Corporate guarantee authority, FEMA breach and stamping objections did not defeat reliance on the documents.

A corporate guarantee and promissory notes were held binding on the company where the board resolution was broadly worded, authority had been held out to the signatory, and no convincing material showed undisclosed internal limits. Alleged contravention of foreign exchange law did not render the guarantee void or unenforceable, because FEMA does not itself declare such transactions void and breach attracts penal consequences instead. An objection to insufficient stamping was treated as technical, as the documents could be considered on payment of penalty, so stamping did not prevent reliance on them. The order appointing the provisional liquidator was upheld and the appeal failed with costs.

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Issues: (i) whether the corporate guarantee and promissory notes executed on behalf of the company were authorised and binding on it; (ii) whether alleged contravention of foreign exchange law rendered the guarantee void or unenforceable; (iii) whether the documents could be acted upon despite the objection as to stamping.

Issue (i): whether the corporate guarantee and promissory notes executed on behalf of the company were authorised and binding on it.

Analysis: The Board resolution was couched in wide terms and did not confine the authority in the manner suggested by the company. The company had also allowed the signatory to project himself as its promoter and had placed no convincing material to disown the transaction. In commercial dealings with third parties, the company could not rely on undisclosed internal restrictions once authority was held out and acted upon.

Conclusion: The execution of the guarantee and promissory notes was held binding on the company.

Issue (ii): whether alleged contravention of foreign exchange law rendered the guarantee void or unenforceable.

Analysis: Section 3 of the Foreign Exchange Management Act, 1999 prohibits dealings in foreign exchange except as permitted, but it does not provide that transactions entered into in breach thereof are void. The earlier law contained an express statutory provision dealing with the effect of such contravention, but that feature was omitted in the later enactment, indicating that breach attracts penal consequences and does not by itself nullify the transaction.

Conclusion: The guarantee was not void or unenforceable merely because prior permission of the Reserve Bank of India had not been obtained.

Issue (iii): whether the documents could be acted upon despite the objection as to stamping.

Analysis: Objection as to insufficient stamping did not create an absolute bar in the facts of the case, as the documents could be considered on payment of the requisite penalty. The objection was therefore treated as technical and not sufficient to defeat the claim.

Conclusion: The stamping objection did not prevent reliance on the documents.

Final Conclusion: The order appointing the provisional liquidator was upheld and the appeal failed, with costs.

Ratio Decidendi: A company cannot avoid liability on a corporate guarantee executed with held-out authority by relying on undisclosed internal limitations, and a contravention of foreign exchange law does not, without an express statutory voiding provision, render the underlying transaction void or unenforceable.

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