Factual Background 

In the instant matter of Vineet Saraf v. Rural Electrification Corpn. Ltd. The petitioner had filed a writ petition to have the impugned demand notice issued by the respondent, Rural Electrification Corpn. Ltd. under Rule 7(1) of the Insolvency and Bankruptcy Application to Deciding Authority for Insolvency Resolution Procedure for Personal Guarantors to Corporate Debtors Rules, 2019, invalidated by the petitioner’s guarantees for the full amount of the outstanding debt. Due to default, the petitioner, a personal surety for a debt backed by a corporate guarantee, launched a Corporate Insolvency Resolution Process against FACOR Power Ltd. The responder started the procedure, which resulted in a Resolution Plan that NCLT, Cuttack, authorised. The FPL promoters’ appeal to NCLAT was denied. The Supreme Court rejected a civil appeal that was brought before it. The respondent, according to the petitioner, promised to transfer its whole debt to FPL as well as all rights, title, and interest in it. The respondent countered that the financial creditors remained to have full rights to pursue the securities even after the plan’s Effective Date because of the continuous personal guarantees and third-party collateral provided to them as security for the debt. According to the 2019 Rules, the respondent issued a demand notice citing the petitioner’s personal guarantee. The petitioner contested the demand notice.

Analysis of Court order 

According to Justice Purushaindra Kumar Yadav of the Delhi High Court’s Single Judge Bench, the petitioner’s argument that the guarantor had a legal right to be heard at a later stage was insufficient to allow the current case to proceed. According to the Court, if the petition in this matter were to be granted, it would ultimately violate the Insolvency and Bankruptcy Code’s 2016 procedures and deny the respondent the chance to argue their case before the relevant NCLT. As a result, the Court denied the writ petition and left it up to the NCLT to assess the case’s merits.

The Court rejected the petitioner’s argument that the inability to use the petitioner’s guarantee was caused by the respondent’s assignment of all of the obligations to Ferro Alloys Corpn. Ltd. without excluding personal guarantees. The Court set down significant guidelines for thought but left it up to NCLT to resolve the case on the merits. The Court argued that a reservation of rights provision in a deed that releases or discharges the primary borrower was meant to protect the creditor’s ability to pursue legal action against the guarantor. However, neither the Assignment Agreement nor the Resolution Plan were signed by the major borrower. The Court said that it is necessary to distinguish between an unconditional release and a commitment not to sue even where rights are expressly reserved. A reserve clause is acceptable in the first case but not in the second since the primary borrower’s release supersedes it.

The Delhi High Court rejected a request for a writ of prohibition, noting that it was inappropriate to create a body of private commercial law to demonstrate the respondent’s lack of jurisdiction. The petitioner’s argument that the guarantor had a right to be heard at a later stage was not enough, according to the court, to allow the petition to proceed. The court reasoned that if the petition was granted, it would violate the IBC’s procedure and deprive the respondent of the chance to address their case before the NCLT. The issue was left up to NCLT’s merit-based decision-making.

CASE NAME – Vineet Saraf v. Rural Electrification Corpn. Ltd., W.P. (C) 3293 of 2023