Court Invalidates Guarantee Deeds, Upholds Novation in Directorship Change Case

The Court set aside the DRAT's judgment and restored the DRT's decision, holding that the alleged guarantee deeds were invalid as the signatures did not match those of the directors. Novation occurred when new directors took over, discharging the former directors and guarantors. The Court found the limitation period inapplicable due to the novation. The change in management was accepted by the bank, leading to a novation of the original contract. The erstwhile directors were discharged from liabilities, and the new directors' guarantees were upheld. The writ petitions by former directors were allowed, and the bank's petition was dismissed.

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Issues Involved:
1. Validity and enforceability of the guarantee deeds dated 22nd July, 1995.
2. Discharge of liability of the erstwhile directors and guarantors due to novation of contract.
3. Limitation and the applicability of the Limitation Act.
4. Effect of change in the management and directors of the company on the guarantees and liabilities.

Detailed Analysis:

1. Validity and Enforceability of the Guarantee Deeds Dated 22nd July, 1995:
The DRAT and DRT both concluded that the alleged guarantee deeds dated 22nd July, 1995, purportedly signed by the erstwhile directors, were not valid. The signatures on these documents did not match the admitted signatures of the directors, and there was no evidence that they had executed these documents after resigning from the company. Moreover, the new directors had already taken over the management and provided fresh guarantees and collateral security. The Court agreed with these findings, emphasizing that the signatures on the alleged guarantee deeds did not resemble the admitted signatures of the erstwhile directors.

2. Discharge of Liability of the Erstwhile Directors and Guarantors Due to Novation of Contract:
The Court held that the case falls under Section 62 of the Indian Contract Act, which deals with novation, rescission, and alteration of contracts. The original contract was novated when the new directors took over the company and executed new agreements with the bank. The Court noted that the new directors provided fresh guarantees and collateral security, thereby discharging the earlier directors and guarantors from their obligations under the original contract. The substitution of new debtors and the execution of new agreements indicated a clear intention to novate the original contract.

3. Limitation and the Applicability of the Limitation Act:
The Court observed that the issue of limitation was not explicitly raised in the written statements by the erstwhile directors. However, it was implied through their arguments that there was no cause of action against them. The Court agreed with the DRT's view that the limitation period did not apply in this case because the original contract was novated, and a new cause of action arose with the execution of the new agreements by the new directors.

4. Effect of Change in the Management and Directors of the Company on the Guarantees and Liabilities:
The Court highlighted that the change in the company's management and directors was duly informed to the bank, and the bank had accepted the new directors and the fresh guarantees provided by them. The new directors executed new agreements and provided additional collateral security, which indicated a clear novation of the original contract. The Court emphasized that the bank could not hold the erstwhile directors liable for the debts of the company after accepting the new directors and their guarantees.

Conclusion:
The Court set aside the judgment dated 25th March, 2015, of the DRAT and restored the judgment of the DRT in O.A. No. 722/1996. The writ petitions filed by the erstwhile directors were allowed, and the writ petition filed by the Union Bank of India was dismissed. The Court concluded that the erstwhile directors and guarantors were discharged from their liabilities due to the novation of the original contract, and the new directors and their guarantees were valid and enforceable.

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