Section 1(3) of IBC and Constitutional validity of applicability of Part III of IBC on personal guarantors – By Mayank Udhwani

Section 1(3) of IBC and Constitutional validity of applicability of Part III of IBC on personal guarantors

On 15^th November 2019, the Insolvency and Bankruptcy Board of India [“IBBI”], vide Notification bearing S.O. 4126 (E), had made Chapter III of Part III of the IBC applicable to personal guarantors. Pursuant to this notification, the IBBI had also issued Rules and Regulations governing insolvency resolution process for personal guarantors.  Interestingly, Part III of the IBC, which has been made applicable to personal guarantors deals with Insolvency and Bankruptcy of Individuals and Partnership Firms, and not personal guarantors per se. Consequently, the constitutional validity of the aforementioned Notification and the Rules and Regulations made pursuant thereto have been challenged before the Delhi High Court.[1] The crux of the argument of the Petitioner is that provisions governing Insolvency and Bankruptcy for individuals and partnership firms cannot be made selectively applicable to personal guarantors only. In this post, the author argues that the challenge based on the selective application of the provisions of IBC does not hold water.

In order to understand the contention of the Petitioner, one must take note of the proviso to Section 1(3) of the Insolvency and Bankruptcy Code, 2016 [“IBC/Code”]. This proviso, like comparable provisions from other statutes, provides that different dates may be appointed, for bringing into force, different provisions of the Code. Now, it is the contention of the Petitioner that Section 1(3) of the Code only permits implementation of its provisions at different points in time and does not allow limiting the application of a provision to certain category of persons. Meaning thereby, IBC allows the Central Government to fix a date for bringing Part III into force but it does not allow the Central Government to implement Part III only with respect to personal guarantors, especially when Part III deals with insolvency and bankruptcy of individuals and partnership firms.

The author submits that Section 1(3) is not a new provision. A similarly worded provision is contained in many statutes like the Competition Act, 2002; Central Goods and Services Act, 2017; Consumer Protection Act, 2019; Probation of Offenders Act, 1958; Street Vendors (Protection of Livelihood and Regulation of Street Vending) Act, 2014 to name a few. It is the Petitioner’s contention that it is not possible to carve out a limited application of Part III of the IBC only in relation to personal guarantors. Once the rationale for the insertion of such a provision is explained, it will become clear that accepting the Petitioner’s contention will amount to reading a non-existing limitation into Section 1(3) of the IBC. The idea of inserting provisions similar to Section 1(3) of the IBC is to allow the legislature to formulate an exhaustive and a comprehensive scheme of law in a particular subject matter and then leaving it to the relevant government to decide when, how and in what manner should the scheme be introduced. This view was supported by the decision of the Supreme Court in in Basant Kumar Sarkar v. Eagle Rolling Mills. In that case, a similar challenged had come up before the Supreme Court in context of the Employees’ State Insurance Act, 1948 [“ESI Act”], wherein the Petitioner had contended that Section 1(3) of the ESI Act[2] was violative of Article 14 of the Indian Constitution, insofar as it allowed different provisions of the ESI Act to be implemented at different points in time for different parts of the state of Bihar.

In that case, the Supreme Court after noting the beneficial nature of the ESI Act held that such legislations cannot be introduced in toto for the whole country at once. This was because “such beneficial measures which need careful experimentation have sometimes to be adopted by stages and in different phases, and so, inevitably, the question of extending the statutory benefits contemplated by the Act has to be left to the discretion of the appropriate Government.”

Similarly, in Anand Kumar Bindal v. Employees’ State Insurance Corporation, the Petitioner had challenged a notification which implemented the provisions of  Chapter VA of the ESI Act for the district of Saharanpur. It was the Petitioner’s contention that Section 1(3) of the ESI Act was arbitrary in nature as it gave the Government unfettered powers to apply different provisions of the ESI Act in a discriminative fashion. The main grievance of the Petitioner was that Chapter VA of the ESI Act was notified for the Saharanpur district whereas Chapters IV and V were notified for other districts but not for Saharanpur.

Rejecting the contention of the Petitioner, the Allahabad High Court had held that although wide discretion had been granted to the Central Government under the ESI Act, there was nothing to suggest that the Legislature will not implement the statute in whole for the entire territory of India (¶11). The relevant portion of the judgment is reproduced below:

“Although not expressed in so many words it is, in my opinion, sufficiently clear that the Legislature in enacting this statute intended that the benefits which it provided should, as circumstances rendered it practicable, become available to the employees in all factories throughout India…”

In order to bolster this reasoning, the Allahabad High Court had relied upon the decision of the Supreme Court in Biswambhar Singh v. State of Orissa, wherein a similar challenge was brought in context of Section 1(3) of Orissa Estates Abolition Act, 1892. Even in this case, the Supreme Court while rejecting a challenge based out of Article 14 of the Indian Constitution, had held such a provision cannot be considered discriminatory as long as the legislative discretion is exercised within the contours of the object of the statute.

As a side note to the foregoing discussion, it must be noted that Section 1(3) of the IBC vests discretion in the Central Government and not a minor government official. In this regard, it has been held that that a discretionary power is not necessarily discriminatory and that abuse of power cannot easily assumed.

Thus, Section 1(3) of the IBC represents legislature’s attempt to give certain latitude to the Central Government to implement the provisions of the IBC in the manner it deems fit and proper. The impugned notification is nothing but an exercise of that discretion. Accepting Petitioner’s contention that provisions of Part III of IBC have to be implemented for individuals and partnership firms as a whole implies that till the time favourable situation exists, the Central Government would not be able to enforce Part III of the IBC for a really long period of time. Adopting such an approach would go against the object and purpose of the IBC. Furthermore, the “implement-everything-or-nothing-at-all” approach supported by the Petitioner seriously limits the reading of Section 1(3) of the IBC as it prohibits the Central Government from implementing Part III of the IBC in a phased manner. The author submits that the reasoning of the courts in decisions cited above can be applied squarely in the present case to hold that Part III of IBC can be applied to personal guarantors till the time the Central Government is satisfied that satisfactory conditions exist for the extension of application of part III of the IBC to other class of individuals and partnership firms.

Reference

[1] On 27^th August 2020, in the matter of Anil Ambani v. Central Bureau of Investigation & Ors., the Delhi High Court has again issued a notice to the IBBI in the petition filed by Anil Ambani challenging the “vires of the provisions pertaining to personal insolvency against personal guarantors under Part III IBC”.

[2] §1(3) of the ESI Act, which is similar to §1(3) of the IBC, reads as: “The Act shall come into force on such date or dates as the Central Government may, by notification in the Official Gazette, appoint, and different dates may be appointed for different provisions of this Act and for different States or for different parts thereof” (emphasis supplied).