Delhi HC Rejects Personal Guarantor's Petition Challenging Demand Notice Issued under IBC
Moneylife Digital Team 01 August 2023
The Delhi High Court (HC) has dismissed a petition challenging a demand notice issued under the Insolvency and Bankruptcy Code (IBC) by New Delhi-based Vineet Saraf, a personal guarantor for a loan of Rs517.90 crore obtained by one FACOR Power Ltd from Rural Electrification Corporation Ltd (REC). 
In an order last month, the bench of justice Purushaindra Kumar Kaurav says, "It is not the case that the reliefs prayed for cannot be granted by the concerned National Company Law Tribunal (NCLT). Mr Saraf's claim of the guarantor getting a right to be heard at a belated stage is not sufficient to entertain the present petition. The legislature, in its wisdom, thought it fit to give the right of hearing at a belated stage. Indeed, if, in the present case, the petition is entertained, it would subvert the procedure laid down under the IBC. REC, in turn, would be denied the opportunity to present their case before the concerned NCLT."
Mr Saraf was the personal guarantor for the loan obtained by FACOR Power from REC. While the loan agreement was signed on 22 May 2009 and amended on 29 October 2010, 28 June 2013 and 12 November 2014, the deed of personal guarantee was executed on 24 August 2009. The loan was also secured by a corporate guarantee by Ferro Alloys Corporation Ltd (FACOR).
However, FACOR Power failed to repay the loan and, in May 2017, REC initiated corporate insolvency resolution process (CIRP) under IBC against FACOR. This resulted in a resolution plan submitted by Sterlite Power Transmission Ltd on 13 November 2019.
The resolution was also approved by the NCLT bench at Cuttack on 30 January 2020. On 25 November 2020, national company law appellate tribunal (NCLAT) dismissed the appeal filed by the company promoters. Even the Supreme Court rejected the appeal filed by the promoters against the order of NCLAT.
Meanwhile, REC issued a demand notice for recovering its dues worth Rs1,211.91 crore on 21 September 2020. 
Mr Saraf challenged the demand notice before the Delhi HC contending that he does not owe any debt to REC and that the demand notice issued to him should be quashed. 
The bench observed that there are sound reasons for not entertaining a petition before a writ court, where the relief being prayed for can be sought from a statutorily established forum. "If the writ courts routinely grant reliefs—which could have been sought from an alternate forum established by the way a statute—the court, in effect, obviates the will of the Parliament."
Rejecting an argument by Mr Saraf, the bench says, "...the principal debt persists and has never been extinguished. It is, therefore, the case that the assignee can recover the unrecovered part of the debt from FACOR Power, i.e., the principal borrower, and the respondent, in the instant petition, is also attempting to recover the unrecovered part of the debt."
Mr Saraf also argued that since the personal guarantees were specifically excluded from the resolution plan and the assignment agreement, REC can proceed to enforce the guarantee given by the petitioner to the creditor.
Delhi HC noted that the contention of Mr Saraf is not that the resolution plan and the assignment agreement needs to be re-written so as to include the personal guarantee, but rather it is that the legal effect of the underlying debt being assigned while retaining the personal guarantee, is that the creditor, i.e., REC, cannot enforce the guarantee.
Further, REC has merely issued a demand notice to comply with the statutory requirement of Section 95 of the IBC. This notice was issued by REC to enable Mr Saraf to agitate before NCLT that there is a debt that the petitioner owes to the lender.
"In a petition praying for a writ of prohibition, where a petitioner is to demonstrate the absence of jurisdiction, the court does not consider it fit, to develop, if at all this is 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," justice Kaurav says, while dismissing the petition filed by Mr Saraf.
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