Delhi High Court: In a case wherein the petitioner had filed the writ petition seeking to quash the impugned demand notice issued by the respondent, Rural Electrification Corpn. Ltd. under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (‘2019 Rules’) invoking the personal guarantees of the petitioner for the total outstanding debt, a Single Judge Bench of Purushaindra Kumar Yadav, J.*, opined that the petitioner’s claim of the guarantor getting a right to be heard at a belated stage, was not sufficient to entertain the present petition. The Court further stated that, if in the present case the petition was entertained, it would eventually subvert the procedure laid down under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and the respondent in turn would be denied the opportunity to present their case before the concerned NCLT. The Court therefore dismissed the writ petition and left the matter open for NCLT to be decided on merits.
The petitioner was a personal guarantor for a loan obtained by FACOR Power Ltd. (‘FPL’) from the respondent and this loan was secured by a corporate guarantee on behalf of Ferro Alloys Corpn. Ltd.
On account of the default being committed by FPL in repaying the loan, the respondent initiated Corporate Insolvency Resolution Process in accordance with the provisions of the IBC, against Ferro Alloys Corpn. Ltd, which culminated in a Resolution Plan. The said Resolution Plan was approved by NCLT, Cuttack. The promoters of FPL carried an appeal before NCLAT which was further dismissed. Thereafter, a civil appeal was filed before the Supreme Court, however, the same was also dismissed.
The petitioner submitted that in terms of the Resolution Plan, the respondent had agreed to irrevocably transfer, assign, and convey its entire debt given to FPL and all rights, title, and interest thereon to Ferro Alloys Corpn. Ltd., including all benefits, interest and claims thereunder, the recoveries in relation to such debt, and the rights to make claims pursuant to such debt, forever along with all rights thereto absolutely and forever. However, the respondent submitted that in the Resolution Plan it was stated that s the personal guarantees and third-party collateral given to Financial Creditors to secure the debt of the Company and FPL continued and such Financial Creditors had full right to enforce such securities even after plan Effective Date.
Thus, the respondent issued a demand notice dated 9-12-2022 under 2019 Rules invoking the personal guarantee of the petitioner. The petitioner approached this Court seeking quashing of the impugned demand notice.
Analysis, Law, and Decision
On considering the issue, whether an existence of alternate remedy was a bar to grant the writ of prohibition, the Court relied on State of UP v. Mohammad Nooh (‘Mohammad Nooh Case’), 1958 SCR 595, and opined that Nooh Case (supra) had an application in an instant case not merely because the petitioner prayed for the impugned demand notice to be quashed, but also because the writs of certiorari and prohibition were complementary in nature, having a common ground of “lack of jurisdiction”. The Court opined that the existence of an alternate remedy did not act as a bar to entertain a petition praying for a writ of prohibition. However, in such cases the petitioner needed to convince the Court, not merely that the proceedings or actions being taken were wholly without jurisdiction but also why the alternate forum must be deprived of an opportunity to decide upon its own jurisdiction.
On considering the contention of the petitioner that respondent’s formulation would mean that notwithstanding the Assignment Agreement, the same loan could be recovered not only by Ferro Alloys Corpn. Ltd. but also by the respondent and it would mean that the loan was being recovered twice and thus, would be arbitrary and violative of Article 14 of the Constitution, the Court opined that in the present case, the right of the petitioner under Article 14 of the Constitution had not been violated as the respondent had merely issued a demand notice to comply with the statutory requirement of Section 95 of the IBC. The Court further opined that this notice was issued by the respondent to enable them to agitate before the NCLT that there was a debt the petitioner owed to the respondent. Therefore, this could not be elevated to the level of arbitrariness.
The Court opined that the respondent had not done an act that could be especially attributable to the privileges that were enjoyed by virtue of it being a “State”, as defined under Article 12 of the Constitution. Even if it was assumed that the respondent was acting under a misinterpretation of the law, this could not be a ground to claim a violation of Article 14 of the Constitution. Indeed, if this were the sole test, every act of a “State” would be assailed before a Writ Court as being under a misconceived interpretation of the law.
The Court noted that the petitioner contended that the consequence of the respondent assigning the entire debts to Ferro Alloys Corpn. Ltd. whilst excluding the personal guarantees, under the terms of the Resolution Plan and Assignment Agreement, was that the respondent could no longer invoke the guarantee furnished by the petitioner. The Court left the matter open for NCLT to be decided on merits, however, it laid down important principles for consideration of the NCLT.
The Court while discussing the law relating to the reservation of right of creditor to proceed against the surety, opined that a reservation of rights clause, inserted in the deed releasing or discharging the principal borrower, entered into by the creditor and the principal borrower, intended to preserve the right of the creditor to proceed against the surety. However, in the present case, the Court noted that neither the Resolution Plan nor the said Assignment Agreement had been entered into by the principal borrower, i.e., FPL. The Court observed that “even in the case of an express reservation of rights by the creditor to proceed against the surety, a fine distinction must be drawn between a covenant not to sue and an absolute release. A reservation clause was compatible with the former while being incompatible with the latter. The reason being that the reservation of rights clause becomes overridden by the release of the principal borrower”.
The Court opined that in a petition praying for a writ of prohibition, where a petitioner was to demonstrate the absence of jurisdiction, this Court did not consider it fit, to develop, if at all this was a case for that to take place, an area of private contractual law, and then to use that development in order to establish a want of jurisdiction on the part of the respondent.
The Court opined that the petitioner’s claim of the guarantor getting a right to be heard at a belated stage, was not sufficient to entertain the present petition. The Court stated that, if in the present case the petition was entertained, it would eventually subvert the procedure laid down under the IBC and the respondent in turn would be denied the opportunity to present their case before the concerned NCLT. The Court therefore dismissed the writ petition and left the matter open for NCLT to be decided on merits.
[Vineet Saraf v. Rural Electrification Corpn. Ltd., 2023 SCC OnLine Del 4291, decided on 21-07-2023]
*Judgment by -Justice Purushaindra Kumar Kaurav
Advocates who appeared in this case :
For the Petitioners- Jayant Mehta, Senior Advocate; Anirudh Wadhwa, Keshav Gulati, Shashwat Awasthi, Kanishk Garg, Debarshi Chakraborty and Anu Srivastava, Advocates;
For the Respondents- Sudhir Makkar, Senior Advocate; Karan Batura, Jayant Chawla, Saumya Gupta and Shweta Singh, Advocates.