LALIT KUMAR JAIN v. UNION OF INDIA & ORS.

A The Judgment of the Court was delivered by S. RAVINDRA BHAT, J.

1Copy pinpoint1. 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 B 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 C

2Copy pinpoint2. 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 D 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.

3Copy pinpoint3. 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 H 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.

4Copy pinpoint4. 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), C 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.

5Copy pinpoint5. 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.

6Copy pinpoint6. 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: G “It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint:

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A 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.”

7Copy pinpoint7. The petitioners argue that the power delegated under Section B 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.

8Copy pinpoint8. 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, E 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 F 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. G 23.11.2017.” It is urged that this court should, therefore, set aside the impugned notification.

LALIT KUMAR JAIN v. UNION OF INDIA & ORS. 1091 [S. RAVINDRA BHAT, J.]

9Copy pinpoint9. 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.

10Copy pinpoint10. 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 E 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 F 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. G 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 H

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11Copy pinpoint11. 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 E (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 F 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 G (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 H (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 A 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 B Code is in contrast to Part II of the Code, which provides different sets of procedures for different classes of creditors.

12Copy pinpoint12. The petitioners rely on Swiss Ribbons (P.) Ltd. v. Union of 5 India , 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, C 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. D Financial contracts generally involve large sums of money.

13Copy pinpoint13. 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.

14Copy pinpoint14. 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

5 (2019) 4 SCC 17. H

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A 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 B 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.

15Copy pinpoint15. It is argued that the impugned notification has resulted in clothing authorities, the Committee of Creditors (CoC) and Resolution C 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) D 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. E II Contentions of the Petitioners

16Copy pinpoint16. 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 F 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 A 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 B 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. Sabanayagam 7and 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.

17Copy pinpoint17. 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.

18Copy pinpoint18. 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

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. H

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A 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. B

19Copy pinpoint19. 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 C 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 D 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.

20Copy pinpoint20. 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 H 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 India 12 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.

21Copy pinpoint21. 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. E 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 F 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.

22Copy pinpoint22. It was urged that even if it were assumed that the Central G Government had the power to issue the impugned notification and bring Part III in force only with respect to personal guarantors to corporate

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. H

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A 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

23Copy pinpoint23. Learned counsel emphasized that this court has repeatedly clarified that the object of the Code is to ensure a company’s revival and B 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. & C Anr.15 are relied upon for this purpose.

24Copy pinpoint24. 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 D 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 E 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. F

25Copy pinpoint25. 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 G 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 H (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 A 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 B 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 C 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. D

26Copy pinpoint26. 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 E 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 F 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 G subject to any restriction, limitation or proviso (which is the same as an exception) only.”

16 (1949-50) 11 FCR 595. H

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27Copy pinpoint27. 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.

28Copy pinpoint28. 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.

29Copy pinpoint29. 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, F 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 G 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 17 2019 SCC Online SC 1478. 18 (2012) 171 Comp Cas 94. H

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A whole or in part by statute, the liability of the surety also is pro tanto reduced or extinguished.”

30Copy pinpoint30. 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

31Copy pinpoint31. 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.

32Copy pinpoint32. It was argued that Parliament felt compelled to separate personal guarantors from other individuals such as partnership firms, 19 H 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.

33Copy pinpoint33. 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 H

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A 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.

34Copy pinpoint34. 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 D 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.

35Copy pinpoint35. 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 H (1980) 1 SCC 499.

LALIT KUMAR JAIN v. UNION OF INDIA & ORS. 1105 [S. RAVINDRA BHAT, J.]

“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. […]”

36Copy pinpoint36. 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 D stage by stage or region by region implementation is adopted. Furthermore the discretion exercised by the executive government is not unfettered.

37Copy pinpoint37. 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 E 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 21 (1964) 6 SCR 913. 22 1954 SCR 842. H

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A 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 B proceedings against the corporate debtors.

38Copy pinpoint38. 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 C 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.

39Copy pinpoint39. The Attorney General also relied upon the report of the D 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 E 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 F 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 G 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 H recovery.”

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envisaged by the BLRC is found in the IBC in Section 5(22) and Section A 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, D 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.

“6.1 The applicability of the Code G 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 ….” H

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A State of Karnataka24 where this court had examined and dealt with the interplay between Sections 5(22), 60 and 179 of the Code.

40Copy pinpoint40. 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. E

41Copy pinpoint41. 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. F 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 G 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 H (2020)13 SCC 308.

LALIT KUMAR JAIN v. UNION OF INDIA & ORS. 1109 [S. RAVINDRA BHAT, J.]

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.

42Copy pinpoint42. 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 F 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. G State of Haryana & Ors 27 . It was submitted that the Central Government, therefore, acted within its rights to confine the enforcement 25 (2008) 10 SCC 368. 26 (1988) 2 SCC 433. 27 (2003) 8 SCC 369. H

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A 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.

43Copy pinpoint43. 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 E 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 F 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.

44Copy pinpoint44. The Solicitor General submitted that neither the guarantor’s obligations are absolved nor discharged in terms of Sections 133 to 136 G 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 H (2009) 9 SCC 478.

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secure by way of operation of law for instance as under the Code. A 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 B 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: C “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 D 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.” E

45Copy pinpoint45. 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 F 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 G “statutorily” presumed to be consented by the guarantors in question. Therefore, by way of approval of a resolution plan, any release/discharge

32 1982 (3) SCC 358. 33 (2002) 5 SCC 80. 34 2019 SC Online Cal 7288 at para 34 and 35. H

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A 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 E 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 H 2016 SCC OnLine Kar 5991.

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judgment of the UK Supreme Court in In Re Kaupthing Singer and A Friedlander Ltd. (in administration)37.

46Copy pinpoint46. 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.

47Copy pinpoint47. 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 India 38.

48Copy pinpoint48. 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 37 2012 (1) All ER 883 Paras 11, 12, 53-54. 38 (1976) 2 SCC 953, para 49. H

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A 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 B 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 C 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 Officer 43, 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.

49Copy pinpoint49. 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. H 43 (1996) 6 SCC634.

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policy indicated in the relevant statute. For this, reliance was placed on A 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. B

50Copy pinpoint50. 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. E “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 F of the law, and the setting in which the clause to be interpreted occurs.”

51Copy pinpoint51. 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 G and the purpose or object with which the power is conferred. As Iyer, J. observed in Chairman Board of Mining Examination v. Ramji 46 “to 44 (1955) I SCR 735. 45 (1964) I SCR 371, at para 69. 46 AIR 1977 SC 965 at p. 968. H