AI Drafter 
TaxTMI 
TaxTMI 
2023 (7) TMI 962
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.... for the purported total outstanding debt of Rs. 1211,91,94,259 (hereinafter 'impugned demand notice'). 2. As per the facts of the case, the petitioner stood as a personal guarantor for a loan obtained by one FACOR Power Ltd. (hereinafter 'FPL') for a sum of Rs. 517.90 crores from the respondent i.e, REC Ltd. The loan agreement was dated 22.05.2009 (amended on 29.10.2010, 28.06.2013 and 12.11.2014). The deed of personal guarantee was executed on 24.08.2009 (amended and restated on 29.10.2010, 21.06.2013 and 22.01.2015). 3. The aforesaid loan, other than being secured by the petitioner in the capacity of a personal guarantor, was also inter alia secured by a corporate guarantee on behalf of one Ferro Alloys Corporation Ltd. (hereinafter 'FACOR'). 4. The respondent is a Maharatna Company under the Ministry of Power and is a 'State' within the definition of Article 12 of the Constitution of India. 5. On account of the default being committed by FPL in repaying the loan, the respondent in May, 2017 initiated Corporate Insolvency Resolution Process (hereinafter 'CIRP') in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016 (hereinafter 'IBC'), against ....
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....marily thrown out at any stage of litigation." 52. It is pertinent to mention that FPL is a subsidiary of the Corporate Debtor, and Appellant belongs to the erstwhile promoter group of the Corporate Debtor. In a similar case, the shareholders of FACL/ Corporate Debtor had challenged the Approved Resolution Plan before this Appellate Tribunal in Company Appeal (AT) (Insolvency) No. 207 and 208 of 2019 raising identical grounds, which was dismissed. It is not open to the Appellants to prefer a separate appeal on similar grounds being raised in Company Appeal (AT) (Ins.) No. 207 & 208 of 2019. It is not open for a Party to contend that certain points had not been urged and the effect of the Judgment can be collaterally challenged. 53. In Case of Anil Kumar Neotia v. Union of India, (1988) 2 SCC 587 at page 600 Hon'ble Supreme Court has held that: "17. Furthermore, we are of the opinion that the Law as declared by this Court in Doypack Systems Pvt. Ltd. [(1988) 2 SCC 299] is binding on the petitioners and this question is no longer res integrain view of Article 141 of the Constitution. See the observations of this Court in Shenoy and Co. v. CTO [(1985) 2 ....
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....9/2021 passed by the National Company Law Appellate Tribunal, New Delhi. Consequently, the Civil Appeals stand dismissed. Pending application(s), if any, shall stand disposed of." 10. Mr. Jayant Mehta, learned senior counsel assisted by Mr. Anirudh Wadhwa, Mr. Keshav Gulati, Mr. Shashwat Awasthi and Mr. Kanishk Garg, advocates appearing on behalf of the petitioner submitted that the issuance of the impugned demand notice was clearly an indication of the respondent's intention to approach the adjudicating authority under Section 95 of the IBC in relation to, what they term, a non-existent debt. The impugned demand notice was therefore without jurisdiction. 11. He also submitted that as on date, there exists no debt as against FPL that the respondent can recover, and therefore, there arises no question of the petitioner being in the position of a personal guarantor. 12. It is also submitted on behalf of the petitioner that in terms of the Resolution Plan dated 13.11.2019 of FACOR, the respondent had agreed to irrevocably transfer, assign and convey its entire debt given to FPL and all rights, title and interest thereon to FACOR, including all benefits, inte....
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....enefits pertaining to the Loans as of such date, including all realisations and recoveries. if any, made on and after said date shall be for the benefit of the Assignee and shall be transferred and passed on to the Assignee. ..... 8.2 ENTIRE AGREEMENT This agreement supersedes all discussions and agreements (whether oral or written. including all correspondence) prior to the date of this Agreement among the parties with respect to the subject matter of this agreement." 14. According to the learned senior counsel for the petitioner, on the assignment of the loan i.e., the underlying principal debt, the respondent ceased to be a creditor of FPL, and as a result of it, no debt whatsoever was due from FPL to the respondent. It is, therefore, their case that since the underlying principal debt no longer vests with the creditor i.e., the respondent, they cannot invoke the guarantee. 15. It is also submitted on behalf of the petitioner that the guarantee is a secondary obligation securing the performance of a primary obligation, namely, the principal debt, i.e., the loan. It is thus, their case that since the primary debt was assigned by the respondent, th....
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.... would have drastic consequences, immediately upon submission of an application before the NCLT as against the petitioner. 20. It is highlighted that once the application under Section 95 of the IBC is filed, the interim moratorium would immediately commence under Section 96 of the IBC and the appointment of Resolution Professional would take place under Section 97 of the IBC. 21. It is also submitted on behalf of the petitioner that it is only the Resolution Professional who determines whether the application is complete and examines the merits of the same for the first time under Section 99 of the IBC and it is only after the filing of the report under Section 99 that the Adjudicating Authority may reject the application under Section 100 of the IBC. 22. It is further submitted on behalf of the petitioner that noninterference in the demand notice will expose the petitioner to a wholly frivolous proceeding under Part III of the IBC where, the petitioner has to defend the application under Section 95 of the IBC and not the impugned demand notice. 23. Reliance has been placed on behalf of the petitioner on a decision of the Division Bench of the High Court of Gujarat at ....
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....of electronic transfer of the unpaid amount from the bank account of the debtor; (b) evidence of encashment of a cheque issued by the debtor; or (c) a signed acknowledgment by the creditor accepting receipt of dues. 30. After examining the submissions of the debtor, the Resolution Professional is mandated to submit its final report to the NCLT who thereafter passes the final order of admission or rejection of the application. It is thus stated that there are sufficient safeguards provided under the IBC. The learned senior counsel for the respondent therefore submits that the debtor, at appropriate stages, will get ample opportunity to present, represent and defend his case before the passing of any final order(s). 31. On merits, it is submitted that personal guarantees were specifically kept outside the Resolution Plan dated 13.11.2019. 32. Reliance has been placed by learned senior counsel for the respondent on Clause 3(c)(iv)(g) of the Resolution Plan, the same is reproduced as under:- "(g) FACOR Power Limited ('FPL") - Upon Implementation of the Resolution Plan, as an integral part of this Resolution Plan, REC shall on Closing Date: ....
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.... the Company and the Financial Creditors shall be entitled to take all steps and remedies and recourse available to them in Applicable Law for the non-recovery of the uncovered financial debt(i.e., the total dues of the of the Financial Creditors less the aggregate of (i) the Upfront Amount; and (ii) Total Consideration received by such Financial Creditors as part of the Resolution Plan) from such guarantors and/or third party security providers, under their respective security documents." [Emphasis supplied] 34. It is thus stated on behalf of the respondent, that the personal guarantee and the third part 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 for the recovery of the unrecovered financial debt. 35. It is further submitted that the Resolution Plan did not affect the validity and enforceability of the personal guarantees executed by the persons in the promoter group; the corporate guarantees executed by the third parties; and any other security created by a third party, as of the insolvency commencement date of 'th....
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....eliance has been placed on behalf of the respondent, on a decision of the Hon'ble Supreme Court in the case of Lalit Kumar Jain v. Union of India & Ors. (2021) 9 SCC 321., to submit that the release or discharge of a principal borrower from the debt owned by it to its creditor, by an involuntary process, i.e., by operation of law, or due to liquidation or insolvency process, does not absolve the surety/guarantor of his/her liability which arises out of an independent contract. Paragraph no. 125 of the said judgment has been specifically pressed into service. 43. Learned senior counsel appearing on behalf of the respondent has placed reliance on a decision of the Division Bench of the High Court of Gujarat at Ahmedabad, which has also been cited by the learned senior counsel appearing on behalf of the petitioner, in the case of Prashant Shashi Ruia (supra), to submit that the Division Bench in this case did not interfere with the action initiated by the bank and rather left it to the Tribunal to apply its mind and take a final decision. 44. Reliance has also been placed on behalf of the respondent on a decision of the Hon'ble Supreme Court in the case of Phoenix ARC Private Li....
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....y of an alternative efficacious remedy if the actions, orders or proceedings complained of, are wholly without jurisdiction or arbitrary. 49. Reliance has also been placed on behalf of the petitioner on the decisions of the Hon'ble Supreme Court in the cases of Godrej Sara Lee Ltd. v. Excise and Taxation Officer-cum-Assessing Authority and Ors. 2023 SCC OnLine SC 95., Radha Krishan Industries v. State of Himachal Pradesh And Ors. (2021) 6 Supreme Court Cases 771. and Zonal Manager, Central Bank of India v. Devi Ispat Limited and Ors. (2010) 11 SCC 186. 50. It is also submitted that the demand notice can be quashed despite the availability of an alternative efficacious remedy if the same is found to be without jurisdiction and to support the said contention, reliance has been placed on a decision of this court in the case of Bhushan Power and Steel Ltd. v. Union of India, Through its Secretary Ministry of Finance and Ors. 2022 SCC OnLine Del 2337, a decision of the High Court of Bombay in the case of Murli Industries Limited, Through its Dy. Ex. Director v. Assistant Commissioner of Income Tax and Ors. 2021 SCC OnLine Bom 6187 and a decision of the High Court of Allahabad in t....
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....dience to a prohibition was conceived of as a contempt of the Crown. Since it was "the proper power and honour of the King's Bench to limit the jurisdiction of all other courts the writ usually issued out of that court; but it could also be awarded by the Chancery and the Common Pleas. 56. In Halsbury's Laws of England, 5th Ed., Vol. 61A, para. 111, a prohibition order is explained in the following words: "A prohibiting order is an order issuing out of the High Court and directed to an inferior court or tribunal or public authority or a body susceptible to judicial review which forbids that court or tribunal or authority or body to act in excess of its jurisdiction or contrary to law." 57. Sir Michael Supperstone, James Goudie QC, and Sir Paul Walker's Judicial Review, 4th Ed., at page 561, in a lucid manner explains prohibition. It states as under: "PROHIBITING ORDERS The early form: prohibition 16.4-16.4.1 In its original form the writ of prohibition was used primarily to limit the jurisdiction of the ecclesiastical courts. It would issue on the application of a subject. It increasingly came to be used by the common law courts to limi....
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....e without jurisdiction and the writ of prohibition ought to issue. But the writ does not lie to correct the course, practice or procedure of an inferior tribunal, or a wrong decision on the merits of the proceedings. It is also well-established that a writ of prohibition cannot be issued to a court or an inferior tribunal for an error of law unless the error makes it go outside its jurisdiction (See Regina v. Comptroller-General of Patents and Designs 1953 (2) W.L.R. 760, 765 and Parisienne Basket Shoes Proprietary Ltd. v. Whyte 59 C.L.R. 369." [Emphasis supplied] 59. An important finding of the Hon'ble Supreme Court in S. Govinda Menon (supra), relating to the distinction between want of jurisdiction and the manner in which it is exercised, is particularly relevant for the present dispute. It reads as under: "A clear distinction must therefore be maintained between want of jurisdiction and the manner in which it is exercised. If there is want of jurisdiction then the matter is coram non judice and a writ of prohibition will lie to the court or inferior tribunal forbidding it to continue proceedings therein in excess of its jurisdiction." [Emphasis supplied] 60....
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....arlier pronouncements, summarized the exceptions to the rule of alternate remedy in the following words: "27.3. Exceptions to the rule of alternate remedy arise where : (a) the writ petition has been filed for the enforcement of a fundamental right protected by Part III of the Constitution; (b) there has been a violation of the principles of natural justice; (c) the order or proceedings are wholly without jurisdiction; or (d) the vires of a legislation is challenged. 27.4. An alternate remedy by itself does not divest the High Court of its powers under Article 226 of the Constitution in an appropriate case though ordinarily, a writ petition should not be entertained when an efficacious alternate remedy is provided by law. 27.5. 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." [Emphasis supplied] 64. The obse....
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....ciplines of the highest order has to be exercised whilst issuing such writs. It must be remembered that the writ jurisdiction is original jurisdiction distinct from appellate jurisdiction. An appeal cannot be allowed to be disguised in the form of a writ. In other words, this power cannot be allowed to be used "as a cloak of an appeal disguise". Lax use of such a power would impair the dignity and integrity of the subordinate Court and could also lead to chaotic consequence. It would undermine the confidence of the subordinate Court. ... In other words the High Court should not usurp the jurisdiction of the civil Court to decide these questions. In the impugned Judgment no reason, much less a cogent or strong reason, has been given as to why civil Court could not be allowed to decide these questions. The impugned judgment does not state that the civil Court had either proceeded to act without or in excess of jurisdiction or that it had acted in violation of rules of natural justice or that it had proceeded to act under law which was ultra vires or unconstitutional or proceeded to act in contravention of fundamental rights. The impugned judgment does not indicate as to why ....
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.... section of provision of law is cited in a notice or order if the power to proceed is actually there under another provision." 68. Similarly in State of UP v. Nooh (1958) SCR 595., the Hon'ble Supreme Court noted, in the context of the writ of certiorari, the modern-day terminology being 'quashing order', as follow: "11. On the authorities referred to above it appears to us that there may conceivably be cases - and the instant case is in point - where the error, irregularity or illegality touching jurisdiction or procedure committed by an inferior court or tribunal of first instance is so patent and loudly obtrusive that it leaves on its decision an indelible stamp of infirmity or vice which cannot be obliterated or cured on appeal or revision. If an inferior court or tribunal of first instance acts wholly without jurisdiction or patently in excess of jurisdiction or manifestly conducts the proceedings before it in a manner which is contrary to the rules of natural justice and all accepted rules of procedure and which offends the superior court's sense of fair play the superior court may, we think, quite properly exercise its power to issue the prerogative writ of c....
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....t an abuse of process of court. It appears that the High Court has initially granted an ex parte ad interim order mechanically and without assigning any reasons. The High Court ought to have appreciated that by passing such an interim order, the rights of the secured creditor to recover the amount due and payable have been seriously prejudiced. The secured creditor and/or its assignor have a right to recover the amount due and payable to it from the borrowers. The stay granted by the High Court would have serious adverse impact on the financial health of the secured creditor/assignor. Therefore, the High Court should have been extremely careful and circumspect in exercising its discretion while granting stay in such matters. In these circumstances, the proceedings before the High Court deserve to be dismissed. [Emphasis supplied] 71. It must be noted that the observation of the Hon'ble Supreme Court in Phoenix ARC (supra), are not restricted to the examination of the stay granted by the High Court in the said case, but also relate to the question of entertaining a petition where an alternate statutory remedy is available. Paragraph no. 14 of the judgement is reproduced ....
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.... evolved by this Court, which every High Court is bound to keep in view while exercising power under Article 226 of the Constitution. 45. It is true that the rule of exhaustion of alternative remedy is a rule of discretion and not one of compulsion, but it is difficult to fathom any reason why the High Court should entertain a petition filed under Article 226 of the Constitution and pass interim order ignoring the fact that the petitioner can avail effective alternative remedy by filing application, appeal, revision, etc. and the particular legislation contains a detailed mechanism for redressal of his grievance. [Emphasis supplied] 73. Indeed, 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 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 specif....
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....er sub-section (1) of section 95 shall be submitted in Form C, along with a fee of two thousand rupees. (3) The creditor shall serve forthwith a copy of the application referred to in sub-rule (2) to the guarantor and the corporate debtor for whom the guarantor is a personal guarantor. (4) In case of a joint application, the creditors may nominate one amongst themselves to act on behalf of all the creditors." 79. The impugned demand notice records the following particulars of the debt: PARTICULARS OF DEBT 1. Total outstanding debt (including any interest or penalties) Rs. 1211,91,94,259/- 2. Amount of debt in default Rs. 1211,91,94,259/- 3. Date when the debt was due 21.09.2020 (closing date on which the resolution plan of FACOR was implemented) 80. It may be seen that Rule 7 of Rules, 2019 is a requirement mandated by Section 95(4)(b) of the IBC. Section 95 of the IBC reads as under: 95. Application by creditor to initiate insolvency resolution process.-(1) A creditor may apply either by himself, or jointly with other creditors, or through a resolution professional to the Adjudicating Authority for initiating an insolv....
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....vation on the merits of the dispute in the case of Prashant Shashi Ruia (supra), were held by the High Court of Gujarat to be prima facie, this court does not consider it fit to place reliance on the same. This court cannot then, automatically rely upon the said decision. Paragraph no. 97 of Prashant Shashi Ruia (supra) is reproduced as under: "97. We clarify that any observation on merits direct or indirect shall be construed as absolutely prima facie in nature and those shall not be construed as an expression of any final opinion on the issue as regards the jurisdiction of the Tribunal or the pivotal issue of assignment of debt and its effects." 85. In Hutchens v. Deauville Investments Pvt. Ltd. (1986) 68 A. L.R. 367., relied upon by the petitioner, the High Court of Australia observed as under: "As we followed the argument, it was suggested that, by such a transaction, Hutchens' liability as a guarantor could be transformed into an independent liability to a different creditor from the creditor to whom the guaranteed debt remained owing. That suggestion would seem to lie ill with the basic principle that the debt owed by a guarantor, upon default by the prin....
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.... a general pronouncement on the rights of the surety. In this context, it would be apposite to consider a few judgements of the Australian courts that explain the effect of Hutchens (supra). 87. In Mark Sensing (Aust.) Pvt. Ltd. v. Flammea (2003) VSCA 41., the Supreme Court of Victoria Court of Appeal in paragraph no. 21 stated as under: "[21] I return to the appellants' principal argument. It is unnecessary to cite authority for the proposition that the benefit of a contract of guarantee is assignable as a legal chose in action. It is a question of construction of the assignment of the principal debt whether the benefit of a guarantee such as the present, and not merely the principal debt, was intended to be assigned to the assignee. 3 Wherever the words of assignment provide expressly for the assignment of the guarantee in respect of a debt, the position is clear. If, however, there has been no express assignment of the guarantee, the words used may nonetheless be construed as sufficiently broad to extend to related securities, if the assignee is able to show that the express assignment of the principal contract has impliedly carried with it the benefit of the gua....
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....tereo Consultants Pty Ltd [1976] 1 NSWLR 5 at 12 and by O'Donovan and Phillips, The Modern Contract of Guarantee, 3rd ed (1996) LBC at 509. The better view is that the presence of the clause allowing for assignment of the guarantee is not of itself sufficient to infer that the guarantee was assigned with the debt." [65] But in any event, the assignment of the debt was not, as I have held, effective because no notice in writing was given to the debtor as s 12 required. A guarantee cannot be assigned without the benefit of the principal obligation because otherwise "a creditor could effectively divorce the guarantor's liability from that of the principal debtor": Hutchens v Deauville Investments Pty Ltd (1986) 68 ALR 367 at 373." [Emphasis supplied] 90. Similarly, in Property Builders Pvt. Ltd. v. Adelaide Bank Ltd. (2011) NSWCA 266., the Supreme Court of New South Wales Court of Appeal, further extended the pronouncement in Hutchens (supra) and observed as under: [50] In these circumstances there was, in my opinion, no basis upon which Adelaide Bank was entitled to sue Mr Phontos on the guarantee. In Hutchens v Deauville Investments Pty Ltd [1986] HCA 8....
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....uarantee is not assigned then the right in the original creditor to recover under the guarantee must at least be suspended so long as the debt is assigned. There cannot be two persons entitled to recover the amount of the same debt, one from the principal debtor, and so long as the principal debtor was in default, another from the surety. Let it be assumed otherwise and suppose that the original creditor, the assignor of the principal debt, could show that it was overdue and thereupon sued the surety. Let it be assumed that the surety paid. Then, the assignee sues the principal debtor. He must be entitled to succeed unless there are some special circumstances of estoppel in the particular case, a factor which I place to one side. The assignee under an absolute assignment could not be deprived of his right to recover from the debtor because the assignor had recovered from the surety." For similar reasons, in Hutchens v. Deauville Investments Ptv. Ltd. it was held that a guarantee (or the security for it) cannot be assigned without the benefit of the principal transaction. [Emphasis supplied] 93. Further, Guest on The Law of Assignment by AG Guest, 1st Ed., at pa....
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....ead as under: 126. "Contract of guarantee", "surety", "principal debtor" and "creditor".-A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety"; the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written. 127. Consideration for guarantee.-Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. 133. Discharge of surety by variance in terms of contract.-Any variance, made without the surety's consent, in the terms of the contract between the principal and the creditor, discharges the surety as to transactions subsequent to the variance. 134. Discharge of surety by release or discharge of principal debtor.-The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the credit....
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....reement executed between the appellant Basavaraj (since deceased) and the Bank would clearly show it to be one of a continuing guarantee. Section 129 of The Indian Contract Act, 1872 (hereinafter referred to as "the Act") defines a continuing guarantee as "A guarantee which extends to a series of transactions is called a "continuing guarantee". Section 130 of the Act says that "A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor." A reading of the agreement clearly shows that the guarantee was to continue to all future transactions except when the guarantor disclaimed from his liability through a written statement. The deed also clearly mentions that while between the guarantor and borrower, the guarantor is only a surety; yet between the bank and the guarantor, the surety is the principal debtor and his liability would be co-extensive to that of the borrower. Accordingly, the guarantor himself waived off his rights under Chapter VIII of the Act which is conferred on a surety. This Court is in respectful agreement with the decision of Karnataka High Court in the case of T. Raju Shetty v. Bank of Baroda [AIR 1992 KARN....
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....r authority; or (vii) Acquisition or nationalization of the Borrower and/ or any of its undertaking(s) pursuant to any law; or; (viii) any change in the constitution of the Lender; (ix} any dispute between Borrower and the Lender regarding the amount due; (x) insolvency or death of the Guarantor(s)." 102. In light of the above analysis, the concerned NCLT must carefully scrutinize the deed of guarantee, if at all required. 103. 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. 104. Whereas under a contract of....
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....367]. However, the guarantee can be enforced by an assignee of the creditor's rights under the principal contract if the benefit of it is expressly or impliedly assigned along with the principal contract to which the it relates. It is a question of construction whether the benefit of the guarantee was intended to be assigned to the assignee. In the absence of an express assignment of the guarantee together with the principal contract, the assignee must show that the express assignment of the principal contract has impliedly carried with it the benefit of the guarantee. A number of general points can be made about this question of construction. Where the creditor simply assigns the benefit of the principal contract and the words of the assignment are limited to that transaction, the benefit of the guarantee securing it will not follow the assignment. The assignee of the principal transaction is, therefore, unable to enforce the guarantee. An example of this situation is to be found in International Leasing Corp (Vic) Ltd v Aiken, where the guarantee of a chattel lease was held not to be impliedly assigned by an assignment of the lease itself when the words of a....
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....view of the language of Section 128 of the Contract Act, 1872 a there is no discharge under Section 134 of that Act. This Court observed as follows: (SCC pp. 362-63, para 7) "7. Under the bank guarantee in question the Bank has undertaken to pay the Electricity Board any sum up to Rs 50,000 and in order to realise it all that the Electricity Board has to do is to make a demand. Within forty-eight hours of such demand the Bank has to pay the amount to the Electricity Board which is not under any obligation to prove any default on the part of the Company in liquidation before the amount demanded is paid. The Bank cannot raise the plea that it is liable only to the extent of any loss that may have been sustained by the Electricity Board owing to any default on the part of the supplier of goods i.e. the Company in liquidation. The liability is absolute and unconditional. The fact that the Company in liquidation i.e. the principal debtor has gone into liquidation also would not have any effect on the liability of the Bank i.e. the guarantor. Under Section 128 of the Contract Act, 1872, the liability of the surety is coextensive with that of the principal debtor unless it is oth....
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....er: "115. The other question which parties had urged before this Court was that the impugned notification, by applying the Code to personal guarantors only, takes away the protection afforded by law; reference was made to Sections 128, 133 and 140 of the Contract Act, 1872; the petitioners submitted that once a resolution plan is accepted, the corporate debtor is discharged of liability. As a consequence, the guarantor whose liability is coextensive with the principal debtor i.e. the corporate debtor, too is discharged of all liabilities. It was urged therefore, that the impugned notification which has the effect of allowing proceedings before NCLT by applying provisions of Part III of the Code, deprives the guarantor of their valuable substantive rights." [Emphasis supplied] 117. It is thus clear that the specific issue considered by the Hon'ble Supreme Court in the case of Lalit Kumar Jain (supra), was- whether the approval of a resolution, which leads to a discharge or release of a corporate debtor can, in and itself, lead to a discharge of the personal guarantor. 118. In the instant case, the petitioner's claim is not based on the mere passing of the Res....
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....In order to appreciate the submission, the specific clauses of the Resolution Plan and the said Assignment Agreement are reproduced as under: 1. Clause 3(c)(iv)(g) of the Resolution Plan reads as under: "(g) FACOR Power Limited ("FPL") - Upon implementation of the Resolution Plan, as an integral part of this Resolution Plan, REC shall on Closing Date: i. Release its charge on the shares held by the Company in FPL; ii. Transfer, assign and convey its entire debt given to FPL and all rights, title and interest thereto to the Company; and iii. Invoke and enforce or cause the invocation and enforcement of, as the case may be, the pledge on FPL's shares that are pledged for the benefit of REC and shall/shall cause transfer of the same to the Company. iv. In lieu of the personal guarantee provided by existing promoters (and their relatives/controlled entities) of the Company for debt of FPL, require each of the existing promoters and their relatives, controlled entities and Affiliates ("Existing Promoter Group"), to transfer shares held by them in FPL to the Company. It is clarified that such transfer is subject to concurrence of the relev....
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.... underlying Security Interest, save and except the Excluded Assets, in favour of the Assignee. The Parties have agreed to assign and accept the same on the terms and conditions stated herein below." [Emphasis supplied] 4. Clause 1 of the said Assignment Agreement that defines 'Excluded Assets' reads as under: "(g) Excluded Assets means: (i) all third-party Security Interest created to secure the Loans including the pledge of shares of the Borrower which has been released or invoked; and {ii) all personal guarantees provided by an individual for guaranteeing the loans." [Emphasis supplied] 127. It must be noted that the petitioner has not disputed the fact of there being an exclusion of personal guarantee. Indeed, it is this fact that forms the basis of their case, and their reliance on Hutchens (supra). The contention of the petitioner is not that the Resolution Plan and the said 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., the respondent herein, can....
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....ed to any immutable mantra, and must be laid bare, with reference to the facts of each case, it cannot be a mere allegation of breach of contract that would suffice. What must be involved in the case must be action/inaction, which must be palpably unreasonable or absolutely irrational and bereft of any principle. An action, which is completely malafide, can hardly be described as a fair action and may, depending on the facts, amount to arbitrary action." 134. Similarly, this court in IDBI Bank Ltd. v. Power Finance Copn. Ltd. 2023 SCC OnLine Del 2909, as under: 34. Considering the contention of the petitioner that respondent no. 1 has acted in an arbitrary and unfair manner and their right under Article 14 of the Constitution of India has been violated, it must be considered, that arbitrariness needs to be adjudged from the lens of the Constitution and with elements of public law. Every act of breach of contract by a subsidiary, undertaking, instrumentality or functionary of the State, cannot be assailed before a writ court. What the criteria of arbitrariness require in order to bring a case within the parameters of Article 226 of the Constitution of India is, either a ....
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.... of the petitioner under Article 14 of the Constitution of India has been violated. It is, therefore not warranted to delve into, what the true import of specific clauses of contracts is. 140. 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. 141. The material part of the Resolution Plan relating to this claim reads as under: (g) FACOR Power Limited ("FPL") - Upon implementation of the Resolution Plan, as an integral part of this Resolution Plan, REC shall on Closing Date: ... iv. In lieu of the personal guarantee provided by existing promoters (and their relatives/controlled entities) of the Company for debt of FPL, require each of the existing promoters and their relatives, controlled entities and Affiliates ("Existing Promoter Group"), to transfer shares hel....
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....42, "In delivering his judgment, Parke B. laid it down clearly that a proviso such as that with which we have to deal not only rebuts what would otherwise be implied, namely, the release of the surety as against the creditor, but also prevents the rights of the surety against the debtor, that is, the right to indemnity, being impaired, for, as Parke B. points out, the consent of the debtor that the creditor shall have recourse against the surety is impliedly a consent that the surety shall have recourse against him, the debtor." [Emphasis supplied] 148. 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. 149. In this regard, the Privy Council in one of its earlier judgements in the case of Commercial Bank of Tasmania v. Jones (1893) AC 313, later relied upon in Mahant Singh v. U Ba Yi (1939) AC 601, noted the following: ....
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....r as a release which contains a clause preserving rights against the guarantor is effective for that purpose. 151. However, in India, the pronouncement of the Privy Council in Mahant Singh (supra), holds the ground, and has not been departed from. In Mahant Singh (supra), the Privy Council laid down the distinction between a covenant not to sue and an absolute release. The material parts of the judgement may be liberally reproduced as under: "8. Where an absolute release is given there is no room for any reservation of remedies against the surety. See Webb v. Hewitt (1857) 3 K & J 438 and Commercial Bank of Tasmania v. Jones [1893] A.C. 313. XXXX 13. In England an undertaking by the creditor not to sue the principal debtor, or a binding agreement to give him time, does not operate as a discharge of the surety provided it is a condition of the undertaking or agreement that the rights of the creditor to sue or receive the money from the surety are reserved. See Bateson v. Gosling (1871) L.R. 7 C.P. 9 and Oriental Financial Corporation v. Overend, Gurney, & Co. (1871) L.R. 7 Ch. App. 142, 153. 14. Similarly, a failure to sue the principal debtor ....
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....the position in Mahant Singh (supra), the distinction between a covenant not to sue and an absolute release needs to be maintained. 154. From the analysis above, it can be concluded that a reservation of rights clause is incompatible with an absolute release of a principal debtor. 155. It needs to be seen whether the reservation of rights clause can modify the effect that the application of Hutchens (supra) may have. Preliminarily, it may be observed that the principles operate in different fields. While a reservation of rights clause is a private agreement between the parties, Hutchens (supra) on the other hand, seems to be concerned with the legal compliance to the form and substance of a contract of guarantee. 156. The concerned NCLT, if at all it thinks fit, may carefully delve into this aspect of the case. 157. After having considered the relevant issues and pronouncements, this court must now revert to the fundamental issue in this case-whether the petitioner has established that the impugned demand notice was wholly without jurisdiction and the respondent must therefore be prevented from approaching the concerned NCLT under the provisions of the IBC. 158. Even....