2004 (4) TMI 305 - HC - Companies Law

Summary

Issues Involved:
1. Whether the learned Single Judge erred in proceeding with the suit against the Appellant/Guarantor when the industrial company was before the BIFR.
2. Whether the lease finance granted by the Respondent to the industrial company was in fact a loan or advance, thus requiring the suit to be suspended under section 22(1) of SICA.

Detailed Analysis:

Issue 1: Suit Against the Guarantor and BIFR Proceedings
The first point of contention was whether the suit against the Appellant/Guarantor should be automatically suspended because the industrial company was under BIFR proceedings. The relevant provision is section 22(1) of SICA, which states:

>"no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advances granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority."

The court noted that this section was amended in 1994 to include the phrase "and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advances granted to the industrial company." The Appellant argued that this amendment meant that no suit for recovery of money could proceed against the guarantor once the industrial company was before the BIFR.

However, the court referred to several judgments, including Patheja Bros. v. ICICI and Kailash Nath Agarwal v. PICUP, to clarify that the protection under section 22(1) is limited. Specifically, while suits for the enforcement of guarantees related to loans or advances granted to an industrial company are stayed, this does not extend to all types of suits against guarantors. The court concluded that the learned Single Judge was correct in proceeding with the suit against the guarantor, as the protection under section 22(1) did not automatically apply to all suits against guarantors.

Issue 2: Nature of Lease Finance - Loan or Advance
The second issue was whether the lease finance provided by the Respondent to the industrial company was actually a loan or advance, which would invoke the protection of section 22(1) of SICA. The court examined the Lease Agreement and the guarantee given by the Appellant. The Appellant argued that the agreement, though styled as a Lease Agreement, was essentially a financial transaction akin to a loan or advance. They cited the judgment in Sundaram Finance Ltd. v. State of Kerala, which allows courts to look beyond the form of a document to its substance.

However, the court found that the Lease Agreement explicitly stated that the property in the equipment remained with the Respondent and did not pass to the industrial company. The agreement contained several clauses that reinforced this, such as clauses on ownership, maintenance, loss and damage, and return of equipment upon default. The court also noted that the industrial company had always treated the transaction as a lease, not as a loan or advance.

Furthermore, the court referred to previous judgments, including an unreported order by S.H. Kapadia, J., and another by S.N. Variava and S.H. Kapadia, JJ., which had similarly concluded that such lease agreements were not financial agreements. The court emphasized that the text of the guarantee given by the Appellant was clear and that it was not a guarantee for the repayment of a loan but for fulfilling the obligations under a lease.

In conclusion, the court held that the lease finance provided by the Respondent was not a loan or advance and, therefore, the suit did not need to be suspended under section 22(1) of SICA. Consequently, the appeal was dismissed with costs.