Delhi High Court: Existence of An Alternate Remedy Does Not Act as a Bar to Entertain Petition Praying for Writ of Prohibition

Delhi High Court: Existence of An Alternate Remedy Does Not Act as a Bar to Entertain Petition Praying for Writ of Prohibition

The Delhi High Court while dealing with a petition seeking to quash a demand notice issued by the respondent- Rural Electrification Corporation Limited (RECL) against the petitioner- Vineet Saraf 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 has refused to issue a Writ or Prohibition to prevent the creditor from approaching the NCLT under Section 95 of the Insolvency and Bankruptcy Code, 2016 against the personal guarantor.

The single judge Justice Purushaindra Kumar Kaurav, observed that, “The respondent has not, in the instant case, done an act that can be especially attributable to the privileges that are enjoyed by virtue of it being a ‘State’, as defined under Article 12 of the Constitution of India. Even if it is assumed that the respondent is acting under a mis-interpretation of the law, this, in and of itself, cannot be a ground to claim a violation of Article 14 of the Constitution of India. Indeed, if this were the sole test, every act of a ‘State’ would be assailed before a writ court as being under a misconceived interpretation of the law.

However, the Court had remarked that the existence of an alternate remedy did not act as a bar to entertain a petition praying for a writ of prohibition. In cases where an alternate remedy was available to the petitioner, there was a higher threshold that needed to be met, it being of a total and absolute lack of jurisdiction, in order for a writ court to grant relief.

In the instant matter, the petitioner had given a personal guarantee for a loan taken by Ferro Alloys Corporation Limited (FACOR) Power Limited from RECL for a sun of Rs 517.90 crores. FACOR Power Limited defaulted on the loan repayment, and a Corporate Insolvency Resolution Process (CIRP) was initiated against FACOR in accordance with the provision of Insolvency and Bankruptcy Code, 2016, (IBC) which resulted in a resolution plan being approved. The petitioner primarily sought a writ of prohibition, preventing the respondent from approaching NCLT under the provisions of the IBC and an ancillary relief was also sought for, to quash the impugned demand notice.

The Court after referring to catena of judgments observed that, a writ of prohibition can be issued, when a petitioner has made out a case for want of jurisdiction. However, in cases where jurisdictional challenges can be agitated before an alternate forum, circumspection must be observed before a writ of prohibition can be granted.

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

Undeniably, the Court observed that the principle held in the case of State of UP vs. Nooh had 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.’

The Court remarked that, 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 specific procedure and specialized forums,” added the Court.

The Court concluded that the existence of an alternate remedy does not act as a bar to entertain a petition praying for a writ of prohibition.

The Court encapsulated by observing that 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 must 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 jurisdiction, stated the judge.

While examining the present case, the Court placed reliance on the decision passed in the case of Hutchens vs. Deauville Investments Pvt. Ltd. (1986).

In the context of subrogation, the Court observed that, it is not that the guarantor’s right that 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.

Therefore, the Court held that the concerned NCLT must carefully scrutinize the deed of guarantee, if at all required.

The Court clarified that a reservation of rights provision in a deed that releases or discharges the primary borrower was meant to protect the creditor’s ability to pursue legal action against the guarantor. However, neither the Assignment Agreement nor the Resolution Plan were signed by the major borrower. The Court emphasized that the presence of such a clause does not necessarily alter the applicability of the Hutchens (supra) principle or determine the jurisdiction of the financial institution in debt recovery proceedings.

The Court opined that no right of the petitioner under Article 14 of the Constitution had been violated. It was, therefore, not warranted to delve into, what the true import of specific clauses of contracts was.

“It is for this reason that the other claim of the petitioner, relating to the exercise of the Exit Option, by the execution of the said Share Purchase Agreement is not being entertained. This claim, this court finds, is fundamentally based upon the interpretation of Clause 3(c)(iv)(g)(iv) of the Resolution Plan, however, there is a significant disagreement as to what the meaning and import of Clause 3(c)(iv)(g)(iv) of the Resolution Plan is,” in light of the aforementioned analysis, the Court was not inclined to consider it fit to delve into these issues.

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

The Judge stated that even in the case of an express reservation of rights by the creditor to proceed against the surety, a fine distinction must be drawn between a covenant not to sue and an absolute release.

The Judge avowed that, “A reservation clause is compatible with the former while being incompatible with the latter. The reason being that the reservation of rights clause becomes overridden by the release of the principal borrower. The Bench concluded that a reservation of rights clause is incompatible with an absolute release of a principal debtor. The concerned NCLT, if at all it thinks fit, may carefully delve into this aspect of the case.”

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

The Court rejected the request for a writ of prohibition, noting that it was inappropriate to create a body of private commercial law to demonstrate the respondent’s lack of jurisdiction. Thus, the Court observed that, “The petitioner’s claim of the guarantor getting a right to be heard at a belated stage, was not sufficient to entertain the present petition. The legislature, in its wisdom, thought it fit to give the right of hearing at belated stage. Indeed, if in the present case the petition was entertained, it would subvert the procedure laid down under the IBC. The respondent in turn would be denied the opportunity to present their case before NCLT.”

Ultimately, the Court dismissed the writ petition, allowing the NCLT to decide the matter on its own merits.