IBC | Sending Demand Notice Under Rule 7(1) To Personal Guarantor Cannot Be Termed As Arbitrary: Delhi High Court

The Delhi High Court Bench comprising of Justice Purushaindra Kumar Kaurav, while adjudicating a petition filed in Vineet Saraf v Rural Electrification Corporation Ltd., has declined to quash a Demand Notice sent to a personal guarantor 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. It has been held that mere issuance of a Demand Notice to personal guarantor does not reek of arbitrariness, since it has been done to comply with the statutory requirement of Section 95 of IBC, to agitate before the NCLT that there is a debt owed by the personal guarantor to the creditor. “It is not the case that the reliefs prayed for cannot be granted by the concerned NCLT. The petitioner‟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 belated stage. Indeed, if in the present case the petition is 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 the concerned NCLT.” 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. “The respondent in this case, has merely issued a demand notice in order to comply with the statutory requirement of Section 95 of the IBC. This notice was issued by the respondent in order to enable them to agitate before the NCLT that there is a debt that the petitioner owes to the respondent……There is nothing that the respondent has done, that can be elevated to the level of arbitrariness.” The Bench dismissed the writ petition while observing as under: “It is not the case that the reliefs prayed for cannot be granted by the concerned NCLT. The petitioner‟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 belated stage. Indeed, if in the present case the petition is 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 the concerned NCLT.” Further, the Bench has declined to issue writ of prohibition to prevent Respondent from...

IBC | Sending Demand Notice Under Rule 7(1) To Personal Guarantor Cannot Be Termed As Arbitrary: Delhi High Court

Pallavi Mishra

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