Author: Aditya Dwivedi
Fourth year law student at National University of Study and Research in Law, Ranchi.
I. Introduction
On December 10, 2024, the Hon’ble Supreme Court delivered a landmark judgment in the case of Apurva @ Apurvo Bhuvanbabu Mandal v. Dolly & Ors (‘Apurva Bhuvanbabu’) asserting that the right to maintenance is a subset of the right to life under Article 21 of the Constitution. Therefore, such right will override any statutory right of Financial Creditors, Secured Creditors, Operational Creditors, or any other such claimants encompassed within the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI’), the Insolvency and Bankruptcy Code, 2016, (‘IBC’), or similar such laws. This judgment may have far-reaching consequences on the insolvency proceedings of corporate and personal guarantors.
This article analyses those impending consequences and argues for a legislative framework, drawing a line between the enforcement of the right to maintenance and the statutory right of creditors under IBC, so that creditors' rights do not subsume under the right to maintenance, and the purpose of IBC to safeguard the interest of creditors and to reinstate the Corporate Debtor and individuals and firms do not become otiose.
II. Key Facts and Apex Court’s Verdict
The case arose when the appellant-husband contested the Gujarat High Court's decision to award monthly maintenance of 1 lakh rupees to the respondent-wife and 50 thousand rupees each to their two children. The husband submitted income-tax returns and other documents, asserting that the income projected by the respondent-wife before the High Court was highly exaggerated. He further argued before the Supreme Court that business losses and ongoing recovery proceedings made him unable to pay the maintenance amount set by the High Court.
The Supreme Court ruled that its interim order reducing maintenance to 50 thousand rupees for the wife and 25 thousand rupees each for the children would continue, deeming it just and fair. It further held that the right to maintenance, as part of the right to dignity under Article 21, overrides the statutory rights of creditors under laws like SARFAESI, 2002, and IBC, 2016. Consequently, objections from creditors against the respondents' entitlement to maintenance will not be entertained.
III. Analysing the Foreboding Impact on the Resolution of Insolvencies of Corporate Debtors and Personal Guarantors
IBC aims to promote resolution of debts and revive the corporate debtors as a going concern. In DBS Bank Limited Singapore v. Ruchi Soya Industries Limited & Another, the Supreme Court held that the IBC was introduced to strike a balance among the interests of various stakeholders by enabling the resolution of insolvency, encouraging investment, and optimizing asset value.
However, Part II and III of IBC outline separate mechanisms for resolving insolvencies. Part II specifically addresses the insolvency resolution of corporate entities, while Part III focuses on resolving insolvencies involving individuals and partnership firms. However, under part III, only provisions related to the insolvency and bankruptcy of personal guarantors are notified vide a Ministry of Corporate Affairs notification dated 1st December 2019, and provisions related to the partnership firms and individuals are yet to be notified.
Nevertheless, this ruling of the Apex Court will have the same impact on insolvency and bankruptcy proceedings of personal guarantors, and corporate entities. While it may seem that corporate insolvency resolution processes (‘CIRP’) are unaffected since corporate entities do not pay maintenance, the personal guarantor’s role creates a nexus between Part II and III of the IBC.
The Supreme Court in Mahendra Kumar Jajodia v. SBI Stressed Assets Management Branch, affirmed the judgment of the National Company Law Appellate Tribunal (‘NCLAT’) validating the jurisdiction of National Company Law Tribunal (‘NCLT’) under Section 60(1) of IBC over the insolvency resolution process of a personal guarantor irrespective of any CIRP or liquidation proceedings pending against the corporate debtor.
Further, Sections 60(2) and (3) of IBC mandate that in the event of a pending corporate CIRP or liquidation proceeding of a corporate debtor before the NCLT the application related to the insolvency resolution process (‘IRP’) or bankruptcy of its personal guarantor shall be filed before the same, and where CIRP or liquidation proceedings are started after the initiation of IRP or bankruptcy of the concerned personal guarantor then the same shall stand transferred before the NCLT dealing with the CIRP or liquidation proceeding of such corporate debtor, respectively. This ensures a consolidated approach to resolve the debt of the corporate debtor’s and developing a practical resolution plan.
In Lalit Kumar Jain v. Union of India, the Supreme Court held that the legislative intent behind making NCLT a common adjudication forum for corporate debtors and their personal guarantors is to allow the concerned NCLT to assess the financial position of the corporate debtor in regards to its assets and to help the Committee of Creditors (‘COC’) to formulate practical resolution plan, with scope for realising some part of the creditors’ dues from personal guarantors.
Thus, if the COC approves a plan after considering the scope of recovering some portion of the dues from the personal guarantor and if the personal guarantor becomes subject to maintenance proceedings, then it would become challenging for the creditors to recover their dues. In Apurva Bhuvanbabu, the Supreme Court held that in case the appellant failed to pay the arrear of maintenance to the wife then the family court shall auction immovable property of the appellant to recover the arrears. This power of the family court makes the provisions related to interim moratorium and moratorium on the assets of personal guarantor otiose.
Against this backdrop, it becomes a herculean task for the creditors to recover their dues if the personal guarantor becomes subject to maintenance proceedings. Further, in this case, the court only examines the rights of the creditor against the right to maintenance of the wife and children, however under Section 144 of BNSS (old Section 125 of Cr.P.C.) other than the wife, legitimate and illegitimate children, the mother and father are also eligible for the maintenance. Thus, this ruling shall also be applicable in case of maintenance given to the mother and father.
The woes of creditors do not end here, as under Section 30(1) of IBC once a resolution plan is approved, by the adjudicating authority it becomes binding on the corporate debtor and all other stakeholders. However, until the resolution plan is approved by the adjudicating authority, IBC does not allow the COC to withdraw or reconsider it. In RPS Infrastructure Ltd. v. Mukul Kumar, the Supreme Court held that “ The mere fact that the adjudicating authority has yet not approved the plan does not imply that the plan can go back and forth, thereby making the CIRP an endless process”.
Therefore, it will create an impediment for the COC in their debt resolution if the personal guarantor is saddled with the obligations of maintenance liabilities while the plan is approved and submitted before the adjudicating authority.
In this way, the ruling in Apurva Bhuvanbabu will not only impact the IRP of a personal guarantor but will also, to a certain extent, affect the CIRP of a corporate debtor. It should be noted that the bankruptcy of a personal guarantor would face the same outcome as their IRP if mutual obligations arise during bankruptcy proceedings.
IV. Recommendations
It can be said with complete certainty that fundamental rights are sacrosanct and must be held on the highest pedestal. However, this should not be used as an excuse to override the statutory rights of creditors.
Therefore, in the absence of any statutory safeguards under the IBC to address situations where a personal guarantor becomes liable to pay maintenance during the IRP, courts and tribunals must carefully consider this issue. They must strive to strike a balance between fundamental rights and creditors rights, ensuring that the former does not overshadow the latter.
Furthermore, keeping in mind the intent of the IBC, the withdrawal or reconsideration of a resolution plan pending approval by the adjudicating authority should be permitted in cases where it is evident that effective recovery is not feasible due to the emergence of maintenance obligations post-submission of the plan. Moreover, it is incumbent on creditors to remain vigilant about any such foreboding obligations before charting their path toward recovery.
This approach ensures that creditors’ due diligence and awareness of such obligations prior to the finalization of the resolution plan are respected, while also safeguarding stakeholders’ interests in scenarios involving unforeseen liabilities. In this way, the impact of this ruling can not only be limited to the insolvency and bankruptcy of personal guarantors but also help curb any potential abuse of the recommended leeway.
IV. Conclusion
Through this ruling, the Supreme Court has set a precedent for future cases involving mutual obligations. The court struck a balance between the appellant's paying capacity and the reasonable sum required for the respondent's dignified sustenance. Accordingly, courts and tribunals dealing with matters involving mutual obligations should exercise caution and strive to balance conflicting interests. They must ensure that the right to maintenance—both a personal and fundamental right—does not overshadow the statutory rights provided under the IBC or any other similar law.
The legislature should act promptly to amend the IBC, ensuring that issues of mutual obligations are effectively addressed. Until then, the responsibility lies with the courts and tribunals to maintain the balance of justice, while creditors must exercise vigilance in pursuing the recovery of their debts.
Note: This article has been reviewed by Mr. Abir Lal Dey (Partner, Saraf and Partners) at the Tier II Stage.