TMI Blog2023 (7) TMI 962X X X X Extracts X X X X X X X X Extracts X X X X ..... to be given its due weightage while entertaining a petition praying for a writ of prohibition. Undeniably, the principle of Nooh [ 1957 (9) TMI 42 - SUPREME COURT] , has application in the instant case, not merely because the petitioner prays for the impugned demand notice to be quashed, but also because the writs of certiorari and prohibition are complementary in nature, having a common ground of lack of jurisdiction . Thus, the existence of an alternate remedy does not act as a bar to entertain a petition praying for a writ of prohibition. In cases where an alternate remedy is available to the petitioner, there is a higher threshold that needs 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 specialized forum is competent to decide upon its own jurisdiction, the burden upon a petitioner is further compounded. In such a scenario, the petitioner needs to convince the court, not merely that the proceedings or actions being taken are wholly without jurisdiction but also why the alternate forum must be deprived of an opportunity to decide upon its own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge of the personal guarantor - In the instant case, the petitioner s claim is not based on the mere passing of the Resolution Plan of FACOR, but rather is concerned with the effect that the terms of the Resolution Plan have in law. It is their case, that the Resolution Plan is valid in law, its terms need to be adhered to, however, the effect of the terms of the Resolution Plan is that the respondent cannot enforce the guarantee given to it by the petitioner - This court is, therefore, of the opinion that the pronouncement of Lalit Kumar Jain shall have no application in the facts of the present case. The second submission of the respondent that the respondent is only seeking to recover the part of the debt that was left unrecovered after the CIRP of FACOR was concluded now deserves attention - Indeed, it is the case that the respondent intends to recover what was left unrecovered after the CIRP of FACOR concluded, however, after the underlying debt was assigned. The assignee is entitled to recover the unrecovered amount as well. The third argument, and the most vehemently argued submission of the respondent must now be considered by this court. It is their contention tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pta Ms. Shweta Singh, Advocates.) JUDGMENT 1. The petitioner has filed the instant writ petition seeking quashing of the impugned Demand Notice dated 09.12.2022 issued by the respondent i.e., Rural Electrification Corporation Limited(hereinafter REC Ltd. ) 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 (hereinafter Rules, 2019 ) invoking the personal guarantees of the petitioner 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.C.C. Page 1 , wherein it is observed that; One who comes to the Court, must come with clean hands. We are constrained to say that more often than not, process of the Court is being abused. Property grabbers, tax-evaders, bank-loan dodgers and other unscrupulous persons from all walks of life find the Court process a convenient liver to retained the illegal gains indefinitely. We have no hesitation to say that a person, who's Case is based on falsehood, has no right to approach the Court. He can be summarily 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as to Costs. 9. The matter was thereafter carried before the Hon ble Supreme Court in Civil Appeal No. 5991-5992 of 2021, however, the same was also dismissed in terms of the order dated 27.09.2021 which reads as under:- We have heard learned Senior Counsel for the parties for quite some time. We are unable to persuade ourselves to interfere in the judgments impugned dated 12.03.2020 in Civil Appeals @ Diary No. 2669/2021 and dated 25.11.2020 in Civil Appeal No. 5129/2021 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve or agent of the Assignor and to exercise all other rights of the Assignor in relation thereto 7. EFFECTIVE DATE OF AGREEMENT Notwithstanding anything contrary contained herein, this Agreement shall be effective on the date on which its respective portions of Upfront Payment and Total Consideration in accordance with the terms of Resolution Plan arc received by the Assignor ( Effective Date ). With effect from the Effective Date. all economic benefits 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan is being recovered twice. It would therefore be arbitrary, and shall amount to unjust enrichment. It is their submission that the same would be violative of Article 14 of the Constitution. 19. Learned senior counsel appearing on behalf of the petitioner has taken this court through various clauses of the said Assignment Agreement and other relevant documents to indicate that if the impugned action of the respondent is allowed to continue, the same 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereafter, after examining the application referred to Section 95 of the IBC, the Resolution Professional shall within ten days of his appointment, submit a report to the NCLT recommending the approval or rejection of the application. 29. However, where the application has been filed under Section 95 of the IBC, the Resolution Professional may require the debtor to prove repayment of the debt claimed as unpaid by the creditor by furnishing (a) evidence 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit of REC to the Company, as contemplated in Section 3(c)(iv)(g) and Annexure 2, the Resolution Plan shall in no way affect the validity and enforceability of (A) the personal guarantees executed by the person in the promoter group; (B) the corporate guarantees executed by third parties; and (C) any other security created by a third party, as of the insolvency commencement date of the company, for securing the debt of 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 enforc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view of applicability of the doctrine of merger. 41. It is thus stated that once the Resolution Plan has attained finality after the pronouncement of the Hon ble Supreme Court, therefore, at this stage, it would be misinterpretation of the terms and conditions of the Resolution Plan to exclude the liabilities of the personal guarantees which have been specifically excluded by the terms of the Resolution Plan. 42. Reliance 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 lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance has also been placed on behalf of the petitioner on a decision of the High Court of Bombay in the case of Shantilal Ambalal Mehta v. M.A. Rangaswamy 1977 SCC OnLine Bom 69., to submit that the existence of an alternative efficacious remedy is not a bar to entertain a writ petition under Article 226 of the Constitution of India. It has also been submitted that the High Court may exercise its writ jurisdiction despite the availability 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said: It is breve regium and jus coronae, and if this writ shall be denied in such cases, this would be in laesionem, exhereditationem, et derogationem coronae. The matter was expressed more soberly in another case: The King is the indifferent arbitrator in all jurisdictions, as well spiritual and temporal, and [it] is a right of his Crown to ...declare their bounds by prohibitions. [Doctor James s Case (1621) Hobart 17; 80 ER 168]. Disobedience 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 Suppersto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f departure from the rules of natural Justice (See Halsbury's Laws of England, 3rd Edn; Vol. 11, p. 114). It was held for instance by the Court of Appeal in The King v. North 1927 (1) K.B. 491 that as the order of the judge of the consistory court of July 24, 1925 was made without giving the vicar an opportunity of being heard in his defence, the order was made in violation of the principles of natural justice and was therefore an order made 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 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order or proceedings are wholly without jurisdiction or the vires of an Act is challenged. There is a plethora of caselaw on this point but to cut down this circle of forensic whirlpool, we would rely on some old decisions of the evolutionary era of the constitutional law as they still hold the field. [Emphasis supplied] 63. Similarly, the Hon ble Supreme Court in the case of Radha Krishnan Industries (supra), after considering a catena of earlier 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court or Tribunal (a) proceeds to act' without or in excess of jurisdiction, (b) proceeds to act in violation of rules of natural justice, (c) proceeds to act under law which is itself ultra vires or unconstitutional, or (d) proceeds to act in contravention of fundamental right. The principal which govern exercise of such power must be strictly observed. A Writ of Prohibition must be issued only in rarest of rare cases. Judicial disciplines 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceedings against them. They have, therefore, asked for writs of prohibition. The existence of an alternative remedy is not generally a bar to the issuance of such a writ or order. But, in order to substantiate a right to obtain a writ of prohibition from a High Court or from this Court, an applicant has to demonstrate total absence of jurisdiction to proceed on the part of the officer or authority complained against. It is not enough if a wrong 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 appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the proposed action to be taken under Section 13(4). As observed hereinabove, even assuming that the communication dated 13-8-2015 was a notice under Section 13(4), in that case also, in view of the statutory, efficacious remedy available by way of appeal under Section 17 of the SARFAESI Act, the High Court ought not to have entertained the writ petitions. Filing of the writ petition by the borrowers before the High Court is nothing but 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon the High Court under Article 226 of the Constitution to issue to any person or authority, including in appropriate cases, any Government, directions, orders or writs including the five prerogative writs for the enforcement of any of the rights conferred by Part III or for any other purpose are very wide and there is no express limitation on exercise of that power but, at the same time, we cannot be oblivious of the rules of self-imposed restraint 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 cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 of the IBC, and the impugned demand notice must be quashed as there is no debt the petitioner owes to the respondent. 78. The impugned demand notice is issued under Rule 7 of the Rules, 2019. Rule 7 is reproduced as under: 7. Application by creditor. (1) A demand notice under clause (b) of sub-section (4) of section 95 shall be served on the guarantor demanding payment of the amount of default, in Form-B. (2) The application under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guarantees, under the terms of the Resolution Plan and the said Assignment Agreement, is that the respondent can no longer invoke the guarantee furnished by the petitioner. 83. The petitioner, in support of its contention, relies upon Prashant Shashi Ruia (supra). This court is, however, not inclined to rely upon the case of Prashant Shashi Ruia (supra) directly, as the learned senior counsel for the respondent points out, in the said case, the High Court of Gujarat dismissed the petition, and did not grant the relief prayed for by the petitioner. 84. Since the observation 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereupon 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. [Emphasis supplied] 86. At the threshold, it must be considered whether the dictum of Hutchens (supra) is constrained by the peculiar facts of the case or is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he letter merely giving notice of the assignment. The documents do not support the assignment of the guarantee. Although, as I have noted, cl 6.6 of the Deed of Guarantee contemplates that the lender may assign the guarantee and that the guarantor s obligations are not thereby changed, I do not think the presence of that clause alone is sufficient to infer that on any assignment of the debt the guarantee was itself assigned along with the debt: Cf International Leasing at 451 per Asprey JA, and see the criticism of Asprey JA s statement in Sacher Investments Pty Ltd v Forma Stereo 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odern Contract of Guarantee by O Donovan and Philips, 4th Ed., at paragraph no. 6-113 and 6-114 noted as under: Where the principal transaction is assigned without the benefit of the guarantee, so it is likely that the assignor cannot enforce the guarantee. The High Court of Australia in Hutchens v Deauville Investments Pty referred with approval to comments by Jacobs JA in International Leasing Corp (Vic) Ltd y Aiken [(1986) 68 ALR 367] outlining the incongruous result which would occur if the position were otherwise: If the debt is assigned but the guarantee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered. In the context of subrogation, it is not that the guarantor s right gets compromised when the claim for subrogation arises, that is, upon the fulfillment of the entire debt, but the right is trampled upon when the creditor voluntarily acts in a manner, including entering into of an agreement or arrangement, that results into a situation where the surety cannot exercise his rights. On similar terms, the assignment may also constitute an act by the creditor that has impaired the eventual remedy of the surety. 98. The material provisions from ICA read 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 suf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... waived off by the consent of the beneficiary is equally applicable in the context of the surety s rights under the ICA. The surety may waive his rights either through express and specific terms in the contract of guarantee itself, or through a subsequent agreement between the guarantor and the creditor to that effect. 100. In HR Basavaraj v. Canara Bank (2010) 12 SCC 458 the Hon ble Supreme Court dealt with the issue of waiver of rights under Section 130 of the ICA. Paragraph no. 14 of the said judgement reads as under: 14. An examination of the agreement 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er; and/ or (iv) the doing or the omitting to do anything on the part of the Lender that but for this provision might operate to exonerate or discharge the Guarantor from any of his obligations under this Guarantee; (v) any change in the constitution or winding up of the Borrower or any absorption, merger or amalgamation of the Borrower with any other company, Corporation or concern; or (vi) any change in the management of the Borrower or take over the management of the Borrower by Central or State Government or any other 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the concerned NCLT, if it thinks fit, may delve into. 108. It would also be of aid to refer to The Modern Contract of Guarantee (supra). While discussing assignment of guarantees, the author at page 601 states the following: A guarantee or the security for it 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 Pvt. Ltd. (1986) 68 ALR 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... self. However, this Court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability. In Maharashtra SEB the liability of the guarantor (in a case where liability of the principal debtor was discharged under the Insolvency law or the Company law), was considered. It was held that in view of the unequivocal guarantee, such liability of the guarantor continues and the creditor can realise the same from the guarantor in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead in the context of what was previously stated in paragraph no. 122, it being that the sanction of a Resolution Plan and the finality imparted to it by Section 31 of the IBC does not per se operate as a discharge of the guarantor s liability . 116. Further, the precise issue raised before the Hon ble Supreme Court in Lalit Kumar Jain (supra), should also be considered. The Hon ble Supreme Court in paragraph no. 115 succinctly summarised the contentions of the petitioners therein which reads as under: 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 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to accept this argument of the respondent. 125. The third argument, and the most vehemently argued submission of the respondent must now be considered by this court. It is their contention that since the personal guarantees were specifically excluded from the Resolution Plan and the said Assignment Agreement, the respondent can proceed to enforce the guarantee given by the petitioner to the creditor. The terms of the Resolution Plan cannot be altered after they have attained finality. 126. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocuments. [Emphasis supplied] 3. Recital C of the said Assignment Agreement reads as under: (C) Upon implementation of the Resolution Plan on the Closing Date the Assignor is required to transfer, assign and convey the entire financial assistance viz. the Loans provide by the Assignor to the Borrower, disbursed under the aforesaid Financing Documents together will all its rights, title and interest in the Financing Documents and any 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tution of India is a ground to entertain a petition in the field of contract law. 133. Recently, the Hon ble Supreme Court in the case of MP Power Management Company Ltd. v. M/s. Sky Power Southeast Solar India Pvt. Ltd. (2023) 2 SCC 703, noted the following in the context of a violation of Article 14 of the Constitution of India in the realm of contract law: While the concept of an arbitrary action or inaction cannot be cribbed or confined 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 Constitutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of India. Even if it is assumed that the respondent is acting under a misinterpretation 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. 139. This court is, therefore, of the opinion, that in the present case, no right 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 Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rincipal 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. 147. The rationale for allowing such a reservation in the release deed between the principal borrower and the creditor has been noted in an early judgement of the Kings Bench in Cole v. Lynn (1942) 1 KB 142, 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise appeared to be an unconditional release into a covenant not to sue and, once that conclusion was reached, it was also held to preserve the creditor's rights against the guarantor. Given the rejection of the historical distinction between the effect of a release and covenant not to sue in Watts v. Aldington [The Times, 16 December 1993] any agreement between creditor and debtor- whether worded as a covenant not to sue or 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 agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lute release was further maintained in Radha Thiagarajan v. South Indian Bank Ltd. Ors. MANU/KE/0057/1984. The decision in Mahant Singh (supra) was further relied upon by this court in Ram Bahadur Thakur and Co. v. Sabu Jain Ltd. 1979 SCC OnLine Del 114. 153. This court is, therefore, of the opinion that in the absence of a categorical pronouncement by the Hon ble Supreme Court departing from 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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