1999 (7) TMI 680 - HC - Companies Law

Summary

Issues Involved:
1. Whether the suit against guarantors can be continued when the principal debtor company is declared sick under the Sick Industrial Companies (Special Provisions) Act, 1985.
2. Interpretation of the term "suit" and whether it includes execution proceedings.
3. Applicability of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, to guarantors.
4. Binding nature of High Court judgments on lower courts.

Issue-wise Detailed Analysis:

1. Suit Against Guarantors:
The primary issue is whether a suit against guarantors can proceed when the principal debtor company is declared sick by the Board for Industrial and Financial Reconstruction (B.I.F.R.). The defendants argued that the suit should be stayed because the principal debtor, D.K. Chemoplast Limited, was declared sick. The plaintiffs contended that the matter was resolved by the Division Bench in Madalsa International Ltd. v. Central Bank of India, which held that the phrase "any guarantee in respect of any loans or advance granted to the industrial company" refers to guarantees given by the industrial company itself and not by third parties.

2. Interpretation of "Suit":
The court examined whether the term "suit" in Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, includes execution proceedings. The Division Bench in Madalsa International Ltd. held that the term "suit" does not encompass execution proceedings. The court noted that the unamended Section 22 did not suspend suits for recovery of money or enforcement of any security against the industrial company, but the amended section included such suits.

3. Applicability to Guarantors:
The court analyzed whether Section 22 applies to guarantors. The Division Bench in Madalsa International Ltd. concluded that the term "suit" does not include execution proceedings, and thus, the stay of execution proceedings against guarantors was not warranted. However, the current judgment emphasized that the issue of whether suits against guarantors are suspended was not directly addressed by the Division Bench, making their observations obiter dicta. The court further examined the Indian Contract Act, noting that a company cannot be a guarantor for itself, and thus, guarantees must be given by third parties.

4. Binding Nature of High Court Judgments:
The court discussed the binding nature of High Court judgments on lower courts, stating that while the law declared by the Supreme Court is binding under Article 141 of the Constitution of India, there is no similar provision for High Court judgments. However, judicial precedents establish that lower courts should follow High Court judgments. The court clarified that the ratio decidendi of a judgment, which includes issues directly in dispute and decided with reasons, is binding.

Conclusion:
The court concluded that the interpretation by the Division Bench in Madalsa International Ltd. that "suit" does not include execution proceedings was not directly in issue and thus not binding. The court held that Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, applies to guarantors, meaning that suits against guarantors for enforcing guarantees given for loans or advances to a sick company must be stayed. The court transferred the suit and all proceedings to the Debt Recovery Tribunal as the relief sought exceeded Rs. 10 lakhs.