2024 (12) TMI 957 - HC - Companies Law

Guarantee deed declared inoperative when condition precedent for CDR package sanction by all lenders fails

Deepen Arun Parekh Versus Indian Overseas Bank and Ors.

The Bombay HC held that a deed of guarantee remained inoperative as the condition precedent for its enforcement was not fulfilled. The guarantee was ... Enforceability of the Deed of Guarantee as against the Plaintiff - statutory bar to the reliefs sought - non-existence of Deed of Guarantee before the Tribunals in which proceedings have been initiated - suit barred by time limitation - whether the personal guarantee became effective? - HELD THAT:- The recitals and clauses in the Deed of Guarantee, on their plain reading, leave no manner of doubt that the guarantee was conditional. The condition being the CDR package sanctioned by CDR EG accepted by all the lenders. The communication dated 23 March 2016 addressed by the Corporate Debt Reconstructing Cell (Exhibit C) to the Indian Overseas Bank, the leader of consortium of lenders, records that the company stood exited from the CDR mechanism as failure, in terms of the decision taken at the meeting held on 22 February 2016 - The recitals and covenants in the Deed of Guarantee make it abundantly clear that the sanction of CDR package by CDR EG and acceptance thereof by all the lenders, was a condition precedent for the guarantee to spring to life. As the CDR package was not approved, the Deed of Guarantee, prima facie, did not become operative. Whether in view of the pendency of these proceedings before DRT, jurisdiction of this Court is ousted? - HELD THAT:- On a plain reading of Section 17 (1) of the RDB Act, 1993, the Tribunal constituted under the said Act, shall exclusively exercise jurisdiction, power and authority to entertain and decide applications from the banks and financial institutions for recovery of debts due to such banks and financial institutions. In clause (b) of Section 2 of RDB Act, 1993, “application” means an application made to a Tribunal under Section 19 of the Act - Sub-section (9) of Section 19 declares that the counter-claim shall have the same effect as a cross-suit so as to enable the Tribunal to pass a final order on the same application, both on the original claim and on the counter-claim. DRT is a creature of statute. It exercises jurisdiction within the province of authority conferred by the RDB Act, 1993. The bar under Section 18 of the Act, 1993 is, thus, required to be considered keeping in view this nature of jurisdiction exercised by the DRT. The bar under Section 18, thus, cannot be considered de hors the provisions contained in Section 17 and 19 of the RDB Act, 1993. From the phraseology of Order VII Rule 11 of the Code of Civil Procedure, 1908, which empowers the Court to interdict the suit if the plaint does not disclose a cause of action or suit appears to be barred by any law, indicates that the said power can be exercised at any stage of the suit. It is not peremptory that the Defendant must raise a ground either in written statement or by filing an independent application that the plaint is liable to be rejected. In a sense, a duty is cast on the Court to carefully examine the plaint and read the averments in the plaint in a meaningful manner, and, if upon such reading, the Court finds that an illusion of cause of action is created or the suit is otherwise, barred by any law, the Court can reject the plaint even without any intervention by the Defendant. In the case of Dahiben V/s. Arvindbhai Kalyaniji Bhanusali (Gajra) and Ors. [2020 (7) TMI 786 - SUPREME COURT], the Supreme Court emphasised the peremptory nature of the provisions contained in Order VII Rule 11 and upheld the order of rejection of the plaint where the suit appeared to be barred by limitation. The aforesaid enunciation of law would indicate that the provisions of Order VII Rule 11 of CPC are of mandatory nature. The stage of the suit does not matter. The said power can be exercised by the Court, de hors any contention in the written statement or an application seeking rejection of the plaint. If the Court upon a meaningful reading of the plaint comes to the conclusion that the plaint does not disclose a cause of action or the suit is otherwise barred by any law, the Court is enjoined to pass an order of rejection of the plaint - re-adverting to the facts of the case, the bar of limitation was premised on the fact that the Defendant-Banks had started enforcing the guarantee by instituting proceedings since the year 2016. Whether a declaration in respect of or an order for cancellation of the Deed of Guarantee in question is strictly warranted? - HELD THAT:- Tthe recitals in the covenants in the Deed of Guarantee make it, prima facie, beyond contestation that the sanction of CDR package by CDR-EG and acceptance thereof by the lenders was peremptory to infuse life into the contract of guarantee. The non-approval of CDR package, prima facie, dismantled the very edifice on which the contract of guarantee could have been built. The deed of Guarantee, thus, did not come into force - Prima facie, in the facts of the case, it appears that the contract of guarantee, sans approval of CDR by CDR-EG, did not come into existence and become operable. The challenge to the instrument is, thus, not on the count of non-enforceability of the contract, but to the very formation of the jural relationship on the basis of the said contract. Whether in such a situation the bar of limitation would be attracted. Can the Court on the basis of the plain terms of the Deed of Guarantee and indubitable position that the CDR package was not sanctioned, enforce the terms of the Deed of Guarantee? - HELD THAT:- Prima facie, the Court may not enforce the Deed of Guarantee on its plain terms upon being apprised that the condition precedent has not been fulfilled. If the Deed of Guarantee is, prima facie, found to be an inoperative instrument, a declaration to that effect is not a must. In the case of Gouri Amma Vaidehi Amma V/s. Parameshwaran Pillai Madhavan Pillai and Anr. [1955 (8) TMI 53 - KERALA HIGH COURT] the distinction between voidable documents on the one hand, and void documents, on the other, was highlighted and it was enunciated that there can be no doubt that Article 59 is applicable only in cases where it is necessary to have a document set aside. Whether the document will have to be set aside or not for the purpose of ensuring the rights of the Plaintiff bears upon the principle of substantive law and the distinction has always been maintained between voidable documents on the one hand and void documents on the other. In view of the enunciation of law by the Supreme Court in the case of Bank of Rajasthan Limited [2022 (11) TMI 1325 - SUPREME COURT], in a suit of the present nature, the Plaintiff, who has already been proceeded against before the DRT, cannot interdict those proceedings before the DRT under the RDB Act. The Supreme Court has made it explicitly clear that the claim Petition under RDB Act would continue to proceed in terms fo the procedure established therein, notwithstanding the nature of the relief claimed by the borrower in an independent suit filed before the civil court. The order passed by this Court should not have the effect of staying the proceedings which have been instituted against the Plaintiff by the banks before the DRT under the RDB Act or the proceedings before the Tribunals under the IBC, 2016. Such a fine balance can be achieved by making an interim declaration that the Deed of Guarantee has not become operative. Such a relief may not styme the proceedings before the Tribunals under the RDB Act and IBC 2016. The Tribunals may, however, take into account the interim declaration made by civil Court, while exercising their statutory jurisdiction. Interim Application stands partly allowed - By way of interim relief, it is declared that the Deed of Guarantee dated 10 April 2014 has not become operative. Issues Involved:1. Validity and enforceability of the Deed of Guarantee dated 10 April 2014.2. Jurisdiction of the Civil Court in light of statutory bars under various financial recovery laws.3. Applicability of the law of limitation to the suit.4. Appropriateness of granting interim reliefs to the Plaintiff.Detailed Analysis:1. Validity and Enforceability of the Deed of Guarantee:The Plaintiff contended that the Deed of Guarantee executed on 10 April 2014 was conditional upon the approval and implementation of a Corporate Debt Restructuring (CDR) package, which never materialized. The Plaintiff argued that the guarantee did not become effective due to the non-approval of the CDR package by the CDR Empowered Group (EG), as explicitly stated in Clause 12 of the Deed of Guarantee. The Court noted that the recitals and clauses in the Deed of Guarantee indicated that the guarantee was conditional and never came into force due to the failure of the CDR package. The Court found that the Deed of Guarantee was inoperative and did not establish a jural relationship, thus supporting the Plaintiff's claim.2. Jurisdiction of the Civil Court:The Defendants argued that the suit was barred by statutory provisions, including Sections 34 and 35 of the SARFAESI Act, Section 18 of the RDB Act, and Section 180 of the Insolvency and Bankruptcy Code, which restrict the jurisdiction of Civil Courts in matters of debt recovery. However, the Court referred to the Supreme Court's decision in Bank of Rajasthan Ltd. v/s. VCK Shares and Stock Broking Services Ltd., which clarified that the jurisdiction of civil courts is not ousted by the RDB Act for independent suits filed by borrowers. The Court concluded that the Plaintiff was entitled to seek a declaration regarding the Deed of Guarantee's validity in a civil court, and the statutory bars did not apply to preclude the Plaintiff's claim.3. Applicability of the Law of Limitation:The Defendants contended that the suit was barred by limitation, as the right to sue accrued in 2016 when the Defendants began enforcing the guarantee. They argued that the suit filed in 2024 was beyond the three-year limitation period prescribed under Articles 58 and 59 of the Limitation Act. The Court distinguished between void and voidable instruments, noting that the Deed of Guarantee was void ab initio due to the non-fulfillment of the condition precedent (approval of the CDR package). The Court held that a declaration or cancellation was not necessary for an inoperative instrument, and thus, the limitation period did not apply as the Deed of Guarantee never came into force.4. Appropriateness of Granting Interim Reliefs:The Plaintiff sought interim relief to prevent the Defendants from acting upon the Deed of Guarantee. The Court recognized the Plaintiff's strong prima facie case and the potential irreparable loss if interim relief was not granted. However, the Court balanced this with the need not to impede ongoing proceedings before the Debt Recovery Tribunal (DRT) and other tribunals. The Court provided an interim declaration that the Deed of Guarantee had not become operative, allowing the tribunals to consider this declaration while continuing their proceedings.Conclusion:The Court granted interim relief by declaring that the Deed of Guarantee dated 10 April 2014 had not become operative. This decision balanced the Plaintiff's strong prima facie case with the need to allow ongoing tribunal proceedings to continue, ensuring that the Plaintiff's rights were protected without impeding statutory recovery processes.