IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 20.04.2011 CORAM : THE HONOURABLE Mrs.JUSTICE R.BANUMATHI and THE HONOURABLE Mr.JUSTICE V.PERIYA KARUPPIAH O.S.A.NO.254 of 2010 1.Salem Textiles Ltd., LRN Building, IInd Floor Sarada College Road, Salem – 636 007 rep.by its Managing Director 2.R.Prabhakaran ... Appellants/Defendants Vs. Simpson & General Finance Co.Ltd, 861, Anna Salai, Chennai – 600 012 rep.by its Director S.Srinivasaraghavan ... Respondent/Plaintiff Prayer: Original Side Appeal filed under Order XXXVI Rule 11 of the O.S.Rules read with Clause 15 of the Letters Patent against the order dated 4.11.2006 made in Application No.518 of 2006 in C.S.No.889 of 2005 on the file of this Court. Application praying that this court pleased to reject the plaint and consequently dismiss the above suit. For Appellant : Mr.Vijay Narayan,Sr.Counsel for Mr.R.Parthiban For Respondent : Mr.Krishna Srinivas for M/s.Ramasubramaniam Associates JUDGMENT R.BANUMATHI,J In view of the Case No.252 of 1998 pending before the Board for Industrial and Financial Reconstruction (in short, "BIFR"), whether suit – C.S.No.889 of 2005 filed against the appellants- defendants, the Company – Salem Textiles Limited and the 2nd defendant - the Managing Director of the 1st appellant is liable to be rejected is the point falling for consideration in this https://hcservices.ecourts.gov.in/hcservices/ appeal. This appeal arises out of the order dated 4.11.2009 in Application No.518 of 2006 in C.S.No.889 of 2005 dismissing the application filed by the appellants under Order 7 Rule 11 C.P.C. read with Order XIV Rule 8 of Original Side Rules. 2. The appeal arises on the following facts: The first appellant Company is carrying on business in Textiles. The 2nd Appellant is the Managing Director of the 1st Appellant Company. Respondent/ Plaintiff is engaged in the business of leasing and hire purchase finance for machines, equipments, motor vehicles, etc. In the course of their business, the respondent/plaintiff extended lease finance facility to the 1st Appellant for which a personal guarantee was executed by the 2nd Appellant. Onbehalf of the 1st Appellant Company, the 2nd Appellant entered into a lease agreement dated 18.9.1995 in respect of two Lakshmi Rieter Comber Machines and one silver Lap Machine for a total contract value of Rs.40,50,000/- inclusive of finance charges, payable in 60 equal monthly instalments of Rs.67,500/- each. The first of such instalment was to be paid on 18.9.1995 and the last on 18.8.2000. As additional security, in his personal capacity, the 2nd appellant had executed a demand promissory note on 18.9.1995 in favour of the respondent promising to pay the respondent a sum of Rs.40,50,000/- jointly and severally on demand by the respondent for value received. The rentals had been remitted upto 14th instalment and only a part of 15th instalment was paid. The rental for the rest of the instalments viz., 16th instalment onwards remain unpaid. 3. The respondent filed Company Petition in C.P.No.163 of 1998 for winding up the first appellant - Company under Section 433 (1)(e) on the ground that the 1st Appellant Company is unable to pay its debts. There were also other Company Petitions filed by other creditors against the 1st appellant Company. In the Company Petition, 1st Appellant filed counter stating that Company has preferred Case Nos.252 of 1998 and 168 of 2001 before BIFR and the matter is pending before BIFR. By the Order dated 19.9.2003, C.P.No.163 of 1998 had been closed with liberty given to the respondent to revive the same on the disposal of BIFR proceedings. According to plaintiff, the proceedings before BIFR are still pending. Stating that the 2nd Appellant had stood as guarantor and has given personal guarantee, which is co-existent with the liability of the 1st appellant, respondent filed the suit – C.S.No.889 of 2005 for recovery of Rs.84,16,083/-. Case of respondent is that the 2nd Appellant had given a personal guarantee for the loan availed by the 1st appellant and 2nd appellant is also bound to pay the amount due to the plaintiff from the 1st appellant Company and the liability of the 2nd appellant is distinct and can be enforced against the guarantor without any recourse to the borrower. The respondent averred that in view of Section 22(5) of the Sick Industrial Companies (Special Provisions) Act, 1985, (in short, "SICA"), the suit is not barred by limitation. https://hcservices.ecourts.gov.in/hcservices/ 4. The appellants filed Application No.518 of 2006 under Order 7 Rule 11 C.P.C. read with Order XIV Rule 8 of Original Side Rules to reject the plaint. The appellants sought for rejection of plaint on the ground that case was registered by BIFR as Case No.252 of 1998 and ICICI Limited was appointed as the operating agency under Section 16(2) of the Act and the matter is still pending before BIFR for consideration. Further case of Appellants is that in view of Section 22(1) of SICA, no suit or legal proceedings shall lie or be proceeded with except with the consent of the Board or as the case may be, the appellate authority. Case of appellants is that when the suit itself cannot be filed except with the consent of the BIFR, the filing of the suit itself is barred and therefore the suit for enforcement of any guarantee in respect of the loan advanced to the industrial Company would come within the scope of Section 22(1) of the Act. Since the appellants prayed for rejection of the plaint on the ground that respondent had not obtained the consent of the BIFR for filing of the suit against the guarantor and the suit is barred under Section 22, consequently the suit is liable to be dismissed. 5. The respondent resisted the application contending that the proceedings before BIFR would not vitiate the suit proceedings filed by the respondent against the 2nd appellant, which is based on the promise to pay the assured amount by way of demand promissory note dated 18.9.1995 in his personal capacity. The respondent is seeking relief only against the 2nd defendant, which is not barred under Section 22 of the SICA and therefore the plaint cannot be rejected. 6. Upon consideration of the contentions, the learned single Judge held that the suit is not a suit for recovery of money for the loan granted to the Company, but it is a suit for recovery of rentals payable by the Company on the basis of the lease agreement for which 2nd appellant offered personal guarantee and therefore the consent of the Board is not at all necessary before instituting the suit. The learned single Judge further held that the suit is only for recovery of rental arrears for which E.M.I. of Rs.67,500/- each is payable under the lease agreements and not a loan or advance given to the Company. Section 22(1) of the SICA will not get attracted and therefore the plaint cannot be rejected at the threshold itself as barred by law. 7. Challenging the impugned order, on behalf of the appellants, the learned Senior Counsel Mr.Vijay Narayanan has interalia contended that the pleadings in the suit proceeded on the basis that it is for recovery of money based on promissory note and while so learned single Judge erred in saying that the suit is only for recovery of arrears of rentals. The learned Senior Counsel interalia made the following submissions:- https://hcservices.ecourts.gov.in/hcservices/ ●The respondent is a party to Order in C.P.No.163 of 1998 and therefore the respondent can make claim only after BIFR proceedings are over and the Order in C.P. binds the respondent and the suit is barred by res judicata. The agreement between the parties, even though termed as lease finance facility and as such the financial arrangement was in essence a loan and even according to the respondent, the provisions of Section 22 would apply and consequently the suit is barred. When principal debtor/Company is declared as sick industry, the bar equally applies to the guarantor. ●Invoking Section 22(5) of SICA, plaintiff claims the benefit of limitation and if Section 22 does not apply, then Section 22(5) also will not apply and in such case the suit will be barred by limitation. 8. Countering the arguments, the learned counsel for respondent – Mr.Krishna Srinivas has submitted that the suit has been filed for recovery of the rental arrears from the 2nd appellant, who gave personal guarantee and there is no embargo for invoking the personal guarantee against the 2nd appellant. The learned counsel would further submit that the plaint has to be read as a whole and the word "loan" occurring in paragraph 15 of the plaint cannot be put against the plaintiff. 9. The learned counsel would further contend that upon consideration of the terms of lease, finance agreement for extending the lease finance facility, the learned single Judge rightly held that the suit is only for rental charges and not for a loan or advance given to the Company and therefore Section 22(1) of SICA will not get attracted and the plaint cannot be rejected at the threshold as barred under law. 10. We have considered the materials on record, impugned order and the rival contentions. 11. As pointed out earlier, about 12 company petitions including C.P.No.163 of 1998 filed by the respondent, were filed against the 1st appellant Company by various creditors. In all the Company Petitions, the 1st appellant – Company filed counter stating that the Company has preferred Case Nos.252 of 1998 and 168 of 2001 before BIFR and that BIFR has passed Order on 27.11.2002. Learned Senior Counsel has drawn our attention to the Order of BIFR dated 26.5.2009, wherein BIFR passed the order issuing certain directions for reviving the unit. By perusal of the said order, it is seen that the 1st appellant Company was declared sick and IDBI was appointed as an operating agency under Section 17(3) of SICA to prefer a rehabilitation scheme, if feasible, for the Company. In the said order, BIFR issued various directions to revive the 1st appellant Company. Be that as it may, C.P.No.163 of 1998 filed by the 1st appellant Company was closed by the Order dated 19.9.2003 https://hcservices.ecourts.gov.in/hcservices/ giving liberty to the respondent to revive the Company Petition as and when finality is arrived in BIFR and if situation warrants. Two years after closure of the Company Petition, the respondent has filed the suit on the personal guarantee by the 2nd appellant, who is none other than the Managing Director of the 1st Appellant Company. 12. Mr.Vijay Narayanan, learned Senior Counsel appearing for the Appellants mainly contended that the provisions of Section 22 of SICA are clear and thereunder, no suit for the enforcement of any guarantee in respect of any loan or advance granted to the industrial company concerned would lie or could be proceeded with except with the consent of the Board of the Appellate Authority under the said Act. Placing reliance upon PATHEJA BROS. FORGINGS & STAMPING AND ANOTHER VS. ICICI LTD. AND OTHERS, (2000) 6 SCC 545, learned Senior Counsel would further contend that the object of Section 22 of SICA in protecting guarantors from legal proceedings pending a reference to BIFR by the principal debtor was to ensure that a Scheme for rehabilitation would not be defeated by isolated proceedings adopted against the guarantors of a sick Company. 13. Countering the above submissions, the learned counsel for Respondent contended that the suit claim was not a loan transaction, but only for collection of rentals for which the 2nd appellant has given personal guarantee. The learned counsel would further submit that the key words in Section 22 are "..... for recovery of money ..... " or of "any guarantee in respect of any loan or advance granted to the industrial Company", but the instant case is only for recovery of rental arrears and therefore the present case would not fall within the ambit of Section 22. The learned counsel for respondent further contended that only a limited protection had been afforded to guarantors and the suit invoking personal guarantee on the recovery of rental arrears would stand outside the protection afforded under section 22(1) of SICA. 14. Placing reliance upon KAILASH NATH AGARWAL V. PRADESHIYA INDUSTRIAL AND INVESTMENT CORPORATION OF U.P. LTD. [[2003] 4 SCC 305], the learned counsel for Respondent contended that in the said case, the Supreme Court has held that "the Legislature by an amendment to Section 22 intended to provide only limited protection to the guarantor, i.e., in respect of suits for loans and advances guaranteed by them on behalf of the industrial company". 15. Learned counsel for Respondent contended that in the case on hand we are concerned with the lease agreement and the totality of the clauses lead to the conclusion that it is only a "lease document" and that it cannot be held as a "finance document" and therefore, protection under Section 22 is not available to the lease agreement and rentals payable thereon. Contending that SICA https://hcservices.ecourts.gov.in/hcservices/ has no application in respect of lease agreement, learned counsel for Respondent placed reliance upon VED PRAKASH AGARWAL V. RAMA PETROCHEMICALS LTD. [MANU/MH/0589/2004=((2004) 122 COMP.CASES 8 (BOM)). In the said case, based on the lease agreement, machinery was leased out to the industrial company and the machinery was to remain equipment owned by the Respondent throughout the period of the agreement. Observing that the relationship created by the Respondent with the industrial company was only a lease agreement/lease finance given by the Respondent to the industrial company which was guaranteed by the Appellant thereon, the Division Bench of Bombay High Court held as under:- " ..... As far as leasehold rights of a sick company in a leased premises are concerned, they are not a property protected under Section 22 of the SICA as decided in Shree Chamundi Mopeds Ltd. MANU/SC/0501/1992 : [1992] 2 SCR 999]. .....And lastly, as held in PICUP MANU/SC/0114/2003 : [2003] 1 SCR 1159, the protection under the amended Section 22(1) is not available to the guarantors, when it comes to execution proceeds. The effect of the amendment is to stall suits of a particular type but not the recovery proceeding against the guarantor. The upshot of the above discussion is that firstly execution or recovery proceedings on the basis of existing decrees is not at all covered by the amendment of 1994. When it comes to guarantors, it is only the suits for enforcement of any guaranteee which would be stayed as against them provided they are in respect of loans or advances granted to the industrial company. Thus it is not that merely because the industrial company has become sick that the suits against the guarantors thereof would automatically get halted. The guarantors will have to show that they are suits in respect of loans or adances granted to the industrial company to get the protection and not otherwise. Therefore, merely because the industrial company is protected, the guarantor does not get protected automatically. ...." 16. Pointing out that the text of the guarantee is also very clear, in Ved Prakash Agarwal's case, (2004) 122 COMP.CASES 8 (BOM), the Division Bench of Bombay High Court held "That being so, it cannot be said that the lease finance given by the respondent to the industrial company was in fact a loan or an advance and which was guaranteed by the appellant. In view of this conclusion arrived at, on the second point for determination also there is no substance in the appeal." 17. Heavily placing reliance upon Ved Prakash Agarwal's case, (2004) 122 COMP.CASES 8 (BOM), the learned counsel for Respondent has contended that in the case on hand we are concerned only with the lease document. Learned counsel for the Respondent contended that by reading the totality of the clauses in the document, it could only be a "lease document" and cannot be held to https://hcservices.ecourts.gov.in/hcservices/ be "finance document" and SICA has no application in respect of lease agreement. It was further contended that the industrial company or 2nd Appellant nowhere denied that the document is not a lease agreement. The tenor of the entire document would show that it is only a "lease agreement". Learned counsel has drawn our attention to the specific clauses of the lease agreement and pointed out that the document made it very clear that it is only "lease agreement". Clause-4 of agreement captioned as "ownership" reads as follows:- "4. OWNERSHIP – The Equipment shall at all times remain the sole and exclusive property of the Lessor and the Lessee shall have no right, title or interest therein except as Lessee. 18. Clause-6 of the agreement required "the lessee to maintain the equipment, identification and not to deface the machinery". Clause-12 deals with the loss and damage and it states that "in the event of any loss or damage to the equipment, the lessee shall replace the equipment with equipment which is in the opinion the lessor comparable and in good repair and conditions and working order". Clause 12 further stipulates "such equipment shall be for all purposes be the property of the lessor". Clause-23 provides for default. In the event of default or in the circumstances, in Clause-23 the lessor has the right to repossess and retake the equipment. 19. Laying emphasis upon the various Clauses in the lease agreement and also heavily placing reliance upon Ved Prakash Agarwal's case, (2004) 122 COMP.CASES 8 (BOM), learned counsel for Respondent contended that the case before the Division Bench of Bombay High Court was identical dealing with the lease finance facility and the suit was filed against the guarantor for enforcement of the guarantee. It was submitted that the decision of the Bombay High Court that "lease finance given by the respondent to the industrial company was only in respect of the machinery and the text of the guarantee is also very clear and the guarantee cannot be said to be a guarantee with respect to the repayment of the loan". 20. As held by the Supreme Court in SUNDARAM FINANCE LIMITED CASE [AIR 1965 SC 116], the true effect of the transaction could be determined from the terms of the agreement considered in the light of the surrounding circumstances only when the parties adduce oral and documentary evidence. On the materials available and by cursory reading of the plaint, in our considered view, the suit based on promissory note is only for recovery of the money from the 2nd Appellant who is a guarantor of the 1st Appellant company. We are of the view that to proceed with the suit against the 2nd Appellant, consent of BIFR is required. 21. We are unable to subscribe the view taken by the learned single Judge that the suit is for recovery of rentals. Of course, the document in question was a lease finance facility for Rs.40,50,000/- on which E.M.I. is payable at Rs.67,500/- per month. https://hcservices.ecourts.gov.in/hcservices/ By a reading of the plaint, it is seen that the suit is for recovery of money based on a promissory note. In paragraph 15 of the plaint, plaintiff has averred that "the 2nd defendant having given a personal guarantee for the loan availed of by the 1st defendant, the 2nd defendant is also bound to pay the amounts due to the plaintiff from the 1st defendant" Again in paragraph 17 – cause of action, it was averred that the suit claim is based on promissory note as seen from the following averments: ".... and on 18.9.1995 when Lease Agreement were entered into between the Plaintiff and the Defendants and on 18.9.1995 when the Defendants had given a Demand promissory Note to the Plaintiff standing guarantee for the 1st Defendant and" 22. In paragraph No.12 of the counter affidavit filed by the respondent/plaintiff to Application No.518 of 2005, reiterating the plaint averments, it is stated that "the Respondent/Plaintiff have proceeded to file the said Suit against the Second Applicant/Defendant based on the promise to pay the assured amount by way Demand promissory note dated 18.9.1995 in his personal capacity." Also, in Paragraph No.13 of the counter affidavit, it is reiterated that "the 2nd defendant has executed a separate Demand Promissory Note." 23. It is thus clear that the suit is filed mainly on the promissory note executed by the 2nd appellant, which was taken as a security/personal guarantee for the amount payable by the 1st appellant Company. The averments are to the effect that the money is due from the 1st appellant Company for which the 2nd defendant stood as guarantor. As held in Patheja Bros. Forgings & Stamping case, ((2000) 6 SCC 545), the ambit of Section 22 extends even to third parties, who have acted as guarantors in respect of loans or advances or debts incurred by an industrial company in respect of which inquiry has been registered under Section 16 of SICA. 24. Section 22 of SICA, so far as it is relevant, reads thus: “22. Suspension of legal proceedings, contracts, etc.—(1) Where in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for https://hcservices.ecourts.gov.in/hcservices/ execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof [and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company] shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the appellate authority.” 25. In PATHEJA BROS. FORGINGS & STAMPING AND ANOTHER VS. ICICI LTD. AND OTHERS, ((2000) 6 SCC 545), the Supreme Court has analysed the provisions of Section 22 in the light of the amendments made to the Act in 1994 holding that the embargo under Section 22 will also cover the guarantors to the sick industrial company. In PATHEJA BROS. FORGINGS & STAMPING AND ANOTHER VS. ICICI LTD. AND OTHERS, ((2000) 6 SCC 545), the Supreme Court held as under: "7. The words in the square brackets above were inserted into Section 22 by Act 12 of 1994 and it is these words which are relevant for our purposes. As we read them, they provide that no suit (a) for the recovery of money, or (b) for the enforcement (i) of any security against the industrial company, or (ii) of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with except with the consent of the Board or the appellate authority under the said Act. For our purposes, therefore, the relevant words are: “no suit ... for the enforcement ... of any guarantee in respect of any loans or advance granted to the industrial company” shall lie without the consent of the Board or the appellate authority. The words are crystal clear. There is no ambiguity therein. It must, therefore, be held that no suit for the enforcement of a guarantee in respect of a loan or advance granted to the industrial company concerned will lie or can be proceeded with, without the sanction of the Board or the appellate authority under the said Act. 8. It is not possible to read the relevant words in Section 22 as meaning that only a suit against the industrial company will not lie without such consent. There is no requirement in Section 22, as analysed above, that, to be covered thereby, a suit for the enforcement of a guarantee in respect of a loan or advance to the industrial company should be against the industrial company. ...... https://hcservices.ecourts.gov.in/hcservices/ 10. Section 22-A