Saturday, 18 August 2018

Whether moratorium as per S 14 of Insolvency and Bankruptcy Code, 2016 will apply to personal guarantor of corporate debtor?

State Bank of India managed to settle the prolonged issue in favour of the creditors who are facing procedural and legal hindrances in recovering public money after the judgement passed by Supreme court regarding the applicablity of moratorium on the assets of the personal guarantor to the corporate debtors which are undergoing insolvency process. Supreme Court setting aside the order of Appellate Tribunal held that since the personal guarantor's moratorium is covered under section 96 and 101 of the code and at present these sections are not notified , In such scenario moratorium will only apply to the corporate debtor and not on personal guarantors.This remarkable judgement came in the light of recent amendments in the insolvency code where section 14 (3) is substituted with "the moratorium will not be applicable to a surety in a contract of guarantee to a corporate debtor".This will allow the banks and other creditors to take actions against the defaulting personal guarantors which in most of the cases are promoters and directors of the company.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3595 OF 2018

STATE BANK OF INDIA  Vs V. RAMAKRISHNAN & ANR.
Dated: August 14, 2018.


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,
1
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,
2
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
3
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
5
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
7
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
8
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,
9
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 subsections
(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
12
(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
13
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
14
(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.
17
(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
18
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 coextensive
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 nonperforming
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-àvis
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
35
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
36
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.
37
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
38
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
39
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
40
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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