Guest Post: Conditional Legislation and Executive Power – The constitutional challenge to the IBC personal guarantor notification

[This is a guest post by Aakanksha Saxena, Pooja Vasandani and Pranav Narsaria. The authors assisted Senior Counsel appearing for some of the Petitioners.]


The Insolvency and Bankruptcy Code, 2016 (“IBC/the Code”) was enacted with a view to inter alia provide for the timely resolution of insolvency of corporate persons, partnership firms, and individuals, with a  focus on the maximization of value of assets of such persons. Section 1(3) of the Code provided for the coming into force of the Code and/or its various provisions, on such date as the Central Government would by notification appoint. Several provisions were thus brought into force by the Central Government from time to time.

Vide its  (“Notification”), purportedly issued in the exercise of the power conferred on the executive under section 1(3), the Central Government brought into force the majority of Part III of the Code titled “INSOLVENCY RESOLUTION AND BANKRUPTCY FOR INDIVIDUALS AND PARTNERSHIP FIRMS”, with a limited application viz. , “only in so far as they relate to personal guarantors to corporate debtors”. Given the apparent overstepping by the executive in the Notification, in the background of the limited scope of Section 1(3), as well as other concerns in respect of the Rules and Regulations pertaining to personal guarantors that also stood notified, the constitutional validity of the Notification was challenged before several High Courts, and the Hon’ble Supreme Court (“Court”) subsequently brought up all the cases to itself for hearing. Furthermore, the Court limited the hearing to arguments on whether the MCA had the power to issue the Notification. The hearing has been completed and the Court has reserved its judgement.

In this blog, the authors will cover the specific ground of challenge to the Notification being the overreach of the executive qua Section 1(3) of the Code, the Union of India’s arguments in support thereof and the attempted consequent widening of conditional legislation, and the larger issue facing the Court in this matter.

Ground of challenge

The concept of ‘conditional legislation’ has been elaborately explained by the Court in Sardar Inder Singh v. State of Rajasthan, wherein the Court held that, “Such legislation is termed 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, the only function assigned to it being to bring the law into operation at such time as it might decide.”

Now, Section 1(3) of the IBC provides that:

It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint:

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 as a reference to the commencement of that provision.”

Thus from a plain reading of the section, it is a classic case of ‘conditional legislation’, wherein the legislature has itself made the law, and the only function assigned to the executive is to bring the law into operation at such time as it may decide. The proviso only extends this power to bringing the provisions of the IBC into force on different dates.

However, vide the Notification, the executive sought to bring the majority of part III of the IBC into force only with respect to one class of debtors, i.e., personal guarantors to corporate debtors. This has the effect of modifying part III of the IBC, which did not otherwise create any distinction between the insolvency / bankruptcy of an individual and that of 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 effect of the Notification is that it in substance modifies the text of the actual sections of Part III, despite the clear 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 Notification are attempted to be added like a rider to each of the sections mentioned in the Notification, clearly rendering such an exercise outside the scope of Section 1(3) of the IBC. What is interesting to note is that Part III nowhere even contains or uses the term “personal guarantor”. This argument formed the basis of the challenge mounted to the Notification, which if successful, will render the government liable to re-notify the provisions in a valid manner, or, the legislature will be required to amend the text of the Code itself and bring in a category of personal guarantors independently, both of which will then be required to stand the test of judicial review.

Other arguments canvassed by the Petitioners also arose from the inconsistency between the avowed object of the Code viz. that of revival and maximisation of value, and the frame of Part III which focuses on recovery by way of the repayment plan, and Part III being contrary to the Indian Contract Act.

Union of India’s arguments

The Union of India relied on the Insolvency and Bankrupcty Code (Amendment) Act, 2017, which had amended Section 2(e) of the IBC. Section 2 deals with the classes of persons to whom IBC shall apply. Prior to this amendment, Section 2(e) provided that the IBC would apply to “individuals and partnership firms”. The amendment substituted clause (e) and added three classes in its place. i.e.:

(e) personal guarantors to corporate debtors;

(f) partnership firms and proprietorship firms; and

(g) individuals, other than persons referred to in clause (e).”

On the basis of this amendment it was argued that Section 1(3) r/w section 2(e) authorized the executive to bring into force any part of the IBC with respect to a specific class specified in Section 2, which in this case was the class of personal guarantors to corporate debtors. The Union relied on the lack of challenge to the amendment of Section 2(e) to bolster its case of widening the scope and ambit of Section 1(3) vis-à-vis its own powers of notifying the law.

However this is clearly beyond the scope of the power under section 1(3), as explained in Sardar Inder Singh, under a conditional legislation, the legislature has made a complete law as regards, ““place, person, laws, powers””, and thus the executive is not competent to enact a provision only in so far as it relates to a specific class of persons. Such exercise, if deemed necessary can only be done by the legislature. Thus, if the Government of India thought it was necessary to bring part III of the IBC into force only with relation to a specific class of persons, then such an exercise could only be done via a legislative amendment, as it would require modification of the provisions of the IBC.

There are various other enactments containing similar provisions, for instance the Companies Act, 2013 also has a similar provision viz. Section 1(3), allowing the executive to bring the provisions of the act into force at such time as it deems fit. If the Union’s arguments are accepted, then it would mean that the executive can step into the shoes of the legislature and modify the provisions in various different legislations framed by the Parliament in its wisdom.

‘Conditional’ and ‘Delegated’ legislation

The power to modify a provision is an extreme form of ‘delegated legislation’ which is distinct from ‘conditional legislation’. The distinction between the two forms of legislation has been elaborated by the Court in Vasu Dev Singh v. Union of India, wherein the Court stated that:

“The distinction between conditional legislation and delegated legislation is clear and unambiguous. In a conditional legislation the delegatee has to apply the law to an area or to determine the time and manner of carrying it into effect or at such time, as it decides or to understand the rule of legislation, it would be a conditional legislation. The legislature in such a case makes the law, which is complete in all respects but the same is not brought into operation immediately. The enforcement of the law would depend upon the fulfilment of a condition and what is delegated to the executive is the authority to determine by exercising its own judgment as to whether such conditions have been fulfilled and/or the time has come when such legislation should be brought into force. The taking effect of a legislation, therefore, is made dependent upon the determination of such fact or condition by the executive organ of the Government. Delegated legislation, however, involves delegation of rule-making power of legislation and authorises an executive authority to bring in force such an area by reason thereof. The discretion conferred on the executive by way of delegated legislation is much wider.”

A clear example of delegated legislation can be found in Section 239 of the IBC itself, which empowers the Central Government to make rules for carrying out the provisions of the IBC.

As elaborated by the Court in Vasu Dev Singh, the discretion and power granted to the executive in a case of ‘conditional legislation’ is extremely limited, i.e. limited only to the extent of notifying a date on which provisions shall come into force, and no further. Section 1(3) being a classic example of conditional legislation, the executive could not have gone beyond the power conferred to it and attempt a modification of provisions of part III of the IBC in the garb of exercise of ‘conditional legislation’.

As elaborated by the Court in Vasu Dev Singh, the discretion and power granted to the executive in a case of ‘conditional legislation’ is extremely limited, i.e. limited only to the extent of notifying a date on which provisions shall come into force, and no further. Section 1(3) being a classic example of conditional legislation, the executive could not have gone beyond the power conferred to it and attempt a modification of provisions of part III of the IBC in the garb of exercise of ‘conditional legislation’.

The question that the Court is faced with in this case is to determine whether the executive is empowered to in effect modify a provision in exercise of power granted by ‘conditional legislation’.

Conclusion

The Central Government is right in saying that the provisions of the IBC should be extended to personal guarantors of corporate debtors, as in most cases they are the promoters of the corporate debtors who play a huge part in bringing the corporate debtor to insolvency. However, the manner in which the Government has undertaken this exercise  would unfairly and incorrectly stretch the contours of the power of ‘conditional legislation’. The Court being faced with a long line of established precedent, ought not permit this manner of notification which will then grant the executive wider powers than would be legislatively intended.

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