same way in the
Notification. The petitioners argued that the rules of Part III of the IBC, which were
implemented by the Notification, establish a single procedure for a personal
guarantor's bankruptcy resolution, regardless of whether the creditor is a financial or
operational creditor. To further buttress their argument they cited Swiss Ribbons Pvt.
Ltd. v Union of India.5 In which the Supreme court laid down different procedures to
be followed for operational creditors and financial creditors.( Para NO. 11,12,13,17)

3. The inability of the central government to put S.243 of the IBC into effect. The
petitioners stated that Section 243 of the IBC, which abolished the Presidency Towns
Insolvency Act of 1909 and the Provincial Insolvency Act of 1920, should have been
implemented by the Central Government. Prior to the Notification, only the
aforementioned enactments may be used to bring bankruptcy proceedings against a
person. As a result, the petitioners argued that failing to implement Section 243 shows
non- application of mind . It also had created two self-contradictory legal .

4. The personal guarantor's responsibility is joint co- extensive with the corporate

debtor's. The petitioners argued that the guarantor's liability was co-extensive with the
corporate debtor's, and if a resolution plan was approved, the personal guarantor's
liability would be discharged as well. To support their argument, they submitted the
case Committee of Creditors of Essar Steel India Ltd. v Satish Kumar Gupta 6. In this
case it mainly focused on the S. 29 (a) of IBC and also mentioned that under S. 31(1)
of IBC after the approval of resolution plan , it shall be binding on all stakeholders and
guarantor. (Para NO. 14,28,29)

ARGUMENTS ADVANCED BY THE RESPONDENT

5
Swiss Ribbons (P.) Ltd. v. Union of India, 2019 4 SCC 17.
6
Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, 2019 SCC OnLine SC 1478.
9
 1. Personal guarantors were to be treated differently under the law. The
respondents replied by saying that the Parliament has always desired to treat
personal guarantors differently than partnership and proprietorship organizations,
As a result, an amendment was bought into effect in 2018 to cover three types of
debtors: personal guarantors to corporate creditors under Section 2(e), partnership
businesses and proprietorship enterprises under Section 2(f), and people under
Section 2(g). It was also claimed that in 2018, Section 60(2) of the IBC was
partially changed, with the addition of the terms "corporate guarantor or personal
guarantor as the case may be." Now even personal guarantors may be subject to an
insolvency process . The intent behind bringing this amendment was to accomplish
uniform adjudication of issues and conflicts relating to corporate resolution
procedures, as well as bankruptcy and insolvency processes, through a single
forum NCLT.( Para NO. 31,32,33,34 and 39)

2. Personal guarantors' liability is not only coextensive, but also joint, and
several. According to respondents, the personal guarantor's obligation might be
joint and several or coextensive, depending on the parties' agreement and the
subject matter of the contract . The guarantor is not relieved of its joint and several
duty to make payment of the sums owed until the debt is completely paid off to the
creditor. They also presented the case of Maharashtra State Electricity Board
Bombay v Official Liquidator, High Court, Ernakulum & Amr 7 in which it was
stated that even in cases of the stage of liquidation and bankruptcy the rights of
creditors do exist. As a result, under Section 135 of the Indian Contracts Act, 1872
(Contract Act), the personal guarantor may not be completely discharged of his
liabilities even if the resolution plan is approved.

3. Segmented implementation of law is constitutional. The respondents then

claimed that stage by stage implementation of legislation had been found to be

7
Maharashtra State Electricity Board Bombay v. Official Liquidator, High Court, Ernakulum & Anr. 1982 AIR
1497, 1983 SCR (1) 561
10
 legitimate in several cases8 because it allowed for a deeper comprehension of the
laws . It is necessary to understand the potential impact it had on the particular
matter .

According to the respondents, it was also necessary to interpret Section 1(3) of the IBC
in a flexible manner in order to achieve the IBC's goals and objectives for the working
of society. As a result, the respondents claimed that the Notification was legal and in
accordance with the IBC's principles.

ARGUMENTS BY THE INTERVENERS/ AMICUS

There was no Intervener or Amicus.

8
Basant Kumar Sarkar v. Eagle Rolling Mills Ltd., 1964 6 SCR 913; Bishwambhar Singh v. State of Orissa,
1954 SCR 842.
11
 JUDGEMENT IN PARSONAM

1. The SC after carefully examining the provisions came to a conclusion that the
impugned notification issued on 15 November 2019 is valid . The central government
didn’t exercise excess in its power as the code didn’t have a compulsion effect in it and
hence it is not ultra vires in respect to S. 1(3) IBC 2016.

2. The SC went on to say that the 2018 amendment to the IBC was made to further
strengthen its spirit. It helped to better realize the goals and objectives of the code and
also by this amendment it became more flexible as it now covers personal guarantors
of corporate debtors . It also improved our resolution mechanism.

3. According to the SC, there appeared to be solid grounds because there should be one
single forum for adjudicating insolvency NCLT. The NCLT would thus be able to
look at the big picture, so to speak, of the type of the assets available, during the
corporate debtor’s insolvency proceedings. According to the SC, a larger picture
would aid the Council of Creditors in formulating realistic resolution strategies, with
the possibility of recovering some of the creditor's dues from personal guarantors in
mind.

4. SC held that the approval of the resolution plan will not per se free the guarantor from
his/ her liability. If a corporate debtor's security is lost owing to an involuntary
conduct, the personal guarantor is not released from liability .This is because discharge
under Section 134 of the Contract Act has not happened, the guarantee can be realized
under Section 128 of the Contract Act.

5. Hence, the constitutionality of the notification was held to be valid and all the writ and
transferred petitions were dismissed and the Insolvency and Bankruptcy (Application
to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to
Corporate Debtors) Rules, 2019. However, the judge remained silent on the matter of
cost.

12
JUDGEMENT IN REM

1. There is an ‘INTRINSIC’ connection present between the personal guarantor and the
corporate debtor.

2. SC held that the approval of the resolution plan will not per se free the guarantor
from his/ her liability. If a corporate debtor's security is lost owing to an involuntary
conduct, the personal guarantor is not released from liability .

3. Power exercised by the central government under S. 1(3) of IBC 2016 is not an excess
legislation as there is no compulsive effect in it.

4. Single adjudicating forum for regulation NCLT will help the creditors in framing
realistic resolution plans and will also provide them with the wide picture as NCLT
will determine the nature of assets available, during the corporate debtor’s insolvency
proceedings .

5. The SC held that the liability of the personal guarantor is not only co – extensive, but
also joint and several depending upon the terms of agreement between the party and
the subject matter of the contract so formed.

13