Case Note & Summary
The dispute arose from the U.P. Cooperative Spinning Mills Federation Ltd. inviting applications for private placement of debenture bonds in 1998, guaranteed by the U.P. Government. The first respondent invested Rs.15,00,000 from its employees' provident fund based on this guarantee. However, the Federation faced financial difficulties, went into liquidation, and failed to redeem the bonds, leading to a partial payment of interest. The respondent sought relief from the Delhi High Court, which ordered the State Government to pay the principal amount with interest. The State Government challenged this order, arguing that the Federation's liquidation should relieve it of the obligation to pay interest. The court found this argument untenable, emphasizing that the State's guarantee was meant to protect the investment of the workmen. The court ruled that the State must pay interest at the agreed rate of 14.9% for five years, followed by a reduced rate of 9.5%. The appeals were disposed of with the State given three months to pay the interest, and each party bearing its own costs.
Headnote
A) Contract Law - Guarantee Enforcement - State's Liability for Interest - Government Guarantee Act, 1998 - The State Government's guarantee for repayment of debenture bonds included interest, and the financial difficulties of the Federation do not absolve the State from its obligation to pay interest. The court held that the State must honor its guarantee, ensuring the workmen's investment is protected (Paras 6-7).
Issue of Consideration
Whether the State Government is liable to pay interest on the debenture bonds guaranteed by it despite the Federation being under liquidation.
Final Decision
The Supreme Court upheld the Delhi High Court's order, directing the State Government to pay the principal amount of Rs.15,00,000 and interest at the rate of 14.9% for five years, followed by 9.5% thereafter, granting three months for payment.
Law Points
- Guarantee enforcement
- Interest payment
- Liquidation implications
- Provident fund investment
- State liability
