Delhi HC Issues Notice On Challenge To Centre's Notification Of IBC Part III Only As Regards Personal Guarantors To Corporate Debtors [Read Petition]

The Delhi High Court on Tuesday issued notice on a plea challenging the November 15, 2019 gazette notification bringing into effect certain provisions of Part III of the IBC, i.e., Insolvency Resolution and Bankruptcy For Individuals and Partnership Firms from December 1, 2019.

Part III of IBC pertains to matters relating to fresh start, insolvency and bankruptcy of individuals and partnership firms where the amount of default is not less than one thousand rupees . By way of the gazette notification, the part relating to fresh start has not been notified. The only part that has been notified relates to the Personal Guarantors to the Corporate Debtors and not the other provisions of Part III.

The Petitioner before Justices Vipin Sanghi and Rajnish Bhatnagarn sought a declaration as unconstitutional and striking down of the Notification and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors)

Rules, 2019 issued by the Ministry of Corporate Affairs; and the Insolvency and Bankruptcy Board of India (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019, for being ultra vires the IBC, 2016.

The plea argues that the Impugned Notification and the Impugned Rules and Regulations are manifestly arbitrary and deserves to be struck down for the following reasons:

(i) The Impugned Notification dated 15.11.2019 is patently ultra vires the proviso to Section 1 (3) of the Code (on commencement of its different provisions from the date notified by the Central government)

(ii) The unlawful attempt of the Central Government to enforce Sections 78 (on Application; except with regard to fresh start process), 79 (Definitions), 94 to 187 (Insolvency Resolution Process), etc., only in relation to personal guarantors to corporate debtors is an exercise of legislative power by the Central Government, which is wholly impermissible in law and amounts to an unconstitutional usurpation of legislative power by the executive.

(iii) The Impugned Notification purports to bring into effect Section 2(e) of the Code (Application of the Code to partnership firms and individuals, in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy), which had already come into force with retrospective effect from 23.11.2017 in view of of Act NO.8 of 2018.

(iv) The impugned notification dated 15.11.2019 has the absurd effect of creating two self-contradictory legal regimes for insolvency proceedings against personal guarantors to corporate debtors which is contrary to the legislative intent of repealing the aforesaid two insolvency Acts. This is clear from Section 243 of the Code.

(v) The Impugned Notification is ultra-vires the provisions of the Code as Part III deals only with Individuals and Partnership Firms. Personal guarantors to corporate debtors stand specifically excluded from the definition of individuals. A combined reading of Section 2(e) with Section 2(g) and Part III of the Code would show that personal guarantors to Corporate Debtors are not covered by Part III of the Code. This is apparent from Section 95 of the Code, which permits a creditor to invoke insolvency resolution process against an individual only in relation to a partnership debt. Thus, there is no provision in Part III of the Code which permits initiation of Insolvency resolution process against a personal guarantor to corporate debtor.

(vi) Rule 7 read with Rule 3(e) of the Impugned Rules are ultra vires Section 95 of the Code for the reason that they purport to permit a demand notice and application under Section 95 to be issued against a personal guarantor to corporate debtor, when Section 95 of the Code only permits the creditor to apply under Section 95(1) in respect of a partnership debt.

(viii) The provisions of the Code brought into effect by the Notification dated 15.11.2019 read with the Impugned Rules and Regulations, when enforced only in respect of personal guarantors to corporate debtors, are manifestly arbitrary and violative of Article 14 for the following reasons:

(a) There is no intelligible differentia on which personal guarantors to corporate debtors have been singled out for being covered by the Impugned provisions, particularly when the Code do not separately apply to one SUb-category of individuals.

(b) The provisions of Part III of the Code, which are partly brought into effect by the Impugned Notification dated 15.11.2019 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, which amounts to treating unequals equally and amounts to collapsing the classification that is carefully crafted by the Legislature in Part II of the Code.

(c) Section 96 and 101 of the Code when applied in the manner enforced by the notification dated 15.11.2019 are manifestly arbitrary as they result in the absurd consequence of staying the insolvency proceedings against the corporate debtor, as soon as insolvency proceedings are initiated against the personal guarantor.

(ix) A combined reading of Sections 99 and 100 of the Code read with Regulation 7 of the Impugned Regulations shows that the resolution professional while recommending the approval/rejection of the application, and the Tribunal while accepting the same, are not required to consider whether the underlying debt owed by the Corporate Debtor to the Creditor stands satisfied or extinguished.

(x) The Impugned provisions, rules and regulations create a situation where the creditor can unjustly enrich itself by making a claim in the Insolvency Process of the Guarantor without accounting for the amount realized by it in the Corporate Insolvency Resolution Process of the Corporate Debtor under Part II of the Code.

(xi) The Impugned Rules, which is a subordinate piece of legislation, amount to making a class legislation with respect to Personal Guarantors to Corporate Debtors, by defining the term "guarantor" as a 'debtor who is a guarantor to a corporate debtor and in respect of whom guarantee has been invoked by II the creditor and remains unpaid in full or part', when there is no definition whatsoever in the parent statute defining the terms "guarantor". 

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