Sumitomo Corporation India Pvt. ... vs State Of Uttar Pradesh & Anr.
2010 Latest Caselaw 5736 Del

         IN THE HIGH COURT OF DELHI AT NEW DELHI


                                   W.P. (C) No. 744 of 2010

         SUMITOMO CORPORATION INDIA PVT. LTD.
         & ANR.                                      ..... Petitioners
                     Through: Mr. Sanjay Jain, Sr. Advocate with
                     Ms. Manjula Gandhi & Ruchi Jain, Advocates.

                          versus


         STATE OF UTTAR PRADESH & ANR.              ..... Respondents
                      Through: Mr. Anil Mittal, Advocate

         CORAM:           JUSTICE S. MURALIDHAR


                  1. Whether reporters of local paper may be allowed
                     to see the judgment?                                   No
                  2. To be referred to the reporter or not?                 Yes
                  3. Whether the judgment should be referred in the digest? Yes

                                   ORDER

16.12.2010

1. The prayer in this writ petition is for a direction to the State of Uttar

Pradesh, Respondent No.1, to honour its guarantee in respect of the 14.9%

redeemable bonds issued by U.P. Co-operative Spinning Mills Federation

Ltd. (Respondent No. 2) and pay the Petitioner a sum of Rs. 20,32,491/-

towards the principal amount of the bonds together with interest as well as

overdue interest till payment.

2. The background facts are that Respondent No. 2 wished to raise a sum of

Rs. 55 crores to meet the working capital requirements of its member mills.

It, therefore, came out with a bonds issue through private placement. The

face value of each bond was Rs. 5,000 and tenure 5 years. The bonds were to

carry interest @ 14.9% per annum payable annually on 26 th December of

W.P. (C) No.744 of 2010 page 1 of 10 each year. The bonds were to be redeemed in three instalments at par at the

end of 4th, 4½ and 5th year @ 33%, 33% and 34% respectively. It is stated

that RR Financial Consultants Limited and Dara Shaw Badar Financial

Services Pvt. Ltd., having their office at Delhi besides other places, were

appointed as the arrangers to the issue.

3. In the brochure giving the details of the issue, the commitment of the

Respondent No.1, Government of Uttar Pradesh, in the form of an

unconditional and irrevocable guarantee as well as the fact that loans worth

Rs. 43 crores of the UP Government were converted in equities in

Respondent No. 2 were prominently highlighted. The security for the bonds

was stated to be the said unconditional and irrevocable guarantee of the

Government of Uttar Pradesh for payment of interest and redemption of the

principal amounts. It is stated that consistent with the assurance given, a

letter dated 2nd June 1998 was addressed by the Special Secretary,

Government of UP to the Managing Director of Respondent No. 2

conveying the decision of the former to guarantee the payment in respect of

the said bonds.

4. Acting on the representations made by the Respondents, the trustees of

the Petitioner thought it prudent to make an investment of Rs. 5.5 lakhs by

purchasing bonds of Respondent No. 2 of an equivalent amount. The

Petitioner states that they proceeded on the assumption that the investment

was secure on account of the irrevocable guarantee provided by Respondent

No. 1.

W.P. (C) No.744 of 2010 page 2 of 10

5. On the Petitioner‟s application dated 17th June 1998 for 90 bonds and 30th

June 1998 for 20 bonds, Respondent No. 2 allotted to the Petitioner bonds of

the total value of Rs. 5.5 lakhs. Copies of the debenture bonds have been

enclosed which clearly indicate that the allotment was of 14.9% (taxable)

secured redeemable UPCSMFL debenture bonds "fully guaranteed by the

Government of Uttar Pradesh on private placement basis".

6. The Petitioner states to have received interest in the sum of Rs. 63,758/-

for a period of twelve months. However, despite numerous reminders

between August 2001 August 2008, no further payments were forthcoming.

7. On 2nd September 2008, the Financial Controller of Respondent No. 2

informed the Petitioner that under the one time settlement programme of

2005 (`OTS‟), it has sent proposals to Respondent No. 1 and requested it to

release a sum of Rs. 9.5 crores in that regard.

8. The Petitioner received a communication dated 9th October 2001 and 6th

February 2002 from Respondent No. 2 wherein Respondent No. 2 informed

the Petitioner that due to financial crunch they are unable to make the

payment of interest and re-payment of principal sum and have approached

Respondent No. 1 for releasing the amount under guarantee. Respondent No.

2, vide letter dated 28th September 2002, informed Petitioner that a Receiver

is being appointed by the Bombay High Court in an appeal filed by

Respondent No. 2 arising out of the suit filed by Maharashtra State Road

Transport Corporation, Mumbai, a debenture bond-holder in Suit No. 2792

of 2000 for recovery of Rs. 5.89 crore.

W.P. (C) No.744 of 2010 page 3 of 10

9. By a letter dated 10th January 2005, Respondent No. 2 authorised its lead

arranger to approach the investors for the OTS. Consequently, on 24th

January 2005, Respondent No. 2 approached the Petitioner. The Petitioner,

by a letter dated 11th August 2005, agreed to the OTS proposal. However, it

is submitted that no payment has been made.

10. Subsequently not having received any amount, the Petitioners invoked

the guarantee given by Respondent No. 1 by a letter dated 27 th May 2008.

Further, a legal notice was sent to the Respondents on 7 th March 2009

invoking the guarantee and demanding a sum of Rs. 20,32,491/- with

interest @ 14.9%.

11. The Petitioner states that another identically placed secured creditor M/s.

Modern Food Industries (India) Ltd. („MFIL‟) which was subsequently

taken over by Hindustan Unilever Limited („HLL‟) was also an investor in

the above issue of Respondent No.2 on the basis of the guarantee provided

by the Respondent No.1. MFIL filed Writ Petition (C) No. 16462-63 of 2004

in this Court. This Court, by an order dated 21st November 2005, directed

Respondent No.1 to pay the principal and the interest under the bonds within

60 days of the order. The Supreme Court by a judgment dated 15th October

2008 in Civil Appeal No. 6126 of 2008 (State of UP v. Hindustan Unilever

Limited) upheld the order of this Court and ordered that Respondent No.1

was liable to make the guaranteed payment to the investors. On the strength

of the said judgment of the Supreme Court, on 7th March 2009 the Petitioner

wrote to both Respondents 1 and 2 requesting them to make payment of Rs.

64,29,552/- and reminded that these payments had become overdue by then.

W.P. (C) No.744 of 2010 page 4 of 10

12. The Petitioner submits that the present case is squarely covered by the

judgment dated 21st November 2005 passed by this Court in Modern Food

Industries (India) Ltd. v. State of Uttar Pradesh and the subsequent

judgment of the Supreme Court in Civil Appeal No. 6126 of 2008. It is

further pointed out that both the matters relate to the same bond issue of

Respondent No. 2 guaranteed by Respondent No. 1.

13. In para 8 of the judgment, this Court held as under:

"The factum of the receipt of Rs. 15,00,000/- is not in dispute. The sovereign guarantee extended by the State of Uttar Pradesh stands admitted. It is not sanguine to submit that had this sovereign guarantee not been extended the Provident Funds of the Workmen would not have been invested by the Trustees with Respondent No.2. Both the Respondents are jointly and severally liable for the repayment of the principal amount together with interest thereon at the rate of 14.90 per cent per annum. There is little likelihood of this amount being liquidated by the principal debtor, namely, Respondent No.2 and, therefore, it would be appropriate to order recovery from the Guarantor of Respondent No.1. I am galvanized and propelled to exercise jurisdiction vested in this Court under Article 226 of the Constitution of India keeping in perspective the fact that the amounts invested with Respondent No.2, under sovereign guarantee of Respondent No.1, constitute the Provident Funds of the Workmen. The Petitioners are entitled to receive the principal sum of Rs. 15,00,000/- together with interest thereon at the rate of 14.90 per cent per annum from the date of investment. The amounts already paid, W.P. (C) No.744 of 2010 page 5 of 10 that is, Rs. 1,15,118/- and Rs. 1,73,980/- aggregating Rs. 2,89,098/- shall be deducted therefrom. These amounts shall be paid by Respondent No. 1 to the Petitioners within sixty days from today. Respondent No.1 shall be fully empowered to make recoveries from Respondent No.2 for the amounts paid by it to the Petitioners. The petition is allowed with costs quantified at Rs. 15,000/-."

14. The Petitioners point out that the facts are not in dispute and no

adjudication is required. The only direction sought is to Respondent No.1 to

honour its solemn obligation and commitment made to the Petitioner on the

basis of which the Petitioner altered its position and made the investment in

the bonds issued by Respondent No. 2. It is pointed out that a sovereign

government is bound by its undertaking. It is also bound to honour the

obligations since it is only on the assurance of the Government of Uttar

Pradesh, which was acting as a guarantor, that parties like the Petitioner

made their investments.

15. Learned counsel for the Petitioners submits that the case of the Petitioner

is no different from the case of Hindustan Unilever Ltd. and, therefore,

directions should be issued in terms of the order dated 15 th October 2008

passed by the Supreme Court in that case which has recently been followed

by this Court in Tirath Ram Shah Charitable Trust v. State of UP [order

dated 9th July 2010 - passed in W.P.(C) 9150 of 2009].

16. A counter affidavit has been filed on behalf of Respondent No. 2 in

which it is first contended that Respondent No. 2 is under liquidation and, W.P. (C) No.744 of 2010 page 6 of 10 therefore, the present writ petition is not maintainable. It is submitted that a

number of debenture holders have filed suits for recovery of the interest as

well as the principal amount against Respondent No. 2. Further, in Suit No.

279 of 2000 the Division Bench of the Bombay High Court, by an order

dated 3rd December 2001, has appointed a Receiver. Subsequently, by an

order dated 27th June 2006 an application seeking permission for liquidation

of Respondent No. 2 and its member mills has been allowed and the process

of liquidation has been initiated. It is further submitted that there is also a

liability on the member mills of Respondent No. 2 to the tune of Rs. 418.33

crores besides the liability of debenture holders of approximately Rs. 153.47

crores as on 31st March 2006 which will be settled by the Liquidator as per

the U.P. Cooperative Societies Act, 1965. A decision has been taken by

Respondent No. 2 in a meeting on 3rd June 2010 under the chairmanship of

the Chief Secretary, State of U.P. to decide the policy for the payment of

debenture holders, to pay off the principal amount of the government

guaranteed debentures to debenture holders who have agreed to the OTS

without any condition.

17. This Court has considered the above submissions.

18. It appears that the facts of the present case are more or less similar to the

facts in State of UP v. Hindustan Unilever Ltd. A perusal of the order

shows that the fact of Respondent No. 2 being under liquidation was noticed

in para 4 which reads as under:

"4. The Federation sustained losses and went under liquidation. It did not redeem the bonds as agreed and W.P. (C) No.744 of 2010 page 7 of 10 undertaken, in spite of demands. The amounts due were not paid except part payment of Rs. 1,73,980/- and Rs. 1,15,118/- in all Rs. 2,89,098/- towards interest. As the amounts due under the bonds and interest were not paid by the State Government in terms of guarantee, in spite of demand for payment, the respondent approached the Delhi High Court for relief. The High Court, by order dated 21.11.2005, directed the State Government, as guarantor, to pay the sum of Rs. 15,00,000/- (Rupees Fifteen Lakhs) with interest at the rate of 14.9% (the rate agreed under the bonds) less amounts already paid. The said order is challenged in these two appeals by the State Government and the Federation."

19. The Supreme Court expressly also negatived the contention of

Respondent No. 2 that "as the State Government has paid principal amount,

the Respondent should be relegated to other remedies in law for recovery of

interest". The Supreme Court observed as under:

"6. Such a contention is not tenable. The amount invested by first respondent belongs to the workmen of first respondent. The amount was invested in the bonds of the Federation in view of the express guarantee by the State Government that the same will be repaid with interest upto 15.5 % p.a. The very purpose of the State Government guarantee is to ensure payment in case the Federation was not able to make payment. In the circumstances, the fact that the Federation is in financial difficulties cannot be a ground for the State Government to say that it will not make payment of interest, even though it had guaranteed the repayment with interest. If such a contention is accepted, the very purpose of the guarantee will be defeated. We are indeed surprised that

W.P. (C) No.744 of 2010 page 8 of 10 such a plea is put forward on behalf of the State of Uttar Pradesh."

20. Ultimately, the Supreme Court passed the following order:

"7. In the circumstances, we are of the view that the State Government should pay the interest also. However, on the facts and circumstances, we are of the view that interest should be paid at the rate of 14.9% p.a. for a period of five years from the date of deposit and thereafter at the rate of 9.5% per annum (which is equal to the minimum rate of interest that is payable by the first respondent to its workers on the provident fund dues). The above concession regarding interest is granted on the peculiar facts of these appeals. Three months‟ time is granted to the Government of Uttar Pradesh to pay the balance of interest."

21. This Court is unable to find any factor which can distinguish this case

from the case of Hindustan Unilever Ltd. which was disposed of by the

Supreme Court in the above terms. Even though the specific provisions of

the UP Co-operative Societies Act, 1965 may not have been referred to in

the above order of the Supreme Court, the fact of Respondent No. 2 having

gone into liquidation has certainly been taken note of. The prayer that for

recovery of interest the Petitioner should avail of other remedies, has also

been negatived.

22. Accordingly, following the judgment of the Supreme Court in

Hindustan Unilever Ltd., it is directed that Respondent No. 1 will pay to the

Petitioner the principal amount together with simple interest @ 14.9% per

W.P. (C) No.744 of 2010 page 9 of 10 annum for the period of 5 years from the date of the deposit and thereafter @

9.5% simple interest per annum (which is equal to the minimum rate of

interest that is payable by the first Respondent to its workers on the

provident fund dues). Respondent No. 1, Government of UP will pay the

aforementioned principal and interest amounts to the Petitioner within a

period of twelve weeks from today failing which it will pay penal simple

interest at 15% per annum for the period of delay.

23. With the above directions, the writ petition is disposed of, but in the

circumstances, with no order as to costs.

                                                     S. MURALIDHAR, J
DECEMBER 16, 2010
akg




W.P. (C) No.744 of 2010                                            page 10 of 10