From oil adulteration to IBC resolution, here're the key court orders

‘Full and final voucher’ no bar to arbitration

The discharge voucher demanded by insurers and government entities before disbursing amounts due came up again in the Supreme Court and it dismissed the appeal of Oriental Insurance Co against the ruling of the Bombay High Court on this issue. The case arose when there was a dispute between the insurer and Dicitex Furnishing, which was in financial distress following a fire that razed its three godowns. The company’s claim was rejected after two years, based on repeated survey reports of insurers which put the losses far below the claim. Owing to financial distress, the company signed a discharge voucher to get whatever was offered. The voucher stated that the payment was “full and final settlement” voluntarily given, settling “all claims, present or future, arising directly/indirectly in respect of the loss/accident and subrogating all their rights and remedies to the insurer". When the company sought arbitration, the insurer argued that since the company had signed the discharge voucher and accepted the amount offered, there was no arbitrable dispute. The high court rejected that contention, leading to the appeal. The Supreme Court dismissed the appeal, stating that there was an arbitrable dispute and there was prima facie ground to examine “the genuineness or credibility of the plea of coercion.”

Chit fund subscriber’s default serious

If a subscriber in a chit fund scheme defaults, the firm is entitled to recover the consolidated amount of future subscriptions from her in a lump sum. This is because the relationship between a chit subscriber and the chit foreman is a contractual obligation, which creates a debt on the day of subscription, the Supreme Court ruled in its judgment in Oriental Kuries vs Lissa. “The stipulation of empowering the foreman to recover the entire balance amount in a lump sum in the event of default is to ensure punctual payment by each individual subscriber,” the judgment clarified, adding that “without punctual payments, the system would become unworkable, and the foreman would not be in a position to discharge his obligations to the other members of the chit fund". The Kerala High Court had ruled that by entering into a chitty agreement, debt is not created by the subscriber with respect to the amount of all future instalments. Invoking the central law, Chit Funds Act, 1982, the Supreme Court set aside the high court judgment.

Bad cheque after Lok Adalat is offence

A cheque issued following a settlement before the Lok Adalat is meant to discharge a liability and if it is dishonoured by the bank, the drawer can be prosecuted again under the Negotiable Instruments Act, the Supreme Court has ruled in its judgment, Arun Kumar vs Anita Mishra.  In this case, Arun received a cheque from Anita which was dishonoured. She was prosecuted and sentenced to six months of prison and a fine of Rs 3.3 lakh. Later, the dispute was taken to Lok Adalat. According to the settlement, she was to pay Rs 3.51 lakh on the same day. She gave a post-dated cheque according to the settlement. But it also bounced, leading to a second round of criminal case. When the magistrate dismissed her petition to quash prosecution, she moved the Madhya Pradesh High Court. It set aside the prosecution on the ground that the cheque was not issued to clear a debt or liability towards the payee. It was to fulfil a settlement. The Supreme Court asserted that there was a clear liability on account of the settlement. Moreover, the first round of litigation clearly showed that the cheque was issued on account of liability.

Adulteration of oil in ‘critical’ category

Adulteration of petrol and diesel is a “critical irregularity” according to the Marketing Discipline Guidelines issued by public sector oil marketing companies. It called for the termination of the contract between an oil company and a dealer, the Supreme Court stated in its judgment in Indian Oil Corporation vs  R M Services Centre. It set aside the ruling of the Gauhati High Court, which maintained that the variation in quality was not critical and termination was not justified. In this case, the dealer was allotted the contract as a handicapped person. On inspection of the premises, it was found that the diesel was adulterated and there was stock variation. In the latter case, the punishment was warning and suspension. But in case of adulteration, termination was justified according to the guidelines, the judgment said. The court also rejected the argument of the dealer that there was a delay of five days in testing the sample. It said that the 10-day timeline was not mandatory and not to be strictly adhered to. The quality does not vary in such a short period.

IBC resolution does not free guarantor

The liability of a guarantor of a debt of a corporate debtor is not extinguished upon an insolvency resolution plan in respect of the corporate debtor. The Calcutta High Court held so last week in its judgment in Gouri Shankar vs Punjab National Bank. In this case, the director of a company stood a personal guarantee for bank loans. When the company defaulted, the bank moved the National Company Law Tribunal, Kolkata, which approved a resolution plan under the Insolvency and Bankruptcy Code. The dues were paid according to the plan after a haircut. However, the plan did not deal with the personal guarantee of the director. When the bank turned to the director demanding payment according to the guarantee, he argued that his liability is co-extensive with the debtor and, therefore, he was free from the guarantee. The court dismissed his petition stating that the insolvency code “does not allow personal guarantors to escape their liability".  Citing judgments on contracts and insolvency, it said: “The corporate debtor in a proceeding under the code may stand discharged of its liability to its creditors but the same does not absolve the surety of the liability".

Forfeiture of equipment upheld

The Supreme Court has upheld the forfeiture of security deposit and equipment of a contractor whose performance was poor. In this case, Vijay Trading & Transport vs Central Warehousing Corporation, the firm was given a contract for handling and transportation at Inland Clearance Depot, Varanasi. However, the contract was terminated by the government corporation because of poor performance and consequent deterioration in the situation in the depot. The contractor protested and took the issue to arbitration. The award was against him. He challenged the award in the Delhi High Court without success. The Supreme Court dismissed the appeal.

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