IBC | No Writ Can’t Be Issued To Creditor, Free To Proceed Against Personal Guarantor Under IBC : Delhi High Court

On the issue of whether a writ of prohibition can be issued to prevent creditor from approaching NCLT, the Bench opined that when an alternative remedy exists, then the Petitioner must prove, (i) that the proceedings or actions being taken are wholly without jurisdiction; and (ii) as to why the alternate forum must be deprived of an opportunity to decide upon its own jurisdiction.

Background Facts

In 2009, FACOR Power Ltd. (“FPL/Principal Borrower”) had availed loan from Rural Electrification Corporation Ltd. (“Respondent”). Mr. Vineet Saraf (“Petitioner/Personal Guarantor”) stood as a personal guarantor to the said loan and a Deed of Personal Guarantee was executed. The said loan was also secured by Ferro Alloys Corporation Ltd. (“FACOR/Corporate Guarantor”) as a corporate guarantor.

The Principal Borrower defaulted in repayment of loan. In 2017, the National Company Law Tribunal (“NCLT”) initiated Corporate Insolvency Resolution Process (“CIRP”) against FACOR under the Insolvency and Bankruptcy Code, 2016 (“IBC”). In 2019, Sterlite Power Transmission Limited (“SPTL/Resolution Applicant”) submitted a resolution plan for FACOR which was approved by the Committee of Creditors (“CoC”) as well as the NCLT.

On 09.12.2022, the Respondent issued a Demand Notice 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 (“Rules, 2019”), invoking the personal guarantee of Mr. Vineet Saraf (Petitioner).

The Petitioner filed a writ petition before the High Court, seeking issuance of writ of prohibition to prevent the Respondent from approaching NCLT and to quash the Demand Notice dated 09.12.2022. It was argued that the Respondent has assigned the entire debts to FACOR, while excluding the personal guarantees under the terms of the Resolution Plan and the Assignment Agreement. Therefore, the Respondent can no longer invoke the guarantee furnished by the Petitioner. Further, the Demand Notice was indicative of the Respondent’s intention to approach NCLT under Section 95 of IBC against the personal guarantor over a ‘non-existent’ debt.

The Respondent argued that the discharge or release of the principal debtor does not absolve the surety/guarantor of his liability. The Respondent is only seeking to recover the part of the debt that was left unrecovered after the CIRP of FACOR was concluded. Lastly, since the personal guarantees were specifically excluded from the Resolution Plan and the said Assignment Agreement, the terms of the Resolution Plan cannot be altered.

High Court Verdict

The Bench opined that the Respondent has merely issued a demand notice in order to comply with the statutory requirement of Section 95 of IBC, so that it can agitate before the NCLT that there is a debt owed by the Petitioner to the Respondent. Such act cannot be termed as arbitrary.

On the issue of whether a writ of prohibition can be issued to prevent Respondent from approaching NCLT, the Bench opined that when an alternative remedy exists, then the Petitioner must prove, (i) that the proceedings or actions being taken are wholly without jurisdiction; and (ii) as to why the alternate forum must be deprived of an opportunity to decide upon its own jurisdiction.

“From the analysis above, it can be concluded that the existence of an alternate remedy does not act as a bar to entertain a petition praying for a writ of prohibition. In cases where an alternate remedy is available to the petitioner, there is a higher threshold that needs to be met, it being of a total and absolute lack of jurisdiction, in order for a writ court to grant relief. The existence of a statutorily prescribed alternate remedy, where a specialized forum is competent to decide upon its own jurisdiction, the burden upon a petitioner is further compounded. In such a scenario, the petitioner needs to convince the court, not merely that the proceedings or actions being taken are wholly without jurisdiction but also why the alternate forum must be deprived of an opportunity to decide upon its own jurisdiction.”

The Bench opined that the matter involves interpretation of contracts and contractual private law questions, which cannot be dealt in writ petition. Reliance was placed on Supreme Court verdict in Kerala SEB v. Kurien, (2000) 6 SCC 293, wherein it was held that interpretation and implementation of a clause in a contract normally cannot be the subject-matter of a writ petition.

High Court urges NCLT to examine law on assignment, contract of surety, and the applicability of Hutchens v. Deauville Investments Pvt. Ltd. to Petitioner’s case

The Bench also considered the decision of High Court of Australia passed in Hutchens v. Deauville Investments Pvt. Ltd., (1986) 68 A. L.R. 367, wherein it was observed that an assignment of the underlying principal debt with an exclusion of guarantee, results into the assignor being unable to invoke the guarantee. This declaration rests on following two independent grounds:

“Firstly, that the assignment, by splitting the debt, adversely affects the rights of the surety. An assignment of this kind, when analysed through this lens, may possibly undermine a variety of different benefits that a surety is entitled to under the Indian Contract Act, 1872 (hereinafter ‘ICA’).”

“The second ground upon which the finding in Hutchens (supra) seems to rest upon is that the assignment has the effect of fundamentally transforming the contract of guarantee, in a manner such, that it could no longer be meaningfully termed as a guarantee. The contract of guarantee which is for the debt of the principal debtor, becomes a liability to pay irrespective of the debt of the principal debtor as also, despite the absence of the debt of the principal debtor being owed to the creditor. It also leads to a situation where, for the same underlying debt, two entities, that is, the assignor and the assignee can stake claim, thereby bifurcating and replicating the original debt.”

While observing the aforesaid, the Bench noted that the concerned NCLT must carefully examine the law on assignment, contract of surety, and the applicability of Hutchens v. Deauville Investments Pvt. Ltd., if at all found applicable in the factual scenario of the Petitioner’s case.

The writ petition has been dismissed.

Case Title: Vineet Saraf v Rural Electrification Corporation Ltd.

Citation: 2023 LiveLaw (Del) 639

Case No.: W.P.(C) 3293/2023 & CM APPL 12815/2023

Counsel for Petitioner: Mr. Jayant Mehta, Senior Advocate alongwith Mr. Anirudh Wadhwa, Mr. Keshav Gulati, Mr. Shashwat Awasthi, Mr. Kanishk Garg, Mr. Debarshi Chakraborty & Anu Srivastava, Advocates

Counsel for Respondent: Mr. Sudhir Makkar, Senior Advocate alongwith Mr. Karan Batura, Mr. Jayant Chawla, Ms. Saumya Gupta & Ms. Shweta Singh, Advocates.

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