IN WP (C) 3293 OF 2023 - DEL HC-When relief could be sought from a statutorily established forum following specific procedure, the WritCourts cannot routinely grant relief or else it would obviate the will of Parliamentby not giving the requisite regard to its intention of dealing with a category of disputes: Delhi High Court
Justice Purushaindra Kumar Kaurav[24.07.2023]

Read Order:VineetSaraf v. Rural Electrification Corporation Ltd

Simran Singh

New Delhi, July 26, 2023:Dealing with a petition seeking to quash a demand notice issued by the Rural Electrification Corporation Limited (RECL) 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 invoking the petitioner’s personal guarantees for an outstanding debt of Rs. 12,11,91,94,259 (impugned demand notice),the Delhi High Court examined the arguments from both sides around the interpretation of clauses in the resolution plan and assignment agreement, andfound that the petitioner's rights under Article 14 of the Constitutionhad not been violated. Ultimately, the Court dismissed the writ petition, allowing the National Company Law Tribunal (NCLT) to decide the matter on its own merits.

The Single Judge Bench of Justice Purushaindra Kumar Kauravstated that there were sound reasons for not entertaining a petition before a writ court, where the relief being prayed for could be sought from a statutorily established forum. If the writ courts routinely grantedreliefs—which could have been sought from an alternate forum established by way a statute—the court, in effect, obviates the will of the Parliament. It would be a disservice to the legislature and to the laws passed by it, to not give the requisite regard to its intention of dealing with a category of disputes through a specific procedure and specialised forums.

The Bench sated that the existence of an alternate remedy did not act as a bar to entertain a petition praying for a writ of prohibition. In cases where an alternate remedy was available to the petitioner, there was a higher threshold that needed 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 specialised forum was competent to decide upon its own jurisdiction, the burden upon a petitioner was further compounded. In such a scenario, 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.

The Bench stated that the respondent had merely issued a demand notice in order to comply with the statutory requirement of Section 95 of the IBC. This notice was issued in order to enable them to agitate before the NCLT that there was a debt that the petitioner owes to the respondent. There was nothing that the respondent had done, that could be elevated to the level of arbitrariness. “The respondent has not, in the instant case, done an act that can be especially attributable to the privileges that are enjoyed by virtue of it being a ‘State’, as defined under Article 12 of the Constitution of India. Even if it is assumed that the respondent is acting under a mis-interpretation of the law, this, in and of itself, cannot be a ground to claim a violation of Article 14 of the Constitution of India. 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. ”

In the matter at hand, the petitioner had given a personal guarantee for a loan taken by Ferro Alloys Corporation Limited (FACOR) Power Limited from RECL for a sun of Rs 517.90 crores. FACOR Power Limited defaulted on the loan repayment, and a Corporate Insolvency Resolution Process (CIRP) was initiated against FACOR in accordance with the provision of Insolvency and Bankruptcy Code, 2016, (IBC) which resulted in a resolution plan being approved.

The petitioner while placing its reliance on the Gujarat High Court decision in the case of Prashant Shashi Ruia v. State Bank of India argued that since RECL assigned the entire debt to FACOR while excluding the personal guarantees under the resolution plan and assignment agreement, RECL could not now invoke his guarantee.However, the Court noted that the Gujarat High Court judgment did not grant any relief to the petitioner in that case.

The petitioner primarily sought a writ of prohibition, preventing the respondent from approaching NCLT under the provisions of the IBC and an ancillary relief was also sought for, to quash the impugned demand notice. The Court discussed the law around prohibition writs and the existence of an alternate remedy. It noted that while an alternate remedy was not an absolute bar, a higher threshold of total lack of jurisdiction needed to be met.

The Bench held that a writ of prohibition could be issued when a petitioner had made out a case for want of jurisdiction. However, in cases where jurisdictional challenges could be agitated before an alternate forum, circumspection must be observed before a writ of prohibition could be granted. It was stated that existence of alternative remedy was not a bar to grant the writ of prohibition and the Court reiterated that cases where proceedings were wholly without jurisdiction, an alternate remedy did not bar relief.

The Bench relied upon Radha Krishan Industries v. State of Himachal Pradeshwhich had observed that “When a right is created by a statute, which itself prescribes the remedy or procedure for enforcing the right or liability, resort must be had to that particular statutory remedy before invoking the discretionary remedy under Article 226 of the Constitution. This rule of exhaustion of statutory remedies is a rule of policy, convenience and discretion.”

The Bench further stated that “Despite the existence of an alternate remedy not being a bar to grant the writ of prohibition, it is a valid consideration that needs to be given its due weightage while entertaining a petition praying for a writ of prohibition. ”

The Bench also relied upon State of Uttar Pradesh v Mohammad Nooh and  stated that the said principle had application in the present case not merely because the petitioner prays 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’. It was also of significance to consider that the standard a petitioner needed to meet became even stricter when an alternate remedy was provided through a statutorily established forum, specifically designed to address the kind of disputes the petitioner aimed to bring before a writ court.

The Bench opined that no right of the petitioner under Article 14 of the Constitution had been violated. It was, therefore not warranted to delve into, what the true import of specific clauses of contracts was. “It is for this reason that the other claim of the petitioner, relating to the exercise of the Exit Option, by the execution of the said Share Purchase Agreement is not being entertained. This claim, this court finds, is fundamentally based upon the interpretation of Clause 3(c)(iv)(g)(iv) of the Resolution Plan, however, there is a significant disagreement as to what the meaning and import of Clause 3(c)(iv)(g)(iv) of the Resolution Plan is. ”In light of the analysis above, the court did not consider it fit to delve into these issues.

The Court further discussed the law relating to reservation of right of creditor to proceed against surety. “A reservation of rights clause, inserted in the deed releasing or discharging the principal borrower, entered into by the creditor and the principal borrower, intends to preserve the right of the creditor to proceed against the surety. Notably, neither the Resolution Plan nor the said Assignment Agreement have been entered into by the principal borrower i.e., FPL. ”

The Bench stated 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 is 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 Bench concluded that  a reservation of rights clause is incompatible with an absolute release of a principal debtor. The concerned NCLT, if at all it thinks fit, may carefully delve into this aspect of the case.”

The Bench navigated through the issue whether the petitioner had established that the impugned demand notice was wholly without jurisdiction and the respondent must therefore be prevented from approaching the NCLT concerned under the provisions of the IBC.

In a petition praying for a writ of prohibition, where a petitioner was to demonstrate the absence of jurisdiction, the Court did not consider it fit, to develop 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. It was not the case that the reliefs prayed for could not be granted by the NCLT concerned. 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 legislature, in its wisdom, thought it fit to give the right of hearing at belated stage. Indeed, if in the present case the petition was entertained, it would subvert the procedure laid down under the IBC. The respondent in turn would be denied the opportunity to present their case before NCLT. TheCourt was, therefore, of the opinion that the present writ petition deserved to be dismissed.