2018 (3) TMI 561 - HC - Companies Law

Court upholds Option Agreement as enforceable guarantee, rejects termination claim, orders winding-up proceedings.

Vandana Global Limited, Versus IL & FS Financial Services Limited.

The court held that the Option Agreement was valid and enforceable as a guarantee, rejecting the appellant's claim of termination. The court determined ... Winding up petition - difficulties of non payment of the amount due and payable - Held that:- It is well settled that a contract of guarantee involves principally three parties namely the creditor, the surety and the principal debtor, where liability may be actual or prospective. Thus necessarily the ingredients of a contract of guarantee are clearly present in the option agreement which are reflected from the unambiguous nature of Article II the “Put Option” whereby the appellant has irrevocably, absolutely and unconditionally without demur or protest agreed to make payment of the exercise price to the respondent. If this be the case, then considering the provisions of Section 126 of the Contract Act, it is imperative to accept the 'option agreement' as a 'contract of guarantee'. There can be no other interpretation. Single Judge is correct in observing that the 'option agreement' is required to be considered as a guarantee. By agreeing to Article IV (termination clause) and accepting that the agreement will be terminated only on the happening of said two events, it can certainly be said that the appellant had waived the right if any, to terminate the contract. The submission as urged on behalf of the appellant that by their letter dated 4 March 2015 the option agreement was terminated, if is accepted, then the consequence is that Article IV (Termination Clause) of the option agreement itself would be rendered nugatory and meaningless. Whole intention of the parties to incorporate the termination clause as contained in Article IV is to bind the parties only in the stipulated and agreed mode of termination and in no other form or method. In fact what is pertinent is that the parties had categorically avoided to enter any other form of termination when they agreed to incorporate Article IV. Thus, the appellant's contention that in view of termination letter dated 4 March 2015 the “Put Option” could not have been exercised by the respondent is wholly untenable. The appellant's contention of the validity of the option agreement being considered by the learned Single Judge in the summary proceedings of a winding up petition, hence is wholly unfounded. Issues Involved:1. Validity and enforceability of the Option Agreement.2. Interpretation of the Option Agreement as a guarantee.3. Termination of the Option Agreement by the appellant.4. Appropriateness of winding-up proceedings based on the Option Agreement.Issue-wise Detailed Analysis:1. Validity and Enforceability of the Option Agreement:The court examined the Option Agreement dated 6 January 2012, which included a 'Put Option' clause allowing the respondent to demand payment from the appellant upon default by the borrower, Vandana Udhyog Ltd. The appellant contended that the Option Agreement was terminated on 4 March 2015, making it unenforceable. However, the court found that the termination clause (Article IV) stipulated that the agreement could only be terminated upon repayment of all outstanding amounts or receipt of the exercise price by the respondent. Since neither condition was met, the court held that the agreement was still valid and enforceable.2. Interpretation of the Option Agreement as a Guarantee:The court analyzed whether the Option Agreement constituted a guarantee. The agreement included clauses where the appellant irrevocably and unconditionally agreed to pay the exercise price upon default by the borrower. The court referred to Black's Law Dictionary and Section 126 of the Indian Contract Act, 1872, defining a guarantee as a promise to answer for the debt of another. The court concluded that the Option Agreement was indeed a guarantee, as it involved the appellant agreeing to discharge the borrower's liability in case of default.3. Termination of the Option Agreement by the Appellant:The appellant argued that the Option Agreement was terminated unilaterally on 4 March 2015. The court rejected this argument, stating that the termination clause in the agreement specified only two conditions for termination, neither of which occurred. The court held that the appellant had waived any right to terminate the contract outside the agreed conditions, making the purported termination ineffective.4. Appropriateness of Winding-up Proceedings Based on the Option Agreement:The appellant contended that the winding-up petition was not the appropriate remedy and that the validity of the Option Agreement should be determined in a civil suit. The court disagreed, noting that the appellant had admitted its liability as a guarantor in previous affidavits. The court found no merit in the appellant's arguments and upheld the learned Single Judge's decision to admit the winding-up petition and direct its advertisement.Conclusion:The court concluded that the Option Agreement was a valid and enforceable guarantee, the appellant's unilateral termination was ineffective, and the winding-up proceedings were appropriate. The appeal was dismissed with costs, and the winding-up petition was set for final hearing. The appellant's request for a stay on the judgment was also rejected.