Case Note & Summary
The Plaintiff, Deepen Arun Parekh, filed a suit seeking a declaration that the Deed of Guarantee dated 10 April 2014 executed by him in favour of the Defendant banks and financial institutions is not valid and binding, and alternatively, that it has ceased to have effect and stands automatically terminated. The Plaintiff also sought interim relief restraining the Defendants from acting upon the Deed of Guarantee. The Plaintiff is the brother of late Amitabh Arun Parekh, who was the Chairman and Managing Director of Parekh Aluminex Limited (the Company). After Amitabh's sudden demise in January 2013, the Company owed a liability of Rs.2762.09 Crores to a consortium of lenders led by Indian Overseas Bank (Defendant No.1). The lenders pressured the family to take over management and provide personal guarantees as a pre-requisite for a Corporate Debt Restructuring (CDR) scheme. The Plaintiff was appointed as an independent and non-executive Director on 11 September 2013, with an express understanding that he would not be liable for prior acts of the Company. On 10 April 2014, the Plaintiff executed a Deed of Guarantee, which categorically stated that it was provided to comply with CDR conditions. The CDR package failed, and the CDR Cell informed the Defendants on 23 March 2016 that the Company stood exited from the CDR mechanism as a failure. The Plaintiff resigned on 28 April 2016, which was accepted. Despite this, many Defendants impleaded the Plaintiff in recovery proceedings as a personal guarantor. The Plaintiff contended that the Deed of Guarantee never came into effect as it was conditional upon CDR sanction, and alternatively, it ceased to operate under Clause 12 due to events such as his resignation, CDR failure, and lenders walking out. The Defendants opposed the suit on grounds of limitation, bar of jurisdiction under SARFAESI Act, RDB Act, and IBC, and that the Plaintiff should have raised his grievances before the DRT. The Court, after hearing extensive arguments, found that the Plaintiff had made out a strong prima facie case that the Deed of Guarantee was conditional and never became effective or stood terminated. The balance of convenience was in favour of granting interim relief as the Defendants could still proceed against the Company and other guarantors, and the Plaintiff would suffer irreparable loss if the guarantee was enforced. The Court granted an interim stay on the operation and implementation of the Deed of Guarantee qua the Plaintiff, restraining the Defendants from acting upon it, subject to the Plaintiff not alienating or encumbering his assets except in the ordinary course of business.
Headnote
A) Contract Law - Conditional Guarantee - Deed of Guarantee - The Deed of Guarantee was executed subject to the condition that it would come into force only upon sanction of the CDR plan under the CDR Scheme. Since the CDR failed and the company exited the CDR mechanism, the guarantee never became effective. (Paras 3.5, 3.7) B) Contract Law - Automatic Termination - Clause 12 of Deed of Guarantee - The Deed of Guarantee contained clauses for automatic cessation upon occurrence of specified events, including the guarantor ceasing to be a director, CDR becoming inoperative, bankruptcy of the company, and lenders walking out of CDR. All these events occurred, terminating the guarantee. (Paras 3.7, 3.8) C) Civil Procedure - Interim Relief - Prima Facie Case, Balance of Convenience, Irreparable Loss - The Plaintiff made out a strong prima facie case that the Deed of Guarantee never came into force or stood terminated. Balance of convenience was in favour of granting stay as the Defendants could still proceed against the company and other guarantors. Irreparable loss would be caused to the Plaintiff if the guarantee was enforced pending suit. (Paras 12-14) D) Limitation - Suit for Declaration - The suit for declaration that the Deed of Guarantee is not binding was filed in 2024, but the cause of action arose when the Defendants sought to enforce the guarantee against the Plaintiff, which is a continuing cause. The issue of limitation is a mixed question of fact and law and cannot be decided at the interim stage. (Para 6) E) Jurisdiction - Bar under SARFAESI, RDB Act, IBC - The bar under Sections 34 and 35 of SARFAESI Act, Section 18 of RDB Act, and Section 180 of IBC applies only to matters which the DRT or NCLT can adjudicate. The validity and enforceability of a personal guarantee is not exclusively within the jurisdiction of those tribunals, and the Civil Court has jurisdiction to decide the same. (Para 7)
Issue of Consideration
Whether the Deed of Guarantee dated 10 April 2014 executed by the Plaintiff in favour of the Defendants is valid and binding, and whether the Plaintiff is entitled to interim relief restraining the Defendants from acting upon the said Deed of Guarantee.
Final Decision
The Court allowed the Interim Application and granted an interim stay on the operation and implementation of the Deed of Guarantee dated 10 April 2014 qua the Plaintiff, restraining the Defendants from acting upon it, subject to the Plaintiff not alienating or encumbering his assets except in the ordinary course of business.
Law Points
- Conditional guarantee
- Deed of Guarantee
- Corporate Debt Restructuring
- CDR failure
- automatic termination
- prima facie case
- balance of convenience
- irreparable loss
- limitation
- jurisdiction bar under SARFAESI
- RDB Act
- IBC
- Order VII Rule 11 CPC
