Delhi High Court Single Judge Bench of Justice Purushaindra Kumar Kaurav was hearing a petition filed by the Personal guarantor of a Corporate debtor and held that approval of a resolution plan did not automatically discharge the personal guarantor of a corporate debtor from their liabilities under the guarantee contract.
In the present case, a writ petition was filed by a petitioner seeking to quash a demand notice issued by Rural Electrification Corporation Limited (REC Ltd.) on 09.12.2022, invoking the petitioner's personal guarantees for the outstanding debt of Rs. 1211.91 crores. The petitioner had acted as a personal guarantor for a loan taken by FACOR Power Ltd. from REC Ltd.
REC Ltd., being a state company under the Ministry of Power, initiated the Corporate Insolvency Resolution Process against FACOR in May 2017 due to loan default, and a Resolution Plan was approved by the National Company Law Tribunal (NCLT) on 30.01.2020.
The petitioner argued that after the Resolution Plan, REC Ltd.'s debt was assigned to FACOR, and therefore, there was no debt due from FACOR to REC Ltd., and the personal guarantees were discharged due to the transfer of shares from the promoters to the company.
REC Ltd. argued that the writ petition was not maintainable as there was an alternate remedy available under the Insolvency and Bankruptcy Code (IBC). REC Ltd. asserted that the demand notice was valid and the Resolution Plan did not affect the enforceability of personal guarantees.
The High Court examined the contentions of both parties, the clauses in the Resolution Plan, and the Assignment Agreement. The High Court found that the personal guarantees were expressly excluded from the Resolution Plan and remained enforceable. It rejected the petitioner's argument and held that REC Ltd. could still seek recovery from the petitioner.
The High Court also ruled that the writ of prohibition sought by the petitioner to prevent the respondent from approaching the NCLT was not granted as the petitioner failed to demonstrate a total absence of jurisdiction on the part of the NCLT. The High Court emphasized the need for the petitioner to exhaust remedies available under the IBC before seeking relief through a writ petition.
The High Court further discussed the applicability of the law on assignment, contract of surety, and the ruling in Hutchens to the case. It held that the approval of a resolution plan did not automatically discharge the personal guarantor of a corporate debtor from their liabilities under the guarantee contract.
Regarding the petitioner's claim of violation of Article 14 of the Constitution, the High Court held that no violation had occurred as the respondent's actions were not arbitrary and did not constitute a violation of Article 14.
The High Court dismissed the writ petition and allowed the NCLT to decide on the matter based on the submissions of both parties on their merits. All observations made in the judgment were considered prima facie, subject to the competent court or tribunal's discretion to deal with the issues on merits.