Case: Vandana Global Limited Vs. Il &amp; Fs Financial Services Limited

the exercise price. To appreciate as to what is the meaning of the term guarantee it would be useful to refer to Blacks Law Dictionary, Eighth Edition which defines guarantee as under:Guarantee (garantee), n. 1. The assurance that a contract or legal act will be duly carried out.2. GUARANTY (1)In practice, guarantee, n., is the usual term, seen often, for example, in the context of consumer warranties or other assurances of quality or performance, Guaranty, in contrast, is now used primarily in financial and banking contexts in the sense a promise to answer for the debt of another.. Guaranty is now rarely seen in nonlegal writing, whether in G.B. Or in the U.S. Brayan A. Garner, A Dictionary of Modern Legal Usage 394(2nd ed. 1995).3. Something given or existing as security, such as to fulfil a future engagement or a condition subsequent. [Cases: Guaranty 29] 4. One to whom a guaranty is made. Also spelled guaranty.Guarantee, vb 1. To assume a suretyship obligation; to agree to answer for a debt or default. 2.To promise that a contract or legal act will be duly carried out. 3. To give security to.(emphasis supplied)17. In the above context from the bare reading of Article II, it is clear that the appellant as also Vandana Ispat Ltd. had irrevocably, absolutely and unconditionally agreed and had undertaken to the respondent that in the event of occurrence of a default under the facility agreement, the respondent may at its discretion issue Put Notice and upon receipt of the Put Notice, the appellant and Vandana Ispat Ltd., shall without demur or protest make payment of Exercise Price to the respondent and accept by way of assignment from the respondent the facility alongwith all rights and liabilities thereunder. The very wording of Article II is suggestive of a guarantee on the part of the appellant to the respondent. The legal position can be clearly noted from Section 126 of the Contract Act which defines a contract of guarantee to mean a contract to perform the promise, or discharge the liability, of a third person in case of his default. 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. Thus, we are of the considered opinion, the learned Single Judge is correct in observing that the option agreement is required to be considered as a guarantee.18. Now coming to the contention as urged on behalf of the appellant that the option agreement was terminated on 4 March 2015 and the same could not have been invoked. This contention also cannot be accepted, firstly because the parties have bound themselves by providing Article IV the termination clause, which provides that the option agreement will be terminated only on the happening of two events, firstly on due repayment of all outstanding amounts under the facility by the borrower to the respondent and secondly on receipt of exercise price by the respondent from the appellant and Vandana Ispat Ltd. (VIL) It would be desirable to note that the contents of Article IV which reads thus:This Agreement will terminate on the happening of the following events:a) On the repayment of all outstanding amounts under the Facility by the Borrower to IFIN, orb) on the receipt of the Exercise Price by IFIN from VGL and VIL in terms of Article 2.1.Once having agreed to the above conditions of termination, it was not open to the appellant to contend that the appellants liability had ceased to exist in view of a purported termination of the option agreement and that civil proceedings were required to be filed by the respondent to seek specific performance of the said agreement. In our opinion, 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. The 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 appellants 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 appellants 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.19. Before parting, we may also note that by the impugned order the winding up petition of the respondent has been admitted and was directed to be advertised. It is not in dispute that the winding up petition has already been advertised and to that extent the impugned order is already implemented. As regards the final hearing of winding up petition, as informed to us, the learned Single Judge has placed the winding up petition for final hearing on 16 March, 2018.

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 0

Reasoning from the judgment:
0[ds]13. There are three principal submissions as urged on behalf of the appellant in challenging the impugned order passed by the learned Single Judge. The first submission is that the option agreement was not available to be invoked against the appellant as the same was terminated by the appellant on 4 March 2015. The option agreement being terminated was not enforceable in law. As a consequence of termination of the option agreement no dues are payable under the option agreement. Further the adjudication of the validity and purport of the option agreement cannot be a subject matter of summary proceedings of a winding up petition but ought to be agitated in a civil suit. The second submission is that the learned Single Judge has erred in coming to a conclusion that there is no right available under the general law, for the appellant to terminate the option agreement and that the option agreement could not have been terminated only in two circumstances as provided by the termination clauseArticle IV (supra). The third submission is that even assuming that the option agreement was subsisting, the same could not have been construed as an agreement of guarantee by the learned Single Judge. The option agreement had created reciprocal obligations as also there was no amount payable by the appellant per se under the option agreement. The interpretation of option agreement is, therefore, contrary to the express terms of the said agreement.14. We are not persuaded to accept any of the submissions as urged on behalf of the appellant. Taking the third submission first, we may state that it is not in dispute that the principal terms and conditions of the financial assistance as provided by the respondent to theborrowerVandana Udhyog Ltd.stipulates Put Option which provides that on the Put/Call dates, maturity and trigger of any event of default, the respondent shall have an unconditional right to sell the RTL through transfer/assignment, to the appellantVandana Global Ltd. (VGL) and Vandana Ispat Limited (VIL) and realize all the outstanding dues under the loan agreement. It further provides of the unconditional commitment of the appellant and Vandana Ispat Limited (VIL) to buy the RTL on the exercise of the above right by the respondent which will be backed by their respective Board Resolution, in compliance of Section 295 of the Companies Act. Accordingly, the respondent had entered into the Option Agreement dated 6 January 2012 with the appellant and Vandana Ispat Limited and theborrowerVandana Udhyog Ltd.Clause 2 of the said agreement clearly provides that it is a condition for the respondent agreeing to grant financial facility that the appellant and Vandana Ispat Ltd. (VIL), provide the respondent with an unconditional and irrevocable option to sell and assign the facility to the appellant and VIL alongwith associated rights thereunder in the event default occurs under the said facility agreement. Clause 2 reads as under:It is a condition for IFIN agreeing to grant the Facility that VGL and VIL provide IFIN with an unconditional and irrevocable option to sell and assign the Facility to VGL and VIL alongwith the associated rights thereunder in the event in Event of Default occurs under the Facility Agreement.15. Article I being the interpretation clause, the Put Option is defined to mean the right but not the obligation of the respondent to sell and assign the facility to the appellant and VIL on the terms and conditions contained in the said agreement and demand payment of Exercise Price. The Exercise Price is defined to mean the aggregate amount of all debts and monetary liabilities of theborrowerVandana Udhyog Ltd.to the respondentwhich are owed, incurred and outstanding as principal, together with interest, charges, costs, expenses and all other monies payable by the borrower alongwith the penalty, if any, under the facility agreement and any other documents in relation to the facility, upon the occurrence of an event of default, under the facility agreement.In the above context from the bare reading of Article II, it is clear that the appellant as also Vandana Ispat Ltd. had irrevocably, absolutely and unconditionally agreed and had undertakento the respondentthat in the event of occurrence of a default under the facility agreement, the respondent may at its discretion issue Put Notice and upon receipt of the Put Notice, the appellant and Vandana Ispat Ltd., shall without demur or protest make payment of Exercise Priceto the respondentand accept by way of assignment from the respondent the facility alongwith all rights and liabilities thereunder. The very wording of Article II is suggestive of a guarantee on the part of the appellantthe respondent. Thelegal position can be clearly noted from Section 126 of the Contract Act which defines a contract of guarantee to mean a contract to perform the promise, or discharge the liability, of a third person in case of his default. 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 priceIf 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. Thus, we are of the considered opinion, the learned Single Judge is correct in observing that the option agreement is required to be considered as a guarantee.18. Now coming to the contention as urged on behalf of the appellant that the option agreement was terminated on 4 March 2015 and the same could not have been invoked. This contention also cannot be accepted, firstly because the parties have bound themselves by providing Article IV the termination clause, which provides that the option agreement will be terminated only on the happening of two events, firstly on due repayment of all outstanding amounts under the facility by the borrowerto the respondentand secondly on receipt of exercise price by the respondent from the appellant and Vandana Ispat Ltd. (VIL) It would be desirable to note that the contents of Article IV which reads thus:This Agreement will terminate on the happening of the following events:a) On the repayment of all outstanding amounts under the Facility by the Borrower to IFIN, orb) on the receipt of the Exercise Price by IFIN from VGL and VIL in terms of Article 2.1.Once having agreed to the above conditions of termination, it was not open to the appellant to contend that the appellants liability had ceased to exist in view of a purported termination of the option agreement and that civil proceedings were required to be filed by the respondent to seek specific performance of the said agreement. In our opinion, 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. The 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 appellants 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 appellants 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.19. Before parting, we may also note that by the impugned order the winding up petition of the respondent has been admitted and was directed to be advertised. It is not in dispute that the winding up petition has already been advertised and to that extent the impugned order is already implemented. As regards the final hearing of winding up petition, as informed to us, the learned Single Judge has placed the winding up petition for final hearing on 16 March, 2018.