REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3595 OF 2018

STATE BANK OF INDIA … APPELLANT

VERSUS

V. RAMAKRISHNAN & ANR. … RESPONDENTS

WITH  

CIVIL APPEAL NO. 4553 OF 2018

J U D G M E N T

R.F. NARIMAN, J.

1.  The present appeals revolve around whether Section 14 of the

Insolvency and Bankruptcy Code, 2016, which provides for a moratorium

for  the  limited  period  mentioned  in  the  Code,  on  admission  of  an

insolvency petition, would apply to a personal guarantor of a corporate

debtor.

2. The  factual  backdrop  of  the  present  appeals  is  that  the

Respondent  No.1  is  the  Managing  Director  of  the  corporate  debtor,

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namely, the Respondent No.2 Company, and also the personal guarantor

in respect of credit facilities that had been availed from the Appellant.

The Guarantee Agreement entered into between the Appellant and the

Respondent No.1 is dated 22.02.2014.

3. As the Respondent No.2 Company did not pay its debts in time,

the  account  of  Respondent  No.2  was  classified  as  a  non-performing

asset on 26.07.2015. Consequent thereto, the Appellant issued a notice

dated 04.08.2015 under Section 13(2) of the SARFAESI Act demanding

an  outstanding  amount  of  Rs.61,13,28,785.48  from  the  Respondents

within the statutory period of 60 days. As no payment was forthcoming, a

possession notice under Section 13(4) of the SARFAESI Act was issued

on 18.11.2016.

4. As matters stood thus,  an application was filed by Respondent

No.2, the corporate debtor, under Section 10 of the Code on 20.05.2017

to initiate the corporate insolvency resolution process against itself. On

19.06.2017, this petition filed under Section 10 was admitted, followed by

the moratorium that is imposed statutorily by Section 14 of the Code.

While  the said  proceedings were pending,  an interim application was

filed by Respondent No.1 as personal guarantor to the corporate debtor,

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in which Respondent No.1 took up the plea that Section 14 of the Code

would  apply  to  the  personal  guarantor  as  well,  as  a  result  of  which

proceedings against the personal guarantor and his property would have

to be stayed. The National Company Law Tribunal, by its order dated

18.09.2017, held that since under Section 31 of the Code, a Resolution

Plan made thereunder would bind the personal guarantor as well, and

since, after the creditor is proceeded against, the guarantor stands in the

shoes of the creditor, Section 14 would apply in favour of the personal

guarantor as well. The interim application filed by Respondent No.1 was

thus  allowed,  and  the  Appellant  was  restrained  from moving  against

Respondent No.1.

5. An appeal filed to the National Company Law Appellate Tribunal

resulted in the appeal being dismissed. By the impugned judgment dated

28.02.2018, the Appellate Tribunal relied upon Section 60(2) and (3) of

the Code as well as Section 31 of the Code to find that the moratorium

imposed under Section 14 would apply also to the personal guarantor.

The  reasoning  was  that  since  the  personal  guarantor  can  also  be

proceeded against, and forms part of a Resolution Plan which is binding

on  him,  he  is  very  much  part  of  the  insolvency  process  against  the

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corporate  debtor,  and  that,  therefore,  the  moratorium  imposed  under

Section 14 should apply to the personal guarantor as well.

6. Shri  Sanjay Kapur,  learned counsel appearing on behalf  of  the

Appellant in C.A. No. 3595 of 2018, and Shri C.U. Singh, learned Senior

Advocate appearing on behalf  of Appellant in C.A. No. 4553 of 2018,

both  argued  that  the  corporate  debtor  and  personal  guarantor  are

separate  entities  and  that  a  corporate  debtor  undergoing  insolvency

proceedings under the Code would not mean that a personal guarantor

is  also  undergoing  the  same  process.  As  the  guarantor’s  liability  is

distinct and separate from that  of  the corporate debtor,  a suit  can be

maintained against the surety, though the principal debtor has not been

sued.  For  this  purpose,  they  relied  upon  Section  128  of  the  Indian

Contract  Act,  1872.  They  also  relied  heavily  upon  the  reasoning

contained in a judgment by a Single Judge of the Bombay High Court in

M/s. Sicom Investments and Finance Ltd. v.  Rajesh Kumar Drolia

and Anr.1 They then referred to Part III of the Code, and in particular, to

Sections 96 and 101. Although Part III of the Code has not been brought

into force,  it  is  clear  that  if  an insolvency resolution process is  to  be

carried out against a personal guarantor, it can be done only under Part

1 (2017) SCC Online Bom 9725 (decided on 28.11.2017). 4

III, which contains a separate moratorium provision, namely, Sections 96

and  101,  both  of  which  would  attach  only  if  a  separate  insolvency

process were carried out as against the personal guarantor. Shri Singh,

in  particular,  relied  heavily  upon  the  difference  in  language  between

Section 14 and Section 101. According to the learned senior counsel,

Section 14, in all its sub-sections, speaks only of the corporate debtor.

When contrasted  with  Section  101,  it  becomes clear  that  Section  14

cannot possibly attach to a personal guarantor as well, as Section 101

does not speak of a ‘debtor’ but speaks ‘in relation to the debt’ and is not

only wider than Section 14, but would attach only if Part III proceedings

were to be instituted against  the personal  guarantor.  They also relied

heavily  upon  the  Amendment  Ordinance  dated  06.06.2018,  by  which

Section  14(3)  of  the  Code  was  substituted,  including  a  surety  in  a

contract  of  guarantee  to  a  corporate  debtor.  They  relied  upon  the

Insolvency  Law  Committee  proceedings,  which  led  to  the  aforesaid

amendment, stating that it had been recommended to clarify, by way of

an explanation, that all assets of such guarantors to the corporate debtor

shall be outside the scope of the moratorium imposed under the Code.

The very impugned judgment in the present proceedings was referred to

by the Insolvency Law Committee stating that such a broad interpretation

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of Section 14 would curtail significant rights of the creditor. They relied

upon judgments which made it clear that clarificatory statutes, like this

amendment, would have retrospective operation and that, therefore, in

any case, the impugned judgment would have to be set aside.  

7. Learned counsel  appearing  on  behalf  of  the  Respondents  first

took shelter under Section 60(2) of the Code, as according to the learned

counsel, the said Section precludes the bank from proceeding against

the personal guarantor under SARFAESI or any other Act  outside the

Code.  He relied upon the reasoning  of  the  Tribunal  and  took shelter

under Section 31, as did the Tribunal. He also relied upon a judgment of

the Allahabad High Court in Sanjeev Shriya v. State Bank of India and

Ors.,2 which stated that as a proceeding relatable to the corporate debtor

is pending adjudication in two forums, it  is not permissible to proceed

against the personal guarantor. A financial creditor cannot operate in a

manner that imperils the value of the property of the personal debtor. He

also  relied  strongly  upon  the  Insolvency  and  Bankruptcy  Code

(Amendment) Act, 2018 which came into effect on 23.11.2017, by which,

clause (e) of Section 2 was substituted so as to include within the sweep

of the Code, personal guarantors to corporate debtors. He then relied

2 (2018) 2 All LJ 769 (decided on 06.09.2017). 6

upon the Statement of Objects of the Amendment Act, 2018, which was,

inter alia, to extend the provisions of the Code to personal guarantors of

corporate  debtors,  to  further  strengthen  the  corporate  insolvency

resolution process. He then relied upon certain statutory forms which are

contained in the Insolvency and Bankruptcy (Application to Adjudicating

Authority) Rules, 2016 and in particular, to Annexure VI(e) to Form 6.

Regulation  36(2)  of  the  Insolvency  and  Bankruptcy  Board  of  India

(Insolvency  Resolution  Process  for  Corporate  Persons)  Regulations,

2016  also  provides,  as  did  Annexure  VI(e),  that  information  as  to

personal  guarantees have to  be given in  relation to  the debts  of  the

corporate  debtor  when  an  insolvency  process  is  initiated  against  the

corporate debtor. All this would show that since the personal guarantor is

very  much  part  of  the  overall  process,  the  moratorium  contained  in

Section 14 of the Code should apply to the personal guarantor as well.

8. We appointed Shri K.V. Viswanathan, learned Senior Advocate, to

assist us as Amicus Curiae in this matter. We thank him for the valuable

assistance that he has rendered. He has pointed out that the whole idea

of the Insolvency Code was that the history of debt recovery had shown

that  the  earlier  statutes  were  loaded  heavily  in  favour  of  corporate

debtors  and  that,  as  a  result,  huge  outstanding  debts  to  banks  and

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financial institutions had not been repaid.  In particular,  he pointed out

Section 22 of  the  Sick  Industrial  Companies (Special  Provisions)  Act,

1985,  and  stated  that  as  a  result  of  the  said  Section  applying  to

guarantors as well,  creditors could not  proceed against  guarantors as

well  after  the  company  had  been  declared  sick  under  the  said  Act,

without  permission  from  the  Board  for  Industrial  and  Financial

Reconstruction. Now that the said Act has been repealed, and the fact

that several later enactments, including the Companies Act,  2013 had

omitted a provision akin to Section 22, would show that the enactment of

Section 14 of the Code was deliberate, and that the idea was that there

should  be  no  stay  of  proceedings  against  the  guarantor  while  the

corporate debtor is undergoing an insolvency proceeding. For this, he

cited various judgments. He also relied upon the Amendment Act, 2018

and stated that since the Act was to get over the appellate judgment in

particular, and since it was clarificatory, the position in law would be that

it would be retrospective, and would thus govern the case at hand.    

9. Before  dealing with  the  arguments  of  learned counsel  on both

sides, it is important at this stage to set out some of the provisions of the

Code.  One difficulty  that  we faced when hearing the matter  was that

different  provisions  of  the  Code  were  brought  into  force  on  different

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dates, as Section 1(3) indicates. Also, certain important provisions of the

Code have not yet been brought into force. This we will advert to a little

later in our judgment.

10. Section 2(e) of the Code, as originally enacted, reads as under:

“2. Application.— The provisions of this Code shall apply to—

xxx xxx xxx

(e) partnership firms and individuals;

xxx xxx xxx”

By the Amendment Act, 2018, this Section was substituted as follows:

“2. Application.— The provisions of this Code shall apply to—

xxx xxx xxx

(e) personal guarantors to corporate debtors;

xxx xxx xxx”

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. 23.11.2017.

  11. Section 3(7), (8) and (11) of the Code read as under:

“3. Definitions.— In this Code, unless the context otherwise requires,—

(7) “corporate person” means a company as defined in clause (20) of Section 2 of the Companies Act,

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2013 (18 of 2013), a limited liability partnership, as defined in clause (n) of sub-section (1) of Section 2 of  the Limited Liability Partnership Act,  2008 (6 of 2009), or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;

(8)  “corporate  debtor”  means  a  corporate  person who owes a debt to any person;”

xxx xxx xxx

“(11) “debt” means a liability or obligation in respect of  a  claim  which  is  due  from  any  person  and includes a financial debt and operational debt;”

12. Section 5(8)(i) of the Code reads as follows:

“5.  Definitions.— In  this  Part,  unless  the  context otherwise requires,— xxx xxx xxx

(8) “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes—

xxx xxx xxx

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred  to  in  sub-clauses  (a)  to  (h)  of  this clause;

xxx xxx xxx”

13. Section 5(22) of the Code read as follows:

“5.  Definitions.— In  this  Part,  unless  the  context otherwise requires,— xxx xxx xxx

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(22) “personal guarantor” means an individual who is  the  surety  in  a  contract  of  guarantee  to  a corporate debtor;”

14. Sections 14, 31, 60, 95, 101, 238, 243, and 249 of the Code read

as under:

“14. Moratorium.— (1) Subject to provisions of sub- sections  (2)  and  (3),  on  the  insolvency commencement  date,  the  Adjudicating  Authority shall by order declare moratorium for prohibiting all of the following, namely—

(a)  the  institution  of  suits  or  continuation  of pending  suits  or  proceedings  against  the corporate  debtor  including  execution  of  any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b)  transferring,  encumbering,  alienating  or disposing of by the corporate debtor any of its assets or  any legal  right  or  beneficial  interest therein;

(c) any action to foreclose, recover or enforce any security interest  created by the corporate debtor in respect of  its property including any action  under  the  Securitisation  and Reconstruction  of  Financial  Assets  and Enforcement of Security Interest Act, 2002 (54 of 2002);

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

(2) The supply of essential goods or services to the corporate debtor as may be specified shall  not be terminated  or  suspended  or  interrupted  during moratorium period.

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(3) The provisions of sub-section (1) shall not apply to  such  transactions  as  may  be  notified  by  the Central  Government  in  consultation  with  any financial sector regulator.

(4) The order of moratorium shall have effect from the  date  of  such  order  till  the  completion  of  the corporate insolvency resolution process:

Provided  that  where  at  any  time  during  the corporate  insolvency  resolution  process  period,  if the  Adjudicating  Authority  approves  the  resolution plan under sub-section (1) of Section 31 or passes an order  for  liquidation  of  corporate  debtor  under Section  33,  the  moratorium  shall  cease  to  have effect from the date of such approval or liquidation order, as the case may be.”

xxx xxx xxx

“31.  Approval  of  resolution  plan.—  (1)  If  the Adjudicating Authority is satisfied that the resolution plan  as  approved  by  the  committee  of  creditors under  sub-section  (4)  of  section  30  meets  the requirements  as  referred  to  in  sub-section  (2)  of Section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and  other  stakeholders  involved  in  the  resolution plan.

(2) Where the Adjudicating Authority is satisfied that the  resolution  plan  does  not  confirm  to  the requirements referred to in sub-section (1), it may, by an order, reject the resolution plan.

(3) After the order of approval under sub-section (1), —

(a)  the  moratorium  order  passed  by  the Adjudicating  Authority  under  Section  14  shall cease to have effect; and

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(b) the resolution professional shall forward all records relating to the conduct of the corporate insolvency  resolution  process  and  the resolution plan to the Board to be recorded on its database.”

xxx xxx xxx

“60.  Adjudicating  Authority  for  corporate persons.—  (1)  The  Adjudicating  Authority,  in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal  guarantors  thereof  shall  be  the  National Company Law Tribunal having territorial jurisdiction over  the  place  where  the  registered  office  of  the corporate person is located.

(2)  Without  prejudice  to  sub-section  (1)  and notwithstanding anything to the contrary contained in  this  Code,  where  a  corporate  insolvency resolution  process  or  liquidation  proceeding  of  a corporate  debtor  is  pending  before  a  National Company Law Tribunal, an application relating to the insolvency  resolution  or  bankruptcy  of  a  personal guarantor  of  such  corporate  debtor  shall  be  filed before such National Company Law Tribunal.

(3) An insolvency resolution process or bankruptcy proceeding of a personal guarantor of the corporate debtor pending in any court or tribunal shall  stand transferred to the Adjudicating Authority dealing with insolvency  resolution  process  or  liquidation proceeding of such corporate debtor.

(4)  The  National  Company  Law Tribunal  shall  be vested with all  the powers of  the Debts Recovery Tribunal as contemplated under Part III of this Code for the purpose of sub-section (2).

(5)  Notwithstanding  anything  to  the  contrary contained  in  any  other  law  for  the  time  being  in

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force,  the  National  Company  Law  Tribunal  shall have jurisdiction to entertain or dispose of—

(a) any application or proceeding by or against the corporate debtor or corporate person;

(b) any claim made by or against the corporate debtor or corporate person, including claims by or  against  any  of  its  subsidiaries  situated  in India; and

(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of  the  corporate  debtor  or  corporate  person under this Code.

(6)  Notwithstanding  anything  contained  in  the Limitation Act, 1963 (36 of 1963) or in any other law for the time being in force, in computing the period of limitation specified for any suit or application by or against  a  corporate  debtor  for  which  an  order  of moratorium  has  been  made  under  this  Part,  the period  during  which  such  moratorium  is  in  place shall be excluded.”

xxx xxx xxx

“96.  Interim-moratorium.— (1)  When  an application is filed under Section 94 or Section 95—

(a)  an interim-moratorium shall  commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and

(b) during the interim-moratorium period—

(i) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and

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(ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.

(2) Where the application has been made in relation to a firm, the interim-moratorium under sub-section (1) shall operate against all the partners of the firm as on the date of the application.

(3) The provisions of sub-section (1) shall not apply to  such  transactions  as  may  be  notified  by  the Central  Government  in  consultation  with  any financial sector regulator.”

xxx xxx xxx

“101.  Moratorium.—  (1)  When  the  application  is admitted  under  Section  100,  a  moratorium  shall commence  in  relation  to  all  the  debts  and  shall cease to have effect at the end of the period of one hundred and eighty days beginning with the date of admission  of  the  application  or  on  the  date  the Adjudicating  Authority  passes  an  order  on  the repayment  plan  under  Section  114,  whichever  is earlier. (2) During the moratorium period—

(a)  any pending legal  action or  proceeding in respect of any debt shall  be deemed to have been stayed;

(b)  the  creditors  shall  not  initiate  any  legal action  or  legal  proceedings  in  respect  of  any debt; and

(c)  the  debtor  shall  not  transfer,  alienate, encumber or dispose of any of his assets or his legal rights or beneficial interest therein;

(3) Where an order admitting the application under Section 96 has been made in relation to a firm, the

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moratorium  under  sub-section  (1)  shall  operate against all the partners of the firm.

(4) The provisions of this section shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.”

xxx xxx xxx

“238. Provisions of this Code to override other laws.—  The  provisions  of  this  Code  shall  have effect,  notwithstanding  anything  inconsistent therewith  contained  in  any  other  law for  the  time being  in  force  or  any  instrument  having  effect  by virtue of any such law.”

xxx xxx xxx

“243. Repeal of certain enactments and savings. — (1) The Presidency-Towns Insolvency Act, 1909 (3 of 1909) and the Provincial Insolvency Act, 1920 (5 of 1920) are hereby repealed. (2)  Notwithstanding  the  repeal  under  sub-sections (1),—

(i) all proceedings pending under and relating to the  Presidency-Towns  Insolvency  Act,  1909, and  the  Provincial  Insolvency  Act,  1920 immediately before the commencement of this Code shall continue to be governed under the aforementioned  Acts  and  be  heard  and disposed  of  by  the  concerned  courts  or tribunals,  as  if  the  aforementioned  Acts  have not been repealed;

(ii)  any  order,  rule,  notification,  regulation, appointment,  conveyance,  mortgage,  deed, document  or  agreement  made,  fee  directed, resolution passed,  direction given,  proceeding taken, instrument executed or issued, or thing done  under  or  in  pursuance  of  any  repealed

16

enactment  shall,  if  in  force  at  the commencement of this Code, continue to be in force,  and  shall  have  effect  as  if  the aforementioned Acts have not been repealed;

(iii)  anything  done  or  any  action  taken  or purported to have been done or taken, including any rule, notification, inspection, order or notice made  or  issued  or  any  appointment  or declaration made or any operation undertaken or any direction given or any proceeding taken or  any  penalty,  punishment,  forfeiture  or  fine imposed under the repealed enactments shall be deemed valid;

(iv) any principle or rule of law, or established jurisdiction, form or course of pleading, practice or  procedure  or  existing  usage,  custom, privilege, restriction or  exemption shall  not  be affected,  notwithstanding  that  the  same respectively  may  have  been  in  any  manner affirmed or recognised or derived by, in, or from, the repealed enactments;

(v)  any  prosecution  instituted  under  the repealed enactments and pending immediately before the commencement of this Code before any  court  or  tribunal  shall,  subject  to  the provisions of  this  Code,  continue to be heard and  disposed  of  by  the  concerned  court  or tribunal;

(vi) any person appointed to any office under or by  virtue  of  any  repealed  enactment  shall continue to hold such office until such time as may be prescribed; and

(vii) any jurisdiction, custom, liability, right, title, privilege,  restriction,  exemption,  usage, practice, procedure or other matter or thing not in existence or in force shall not be revised or restored.

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(3) The mention of particular matters in sub-section (2)  shall  not  be  held  to  prejudice  the  general application of Section 6 of the General Clauses Act, 1897 (10 of 1897) with regard to the effect of repeal of  the  repealed  enactments  or  provisions  of  the enactments mentioned in the Schedule.”

xxx xxx xxx

“249.  Amendments  of  Act,  51  of  1993.—  The Recovery  of  Debts  Due  to  Banks  and  Financial Institutions  Act,  1993  shall  be  amended  in  the manner specified in the Fifth Schedule.”

15. The first important thing that needs to be noticed is that, as has

been stated earlier in this judgment, Part III of the Code has not yet been

brought  into  force.  This  part  is  entitled  “Insolvency  Resolution  and

Bankruptcy  for  Individuals  and  Partnership  Firms”.  The  repealing

provision,  namely  Section  243,  which  repeals  the  Presidency  Towns

Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, has also

not been brought into force. Section 249, which amends the Recovery of

Debts Due to Banks and Financial Institutions Act, 1993, so that the Debt

Recovery Tribunals under that  Act  can exercise the jurisdiction of  the

Adjudicating Authority conferred by the Code, has also not been brought

into force.   

16. Under Part II of the Code, which deals with “Insolvency Resolution

and Liquidation for Corporate Persons”, a financial creditor or a corporate

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debtor may make an application to initiate this process. Once initiated,

the Adjudicating Authority, after admission of such an application, shall by

order, declare a moratorium for the purposes referred to in Section 14

(See Section 13 of the Code).   

17. Section 14 refers to four matters that may be prohibited once the

moratorium comes into effect. In each of the matters referred to, be it

institution or continuation of proceedings, the transferring, encumbering

or alienating of assets, action to recover security interest, or recovery of

property by an owner which is in possession of  the corporate debtor,

what  is  conspicuous  by  its  absence  is  any  mention  of  the  personal

guarantor. Indeed, the corporate debtor and the corporate debtor alone is

referred  to  in  the  said  Section.  A plain  reading  of  the  said  Section,

therefore,  leads  to  the  conclusion  that  the  moratorium  referred  to  in

Section 14 can have no manner of application to personal guarantors of

a corporate debtor.

18. However, Sections 2(e) and Section 60 are strongly relied upon by

learned counsel for the Respondents as, according to them, the Code

will  apply to personal guarantors of corporate debtors, and by Section

19

60, proceedings against such personal guarantors will  show that such

moratorium extends to the guarantor as well.

19. We are afraid that such arguments have to be turned down on a

careful reading of the Sections relied upon. Section 60 of the Code, in

sub-section (1) thereof, refers to insolvency resolution and liquidation for

both  corporate  debtors  and  personal  guarantors,  the  Adjudicating

Authority for which shall be the National Company Law Tribunal, having

territorial  jurisdiction over the place where the registered office of  the

corporate person is located. This sub-section is only important in that it

locates  the  Tribunal  which  has  territorial  jurisdiction  in  insolvency

resolution  processes  against  corporate  debtors.  So  far  as  personal

guarantors  are  concerned,  we  have  seen  that  Part  III  has  not  been

brought  into  force,  and  neither  has  Section  243,  which  repeals  the

Presidency-Towns Insolvency Act,  1909 and the Provincial  Insolvency

Act,  1920.  The net  result  of  this  is  that  so far  as individual  personal

guarantors are concerned, they will  continue to be proceeded against

under the aforesaid two Insolvency Acts and not under the Code. Indeed,

by a Press Release dated 28.08.2017, the Government of India, through

the Ministry of Finance, cautioned that Section 243 of the Code, which

provides for the repeal of said enactments, has not been notified till date, 20

and  further,  that  the  provisions  relating  to  insolvency  resolution  and

bankruptcy for individuals and partnerships as contained in Part III of the

Code are yet to be notified. Hence, it was advised that stakeholders who

intend to pursue their insolvency cases may approach the appropriate

authority/court under the existing enactments, instead of approaching the

Debt Recovery Tribunals.

20. It is for this reason that sub-section (2) of Section 60 speaks of an

application  relating  to  the  “bankruptcy”  of  a  personal  guarantor  of  a

corporate debtor and states that any such bankruptcy proceedings shall

be filed only before the National Company Law Tribunal. The argument

of the learned counsel on behalf of the Respondents that “bankruptcy”

would  include  SARFAESI  proceedings  must  be  turned  down  as

“bankruptcy” has reference only to the two Insolvency Acts referred to

above. Thus, SARFAESI proceedings against the guarantor can continue

under  the  SARFAESI  Act.  Similarly,  sub-section  (3)  speaks  of  a

bankruptcy proceeding of a personal guarantor of the corporate debtor

pending in any Court or Tribunal,  which shall  stand transferred to the

Adjudicating Authority dealing with the insolvency resolution process or

liquidation  proceedings  of  such  corporate  debtor.  An  “Adjudicating

21

Authority”, defined under Section 5(1) of the Code, means the National

Company Law Tribunal constituted under the Companies Act, 2013.

21. The scheme of Section 60(2) and (3) is thus clear – the moment

there is a proceeding against the corporate debtor pending under the

2016 Code, any bankruptcy proceeding against the individual personal

guarantor  will,  if  already  initiated  before  the  proceeding  against  the

corporate debtor, be transferred to the National Company Law Tribunal

or, if initiated after such proceedings had been commenced against the

corporate debtor, be filed only in the National Company Law Tribunal.

However, the Tribunal is to decide such proceedings only in accordance

with  the  Presidency-Towns  Insolvency  Act,  1909  or  the  Provincial

Insolvency Act, 1920, as the case may be. It is clear that sub-section (4),

which states that the Tribunal shall be vested with all the powers of the

Debt Recovery Tribunal, as contemplated under Part III of this Code, for

the  purposes  of  sub-section  (2),  would  not  take  effect,  as  the  Debt

Recovery  Tribunal  has  not  yet  been  empowered  to  hear  bankruptcy

proceedings against individuals under Section 179 of the Code, as the

said Section has not yet been brought into force. Also, we have seen that

Section 249, dealing with the consequential amendment of the Recovery

of  Debts  Act  to  empower  Debt  Recovery  Tribunals  to  try  such 22

proceedings, has also not been brought into force. It is thus clear that

Section 2(e), which was brought into force on 23.11.2017 would, when it

refers  to  the  application  of  the  Code  to  a  personal  guarantor  of  a

corporate debtor, apply only for the limited purpose contained in Section

60(2)  and  (3),  as  stated  hereinabove.  This  is  what  is  meant  by

strengthening  the  Corporate  Insolvency  Resolution  Process  in  the

Statement of Objects of the Amendment Act, 2018.

22. Section  31  of  the  Act  was  also  strongly  relied  upon  by  the

Respondents. This Section only states that once a Resolution Plan, as

approved by the Committee of Creditors, takes effect, it shall be binding

on the corporate debtor as well as the guarantor. This is for the reason

that otherwise, under Section 133 of the Indian Contract Act, 1872, any

change made to  the  debt  owed by  the  corporate  debtor,  without  the

surety’s  consent,  would  relieve  the  guarantor  from  payment.  Section

31(1), in fact, makes it clear that the guarantor cannot escape payment

as  the  Resolution  Plan,  which  has  been  approved,  may  well  include

provisions as to payments to be made by such guarantor. This is perhaps

the reason that Annexure VI(e) to Form 6 contained in the Rules and

Regulation 36(2) referred to above, require information as to personal

guarantees that have been given in relation to the debts of the corporate 23

debtor. Far from supporting the stand of the Respondents, it is clear that

in point of fact, Section 31 is one more factor in favour of a personal

guarantor having to pay for debts due without any moratorium applying

to save him.  

23. We  are  also  of  the  opinion  that  Sections  96  and  101,  when

contrasted with Section 14, would show that Section 14 cannot possibly

apply to a personal guarantor. When an application is filed under Part III,

an interim-moratorium or a moratorium is applicable in respect of any

debt due. First and foremost, this is a separate moratorium, applicable

separately in the case of personal guarantors against whom insolvency

resolution  processes  may  be  initiated  under  Part  III.  Secondly,  the

protection of the moratorium under these Sections is far greater than that

of Section 14 in that pending legal proceedings in respect of the debt and

not the debtor are stayed. The difference in language between Sections

14 and 101 is  for  a  reason.  Section  14  refers  only  to  debts  due  by

corporate debtors, who are limited liability companies, and it is clear that

in the vast majority of cases, personal guarantees are given by Directors

who are in management of the companies. The object of the Code is not

to  allow  such  guarantors  to  escape  from  an  independent  and  co-

extensive liability  to pay off  the entire outstanding debt,  which is why 24

Section  14  is  not  applied  to  them.  However,  insofar  as  firms  and

individuals are concerned, guarantees are given in respect of individual

debts by persons who have unlimited liability  to  pay them.  And such

guarantors may be complete strangers to the debtor – often it could be a

personal friend. It  is for this reason that the moratorium mentioned in

Section 101 would cover such persons, as such moratorium is in relation

to the debt and not the debtor. We may hasten to add that it is open to us

to mark the difference in language between Sections 14 and 96 and 101,

even though Sections 96 and 101 have not yet been brought into force.

This is for the reason, as has been held in State of Kerala and Ors. v.

Mar Appraem Kuri Co. Ltd. and Anr., (2012) 7 SCC 106, that a law

‘made’ by the Legislature is a law on the statute book even though it may

not have been brought into force. The said judgment states:

“79. The  proviso  to  Article  254(2)  provides  that  a law made by the State Legislature with the President's assent  shall  not  prevent  Parliament  from  making  at any  time  any  law  with  respect  to  the  same  matter including  a  law  adding  to,  amending,  varying  or repealing  the  law  so  made  by  a  State  Legislature. Thus, Parliament need not wait for the law made by the State Legislature with the President's assent to be brought into force as it can repeal, amend, vary or add to  the  assented  State  law no  sooner  it  is  made  or enacted.  We  see  no  justification  for  inhibiting Parliament  from repealing,  amending or  varying any State legislation,  which has received the President's

25

assent, overriding within the State's territory, an earlier parliamentary  enactment  in  the  concurrent  sphere, before it is brought into force. Parliament can repeal, amend, or vary such State law no sooner it is assented to by the President and that it need not wait till such assented-to State law is brought into force. This view finds support in the judgment of this Court in  Tulloch [AIR 1964 SC 1284 : (1964) 4 SCR 461] .

80. Lastly,  the definitions of the expressions “laws in force” in Article 13(3)(b) and Article 372(3) Explanation I  and “existing law” in  Article  366(10)  show that  the laws  in  force  include  laws  passed  or made by  a legislature  before  the  commencement  of  the Constitution  and  not  repealed,  notwithstanding  that any such law may not be in operation at all. Thus, the definition  of  the expression “laws in  force”  in  Article 13(3)(b)  and  Article  372(3)  Explanation  I  and  the definition  of  the  expression  “existing  law”  in  Article 366(10) demolish the argument of the State of Kerala that  a  law  has  not  been made for  the  purposes  of Article  254,  unless  it  is  enforced.  The  expression “existing  law”  finds  place  in  Article  254.  In  Edward Mills Co. Ltd. v. State of Ajmer [AIR 1955 SC 25], this Court has held that there is no difference between an “existing law” and a “law in force”.

81. Applying  the  tests  enumerated  hereinabove,  we hold that the Kerala Chitties Act, 1975 became void on the making of the Chit Funds Act, 1982 on 19-8-1982, [when it received the assent of the President and got published in the Official Gazette] as the Central 1982 Act intended to cover the entire field with regard to the conduct of the chits and further that the State Finance Act  7  of  2002,  introducing  Section  4(1)(a)  into  the State 1975 Act, was void as the State Legislature was denuded of its authority to enact the said Finance Act 7  of  2002,  except  under  Article  254(2),  after  the

26

(Central) Chit Funds Act, 1982 occupied the entire field as envisaged in Article 254(1) of the Constitution.”

24. Thus, for the purpose of interpretation, it is certainly open for us to

contrast Section 14 with Sections 96 and 101, as Sections 96 and 101

are laws made by the Legislature, even though they have not yet been

brought into force.

25. As argued by Shri Viswanathan, the historical background of the

Code  now  needs  to  be  looked  at.  Section  22  of  the Sick  Industrial

Companies (Special Provisions) Act, 1985  reads as follows:

“22. Suspension of legal proceedings, contracts, etc.—(1) Where in respect of an industrial company, an  inquiry  under  Section  16  is  pending  or  any scheme  referred  to  under  Section  17  is  under preparation  or  consideration  or  a  sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is

pending,  then,  notwithstanding  anything  contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of  the industrial  company or  any other  instrument having  effect  under  the  said  Act  or  other  law,  no proceedings  for  the  winding  up  of  the  industrial company  or  for  execution,  distress  or  the  like against  any  of  the  properties  of  the  industrial company  or  for  the  appointment  of  a  receiver  in respect  thereof  [and  no  suit  for  the  recovery  of money  or  for  the  enforcement  of  any  security against the industrial company or of any guarantee in respect of any loans or advance granted to the

27

industrial  company]  shall  lie or  be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.

(2)  Where  the  management  of  the  sick  industrial company is taken over or changed [in pursuance of any  scheme  sanctioned  under  Section  18] notwithstanding  anything  contained  in  the Companies Act, 1956 (1 of 1956), or any other law or in the memorandum and articles of association of such company or any instrument having effect under the said Act or other law—

(a) it shall not be lawful for the shareholders of such company or any other person to nominate or  appoint  any person to be a director  of  the company;

(b) no resolution passed at any meeting of the shareholders of  such company shall  be given effect to unless approved by the Board.

(3) [Where an inquiry under Section 16 is pending or any  scheme  referred  to  in  Section  17  is  under preparation or during the period] of consideration of any scheme under Section 18 or where any such scheme  is  sanctioned  thereunder,  for  due implementation of  the scheme,  the Board may by order  declare  with  respect  to  the  sick  industrial company concerned that the operation of all or any of  the  contracts,  assurances  of  property, agreements,  settlements,  awards,  standing  orders or  other  instruments  in  force,  to  which  such  sick industrial  company  is  a  party  or  which  may  be applicable  to  such  sick  industrial  company immediately  before  the  date  of  such  order,  shall remain suspended or that  all  or  any of  the rights, privileges,  obligations  and  liabilities  accruing  or arising thereunder before the said date, shall remain suspended  or  shall  be  enforceable  with  such adaptations  and  in  such  manner  as  may  be specified by the Board:

28

Provided that such declaration shall not be made for a  period  exceeding  two  years  which  may  be extended by one year at a time so, however, that the total  period  shall  not  exceed  seven  years  in  the aggregate.

(4) Any declaration made under sub-section (3) with respect  to  a  sick  industrial  company  shall  have effect  notwithstanding  anything  contained  in  the Companies Act, 1956 (1 of 1956), or any other law, the memorandum and articles of association of the company or any instrument having effect under the said  Act  or  other  law  or  any  agreement  or  any decree or order of a court, tribunal, officer or other authority  or  of  any  submission,  settlement  or standing order and accordingly,—

(a) any remedy for the enforcement of any right, privilege,  obligation and liability  suspended or modified  by  such  declaration,  and  all proceedings relating thereto pending before any court,  tribunal,  officer  or  other  authority  shall remain stayed or be continued subject to such declaration; and

(b) on the declaration ceasing to have effect—

(i) any right, privilege, obligation or liability so remaining  suspended  or  modified,  shall become  revived  and  enforceable  as  if  the declaration had never been made; and

(ii) any proceeding so remaining stayed shall be proceeded with subject to the provisions of any law which may then be in force, from the stage which had been reached when the proceedings became stayed.

(5)  In  computing  the  period  of  limitation  for  the enforcement  of  any  right,  privilege,  obligation  or liability, the period during which it or the remedy for the enforcement thereof remains suspended under this section shall be excluded.

29

It will be clear from a reading of sub-section (1) thereof that suits for the

enforcement of any guarantee in respect of loans or advances granted to

the industrial company, shall not lie or be proceeded with further, except

with the consent of the Board or Appellate Authority. It may be noted that

the  Sick  Industrial  Companies  (Special  Provisions)  Act,  1985  was

repealed on 01.12.2016. By a notification dated 30.11.2016, Section 14

of  the  Code  was  brought  into  force  w.e.f.  01.12.2016.  In  Madras

Petrochem  Ltd.  and  Anr.  v.  Board  for  Industrial  and  Financial

Reconstruction and Ors., (2016) 4 SCC 1, this Court found:

“40. An interesting pointer to the direction Parliament has taken after enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of  Security  Interest  Act,  2002  is  also  of  some relevance  in  this  context.  The  Eradi  Committee Report  relating  to  insolvency  and  winding  up  of companies  dated 31-7-2000,  observed  that  out  of 3068 cases referred to BIFR from 1987 to 2000 all but 1062 cases have been disposed of. Out of the cases  disposed  of,  264  cases  were  revived,  375 cases  were  under  negotiation  for  revival  process, 741 cases were recommended for winding up, and 626  cases  were  dismissed  as  not  maintainable. These facts and figures speak for themselves and place a big question mark on the utility of the Sick Industrial Companies (Special Provisions) Act, 1985. The Committee further pointed out that effectiveness of  the  Sick  Industrial  Companies  (Special Provisions)  Act,  1985  as  has  been  pointed  out earlier, has been severely undermined by reason of the  enormous  delays  involved  in  the  disposal  of

30

cases by BIFR. (See Paras 5.8, 5.9 and 5.15 of the Report.)  Consequently,  the  Committee recommended  that  the  Sick  Industrial  Companies (Special Provisions) Act, 1985 be repealed and the provisions thereunder  for  revival  and rehabilitation should  be  telescoped  into  the  structure  of  the Companies Act, 1956 itself.

41. Pursuant  to  the  Eradi  Committee  Report,  the Companies Act was amended in 2002 by providing for  the  constitution  of  a  National  Company  Law Tribunal  as  a  substitute  for  the  Company  Law Board, the High Court, BIFR and AAIFR. The Eradi Committee  Report  was  further  given  effect  to  by inserting  Sections  424-A  to  424-H  into  the Companies Act,  1956 which,  with  a  few changes, mirrored the provisions of Sections 15 to 21 of the Sick Industrial Companies (Special Provisions) Act, 1985. Interestingly, the Companies Amendment Act, 2002 omitted a provision similar to Section 22(1) of the Sick Industrial  Companies (Special  Provisions) Act, 1985. Consequently, creditors were given liberty to file suits or initiate other proceedings for recovery of  dues  despite  pendency  of  proceedings  for  the revival or rehabilitation of sick companies before the National Company Law Tribunal.

xxx xxx xxx  

43. Close on the heels of the amendment made to the  Companies  Act  came  the  Sick  Industrial Companies (Special Provisions) Repeal Act,  2003. This  particular  Act  was  meant  to  repeal  the  Sick Industrial Companies (Special Provisions) Act, 1985 consequent  to  some  of  its  provisions  being telescoped  into  the  Companies  Act.  Thus,  the Companies  Amendment  Act,  2002  and  the  SICA Repeal Act formed part of one legislative scheme, and neither has yet been brought into force. In fact, even the Companies Act,  2013, which repeals the

31

Companies  Act,  1956,  contains  Chapter  19 consisting  of  Sections  253  to  269  dealing  with revival  and  rehabilitation  of  sick  companies  along the lines of Sections 424-A to 424-H of the amended Companies Act, 1956.  Conspicuous by its absence is  a  provision  akin  to  Section  22(1)  of  the  Sick Industrial Companies (Special Provisions) Act, 1985 in the 2013 Act. However, this Chapter is also yet to be  brought  into  force.  These  statutory  provisions, though  not  yet  brought  into  force,  are  also  an important pointer to the fact that Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 has  been  statutorily  sought  to  be  excluded, Parliament veering around from wanting to protect sick  industrial  companies  and  rehabilitate  them to giving credence to the public interest contained in the recovery of public monies owing to banks and financial  institutions.  These  provisions  also  show that the aforesaid construction of the provisions of the  Securitisation  and  Reconstruction  of  Financial Assets  and  Enforcement  of  Security  Interest  Act, 2002  vis-à-vis  the  Sick  Industrial  Companies (Special  Provisions)  Act,  1985,  leans  in  favour  of creditors being able to realise their debts outside the court process over sick industrial companies being revived or rehabilitated. In fact, another interesting document is the Report on Trend and Progress of Banking in India 2011-2012 for the year ended 30-6- 2012  submitted  by  Reserve  Bank  of  India  to  the Central Government in terms of Section 36(2) of the Banking  Regulation  Act,  1949.  In  Table  IV.14  the Report  provides statistics regarding trends in non- performing assets bank-wise, group-wise. As per the said Table, the opening balance of non-performing assets in public sector banks for the year 2011-2012 was Rs 746 billion but the closing balance for 2011- 2012  was  Rs  1172  billion  only.  The  total  amount recovered  through  the  Securitisation  and Reconstruction of Financial Assets and Enforcement of  Security  Interest  Act,  2002  during  2011-2012

32

registered a decline compared to the previous year, but,  even  then,  the amounts  recovered under  the said  Act  constituted  70%  of  the  total  amount recovered.  The  amounts  recovered  under  the Recovery  of  Debts  Due  to  Banks  and  Financial Institutions Act, 1993 constituted only 28%. All this would  go  to  show  that  the  amounts  that  public sector  banks  and  financial  institutions  have  to recover are in staggering figures and at long last at least  one  statutory  measure  has  proved  to  be  of some efficacy.  This Court  would be loathe to give such an interpretation as would thwart the recovery process under the Securitisation and Reconstruction of  Financial  Assets  and  Enforcement  of  Security Interest Act,  2002 which Act alone seems to have worked to some extent at least.

44. It will, thus, be seen that notwithstanding the non obstante  clauses  in  Sections  22(1)  and  (4),  read with  Section  32,  Section  22  of  the  Sick  Industrial Companies (Special Provisions) Act, 1985 will have to  give  way  to  the  measures  taken  under  the Securitisation  and  Reconstruction  of  Financial Assets  and  Enforcement  of  Security  Interest  Act, 2002, more particularly referred to in Section 13 of the said Act, and that this being the case, the sale notices  issued  both  in  2003  and  2013  could continue without in any manner being thwarted by Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985.”

(emphasis supplied)

It  is thus clear that for this reason also, it  is obvious that Parliament,

when it enacted Section 14, had this history in mind and specifically did

not provide for any moratorium along the lines of Section 22 of the Sick

33

Industrial Companies (Special Provisions) Act, 1985 in Section 14 of the

Code.

26.  The reasoning of the Bombay High Court in the judgment of M/s.

Sicom Investments and Finance Ltd. (supra) commends itself to us.

The reasoning of the Allahabad High Court, on the other hand, does not.

27. We  now come to  the  argument  that  the  amendment  of  2018,

which makes it clear that Section 14(3), is now substituted to read that

the provisions of sub-section (1) of Section 14 shall not apply to a surety

in a contract of guarantee for corporate debtor. The amended Section

reads as follows:

“14. Moratorium.—  xxx xxx xxx

(3) The provisions of sub-section (1) shall not apply to—  

(a) such transactions as may be notified by the Central  Government  in  consultation  with  any financial sector regulator;

(b)  a  surety  in  a  contract  of  guarantee  to  a corporate debtor.”

28. The  Insolvency  Law  Committee,  appointed  by  the  Ministry  of

Corporate  Affairs,  by  its  Report  dated  26.03.2018,  made  certain  key

recommendations, one of which was:

34

“(iv)  to  clear  the  confusion regarding treatment  of assets of guarantors of the corporate debtor vis-à- vis the moratorium on the assets of the corporate debtor,  it has been recommended to clarify by way of an explanation that all assets of such guarantors to  the corporate  debtor  shall  be outside  scope of moratorium imposed under the Code;”

The  Committee  insofar  as  the  moratorium  under  Section  14  is

concerned, went on to find:

“5.5 Section 14 provides for a moratorium or a stay on  institution  or  continuation  of  proceeding,  suits, etc.  against  the  corporate  debtor  and  its  assets. There have been contradicting views on the scope of  moratorium  regarding  its  application  to  third parties affected by the debt of the corporate debtor, like guarantors or sureties. While some courts have taken the view that Section 14 may be interpreted literally to mean that it only restricts actions against the  assets  of  the  corporate  debtor,  a  few  others have taken an interpretation that the stay applies on enforcement of guarantee as well, if a CIRP is going on against the corporate debtor.”

xxx xxx xxx

“5.7 The Allahabad High Court subsequently took a differing  view in  Sanjeev  Shriya  v.  State  Bank  of India, 2017 (9) ADJ 723, by applying moratorium to enforcement  of  guarantee  against  personal guarantor to the debt. The rationale being that if a CRIP is going on against the corporate debtor, then the debt owed by the corporate debtor is not final till the resolution plan is approved, and thus the liability of the surety would also be unclear. The Court took the view that  until  debt  of  the corporate debtor  is crystallised,  the  guarantor’s  liability  may  not  be

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triggered. The Committee deliberated and noted that this would meant that surety’s liabilities are put on hold  if  a  CIRP is  going  on  against  the  corporate debtor, and such an interpretation may lead to the contracts  of  guarantee  being  infructuous,  and  not serving  the  purpose  for  which  they  have  been entered into.  

5.8 In  State Bank of India  v. V. Ramakrishnan and Veeson  Energy  Systems,  NCLAT,  New  Delhi, Company  Appeal  (AT)  (Insolvency)  No.  213/2017 [Date of decision – 28 February, 2018], the NCLAT took a broad interpretation of Section 14 and held that  it  would  bar  proceedings  or  actions  against sureties. While doing so, it did not refer to any of the above judgments but instead held that proceedings against guarantors would affect the CIRP and may thus be barred by moratorium. The Committee felt that such a broad interpretation of the moratorium may curtail significant rights of the creditor which are intrinsic to a contract of guarantee.”

5.9 A contract of guarantee is between the creditor, the principal debtor and the surety, where under the creditor has a remedy in relation to his debt against both  the principal  debtor  and the surety  [National Project Construction Corporation Limited v. Sandhu and Co., AIR 1990 P&H 300]. The surety here may be a corporate or a natural person and the liability of such person goes as far the liability of the principal debtor.  As  per  section  128 of  the  Indian  Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor and the creditor may go against either the principal debtor, or the surety, or  both,  in  no  particular  sequence  [Chokalinga Chettiar  v.  Dandayunthapani  Chattiar,  AIR  1928 Mad 1262]. Though this may be limited by the terms of the contract of guarantee, the general principle of such  contracts  is  that  the  liability  of  the  principal debtor  and the  surety  is  co-extensive and  is  joint

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and several [Bank of Bihar v. Damodar Prasad, AIR 1969  SC  297].  The  Committee  noted  that  this characteristic of such contracts i.e. of having remedy against  both  the  surety  and  the  corporate  debtor, without the obligation to exhaust the remedy against one  of  the  parties  before  proceeding  against  the other, is of utmost important for the creditor and is the  hallmark  of  a  guarantee  contract,  and  the availability  of  such  remedy  is  in  most  cases  the basis on which the loan may have been extended.

5.10 The  Committee  further  noted  that  a  literal interpretation  of  Section  14  is  prudent,  and  a broader interpretation may not be necessary in the above  context.  The  assets  of  the  surety  are separate  from those  of  the  corporate  debtor,  and proceedings against  the corporate debtor may not be seriously impacted by the actions against assets of  third  parties  like  sureties.  Additionally, enforcement  of  guarantee  may  not  have  a significant  impact  on  the  debt  of  the  corporate debtor  as  the  right  of  the  creditor  against  the principal debtor is merely shifted to the surety, to the extent of payment by the surety. Thus, contractual principles  of  guarantee  require  being  respected even  during  a  moratorium  and  an  alternate interpretation may not have been the intention of the Code, as is clear from a plain reading of Section 14.  

5.11 Further,  since  many  guarantees  for  loans  of corporates are given by its promoters in the form of personal  guarantees,  if  there  is  a stay on actions against their assets during a CIRP, such promoters (who  are  also  corporate  applicants)  may  file frivolous applications to  merely  take advantage of the stay and guard their  assets.  In  the judgments analysed in this relation, many have been filed by the  corporate  applicant  under  Section  10  of  the Code  and  this  may  corroborate  the  above apprehension of abuse of the moratorium provision.

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The Committee concluded that Section 14 does not intend to bar actions against assets of guarantors to the debts of the corporate debtor and recommended that an explanation to clarify this may be inserted in Section  14  of  the  Code.  The  scope  of  the moratorium may be restricted to the assets of the corporate debtor only.”

29. The Report of the said Committee makes it clear that the object of

the  amendment  was  to  clarify  and  set  at  rest  what  the  Committee

thought  was  an  overbroad  interpretation  of  Section  14.  That  such

clarificatory amendment is retrospective in nature, would be clear from

the following judgments:

(i) CIT v. Shelly Products, (2003) 5 SCC 461:

“38. It was submitted that after 1-4-1989, in case the assessment is annulled the assessee is entitled to refund only of the amount, if any, of the tax paid in excess of  the tax  chargeable  on the total  income returned  by  the  assessee.  But  before  the amendment came into effect the position in law was quite different and that is why the legislature thought it  proper  to  amend  the  section  and  insert  the proviso. On the other hand learned counsel for the Revenue  submitted  that  the  proviso  is  merely declaratory and does not change the legal position as  it  existed  before  the  amendment.  It  was submitted that  this Court  in  CIT v.  Chittor  Electric Supply Corpn [(1995) 2 SCC 430 : (1995) 212 ITR 404]  has  held  that  proviso  (a)  to  Section  240  is declaratory and, therefore,  proviso (b)  should also be held to be declaratory. In our view that is not the correct position in law. Where the proviso consists of

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two parts, one part may be declaratory but the other part may not be so. Therefore, merely because one part of the proviso has been held to be declaratory it does not follow that the second part of the proviso is also  declaratory.  However,  the  view that  we have taken  supports  the  stand  of  the  Revenue  that proviso (b) to Section 240 is also declaratory.  We have held that even under the unamended Section 240 of the Act, the assessee was only entitled to the refund of tax paid in excess of the tax chargeable on the total income returned by the assessee. We have held  so  without  taking  the  aid  of  the  amended provision.  It,  therefore,  follows  that  proviso  (b)  to Section 240 is also declaratory. It seeks to clarify the law so as to remove doubts leading to the courts giving  conflicting  decisions,  and  in  several  cases directing the Revenue to refund the entire amount of income  tax  paid  by  the  assessee  where  the Revenue  was  not  in  a  position  to  frame  a  fresh assessment. Being clarificatory in nature it must be held  to  be  retrospective,  in  the  facts  and circumstances of the case. It is well settled that the legislature may pass a declaratory Act to set aside what the legislature deems to have been a judicial error in the interpretation of statute. It only seeks to clear the meaning of a provision of the principal Act and make explicit that which was already implicit.”

(ii) CIT v. Vatika Township, (2015) 1 SCC 1:

“32. Let us sharpen the discussion a little more. We may  note  that  under  certain  circumstances,  a particular amendment can be treated as clarificatory or declaratory in nature.  Such statutory provisions are  labelled  as  “declaratory  statutes”.  The circumstances  under  which  provisions  can  be termed  as  “declaratory  statutes”  are  explained  by Justice  G.P.  Singh  [Principles  of  Statutory

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Interpretation,  (13th Edn.,  Lexis Nexis Butterworths Wadhwa, Nagpur, 2012)] in the following manner:

“Declaratory statutes

The  presumption  against  retrospective operation  is  not  applicable  to  declaratory statutes.  As  stated  in  CRAIES [W.F.  Craies, Craies  on  Statute  Law  (7th  Edn.,  Sweet  and Maxwell  Ltd.,  1971)]  and  approved  by  the Supreme  Court  [in Central  Bank  of  India v. Workmen,  AIR  1960  SC  12,  para  29]:  ‘For modern  purposes  a  declaratory  Act  may  be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute.  Such Acts are usually held to be retrospective.  The usual reason for  passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the  statement  of  the  common  law  or  in  the interpretation  of  statutes.  Usually,  if  not invariably,  such  an  Act  contains  a  Preamble, and  also  the  word  “declared”  as  well  as  the word “enacted”.’ But the use of the words ‘it is declared’  is  not  conclusive  that  the  Act  is declaratory for these words may, at times, be used to introduced new rules of law and the Act in the latter case will only be amending the law and  will  not  necessarily  be  retrospective.  In determining,  therefore,  the  nature  of  the  Act, regard  must  be  had  to  the  substance  rather than to the form. If a new Act is ‘to explain’ an earlier  Act,  it  would  be  without  object  unless construed retrospective.  An explanatory Act  is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or  merely declaratory of  the previous law  retrospective  operation  is  generally

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intended.  The  language  ‘shall  be  deemed always to have meant’ is declaratory, and is in plain  terms  retrospective.  In  the  absence  of clear words indicating that the amending Act is declaratory, it would not be so construed when the  pre-amended  provision  was  clear  and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit.  A clarificatory amendment of this nature will have retrospective  effect  and,  therefore,  if  the principal  Act  was  existing  law  which  the Constitution came into force, the amending Act also will be part of the existing law.”

The above summing up is  factually  based on the judgments  of  this  Court  as  well  as  English decisions.”

30. For  all  these  reasons,  we  are  of  the  view  that  the  impugned

judgment  of  the  Tribunal  has  to  be  set  aside.  The  appeals  are

accordingly allowed.  

……………………………..J. (R.F. Nariman)

……………………………..J. (Indu Malhotra)

New Delhi; August 14, 2018.

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