Loan guarantors not covered under SICA

Written by Indu Bhan | Indu Bhan | Updated: Jan 15 2014, 08:26am hrs
Unregistered undertaking cant be enforced

The Supreme Court, in the case Haryana Financial Corporation versus Gurcharan Singh, has said that a mere undertaking on a stamped paper given by a borrower that he would not dispose of his properties during the currency of the loan is not sufficient to enforce it. The charge over the properties mentioned in the undertaking is created only by deposit of title deeds or through a registered document, it said. In this case, Amrit Steel Industries, a proprietorship firm, had obtained a loan of R5.05 lakh from the corporation by entering into hypothecation of machinery, fixture and a personal guarantee. Singh, the proprietor, had also given a written undertaking that he would not dispose of his properties during the currency of the loan. The firm could not repay. The corporation sold its properties and recovered its dues.

Meanwhile, Singhs wife moved a trial court seeking a declaration that she is the absolute owner and in possession of the properties mentioned in the undertaking. She won the case. Even the Punjab and Haryana High Court upheld it. This was challenged by the corporation in the apex court saying the decree in favour of the proprietor was null and void as the same was obtained by fraud to defeat the personal undertaking executed by Singh. The top court ruled that without transfer of interest in the properties in question by a registered document, no charge could be created in those properties and hence the corporation cannot proceed against those properties on the basis of mere undertaking.

No protection for guarantors in debt recovery

The Supreme Court has ruled that the top brass like the chairman and the directors, who stood as guarantors of a sick company, cannot escape their liability and seek protection under Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, or SICA. Dismissing the appeal of the chairman and a director in the case Inderjeet Arya versus ICICI Bank Ltd, it reiterated that liability of surety or guarantor is co-extensive with that of the principal debtor.

In this case, the Bank of Rajasthan, prior to its amalgamation with ICICI Bank, had moved the Debt Recovery Tribunal, Delhi, seeking recovery of R26.55 crore, including interest to the tune of R2.79 crore from Rajat Pharmachem. The chairman and the director who stood as guarantors for the sick firm were made parties. This was challenged by the top officials in the high court, which held that the protection of Section 22(1) of SICA cannot be extended to the chairman and directors in their capacity as guarantors of debt owned by RPL. On appeal, the apex court stated that they were not protected from the recovery proceedings filed by the bank and financial institutions before a tribunal such as DRT and their liability will remain despite the firm being declared sick.

No resumption in mining of granite quarries

The Supreme Court has rejected the plea of mining firm PRP Exports for permission to operate its quarries in Tamil Nadu. The firm, a 100% export-oriented unit having 55 granite quarries measuring about 584.83 acre in Madurai district, is accused of illegal mining to the tune of R4,124 crore. After receiving complaints of unauthorised quarrying by PRP Exports, the state government officials as well as the district collector and the superintendent of police had sealed its factory premises, vehicles and instruments, and also suspended its quarrying operations. Even a geological survey had estimated that the total volume of illegal mining by all firms in the district was around R12,390 crore and the value of the illicit quarry in the PRPs 16 quarries alone was to the tune of R4,124.14 crore.

Consequently, the state government under Sub-Rule (2) of Rule 19 of the Granite Conservation and Development Rules, 1999, suspended the mining operations of 78 granite quarries of Madurai district including 20 quarries of PRP Exports. The company challenged the suspension of its operations in the Madras High Court, which issued certain directions. It also requested the Supreme Court to allow resumption of its mining operations, but the same has been rejected.