'State Used Dominant Position To Rob Poor Of Earned Interest', High Court Imposes ₹5 Lakh Cost On Punjab Govt For Denying Interest In Investment Scheme

The Punjab & Haryana High Court has imposed a cost of Rs. 5 lakh on the Punjab State Industrial Development Corporation (PSIDC) for denying lawful claims and for coercing investors to enter into agreements to forego the interest on their investment.

The Corporation pleaded financial hardship and sought an extension of time to make arrangements while constantly reminding that it was a State-owned Corporation and thus invoked its sovereign guarantee status. However, it expressed serious concern about investment going bad and the entire money being left unpaid. It later made the investors enter into a settlement to forego the entire interest and only accept the principal amount.

Justice Vinod S. Bhardwaj said, "A Constitutional Court sits as a guardian of the accrued rights of persons/citizens against abuse of authority by the State. It would not allow the State to capitalize in an unholy bargain and divest the citizens of their dues. Being a social welfare State, its obligation to protect faith of people is even otherwise higher. Any attempt to the contrary deserves to be nipped and a stern message needs to be sent that such conduct is unacceptable and unpardonable in law, when it comes from the State."

The judge opined that the State used its dominant position to rob the poor of their earned interest under an imminent threat to the principal as well. It would be an act of gross injustice if such conduct of State is condoned as it erodes the confidence which the name of the State exudes."

The apathy shown by the respondent Corporation towards its investors, who are compelled to enter into settlement in order to save their principal amount is regrettable. The role of the State in the present case is apparently that of an accomplice. While it chose to lend its name and goodwill to the Corporation and to enable it to attract investment on its guarantee, it chose to look the other way when an occasion arose, the Court added.

The Court was hearing plea of the Jute Corporation of India Ltd., a trust seeking direction to the Punjab Government and its Department of Industries and Commerce to discharge their obligation as a guarantor of the bonds issued PSIDC and to pay the accrued interest on the delayed payment of bonds and actual interest accrued on the bonds.

Facts in Brief

The petitioner trust bought bonds of the investment scheme floated by the PSIDC and as per the said scheme of investment, PSIDC had to redeem 30% of the total value of 7.80% bonds in April 2014, 30%...and 40% in April, 2017.

PSIDC is a fully owned undertaking of the State Government and in 2005, the Punjab Government and its Department of Industries and Commerce had undertaken guaranteed repayment of principal and interest amount accrued in favor of the investor who had bought bonds under the scheme of investment floated by PSIDC.

The Corporation pleaded financial hardship and sought extension of time to make arrangements while constantly reminding that it was a State owned Corporation and thus invoked its sovereign guarantee status. However, it later expressed serious concern about investment going bad and the entire money to be left unpaid.

Thereafter, in 2020 the Board of Trustees agreed to accept the payment of only the principal amount of Rs. 80 lakh as a one-time full and final settlement and agreed to forgo the interest component.

After hearing the submissions, the Court considered the question "whether after the acceptance of the proposal of one-time settlement by the petitioner – trust, should it now be allowed to claim the interest accrued on the said investment, by claiming consent under coercion and undue influence."

The Court noted that under the Indian Contract Act, "Not every agreement is a contract. Only those agreements, which are enforceable, are treated as contracts. The result of a contract, ceasing to be enforceable, is that, the contract becomes void."

"In the present case, the petitioner – trust persistently entreated the respondent – corporation – to fulfil its duties and settle the outstanding amount accruing in their favour. Regrettably, the respondent – corporation – disregarded such legitimate demands and obligations, opting instead to exert coercion and undue influence to compel the formation of an agreement for a full and final settlement, thereby attempting to evade their responsibilities," it noted further.

It is impermissible for the respondent corporation to exploit the agreement, procured through coercion or undue influence, to subsequently evade their obligations, the Court said.

Victim Of Economic Duress Has Double Remedy Viz. Defence Of "Undue Influence" and "Opposed To Public Policy"

Justice Bhardwaj observed that in India one party exerting pressure, which is not physical, but akin to economic or commercial, over the other party to the contract is not uncommon.

"The Indian judiciary in order to deal with such contracts having unconscionable bargain have resorted to the concept like economic duress as was done by their English counterparts and dealt with the same under the concept of undue influence," observed the Court.

It said that the the two new doctrines of economic duress and inequality of bargaining power are accepted by the Supreme Court as a part of the Indian legal system. Therefore the victim of economic duress in Indian law has a double remedy, viz., defence of “undue influence” and “opposed to public policy”.

The judge noted that in the present case, it is established that various casual, temporary Group 'D' workers had invested their hard earned contributions in the bond Scheme floated by PSIDC having a sovereign guarantee.

The said money was retained by PSIDC for nearly 13 years which includes a periodical delay of more than 06 years after the payments fell due to the petitioner. In the joint meeting with PSIDC, it showcased its inability to repay the amount no more than the principal, it said.

"Being faced against risking even the principal in pursuit of the interest, the petitioner had no option but to accept what appeared best in the platter. There was no equal bargaining power," added the Court.

Justice Bhardwaj said an association of workers trusted its money to a Government owned Company under a sovereign guarantee where the sovereign detached itself, left no choice, the petitioner having risked the collective funds could not afford loss of the same.

The State also failed in its obligation to protect the rights of citizens and became an accomplice in enabling PSIDC to negotiate unconscionable terms with the petitioner under threat to the financial interest of the petitioner-trust. It's turning a blind eye was a conduct unbecoming of the State and amounted to dishonouring its guarantee, opined the Court.

Furthermore, the Court noted that the petitioner did not, out of its conscious will, choose to forgo the interest amount accrued in their favor, rather, the said proposal was accepted under the fear of losing the principal amount.

Consequently, it said the "acceptance under fear cannot be held to be a free consent and therefore voidable at the option of the petitioner – trust."

In light of the above, the Court directed the respondents to jointly or severally discharge their obligation as a guarantor and to discharge their obligations against the petitioner-trust within a period of 02 months.

The Court also clarified that as per Section 64 of the Indian Contract Act, 1872, whereby when a party exercises its right to declare an agreement voidable on their end, it has to restore such benefits received, however in the present case the principal amount received by the petitioner – trust cannot be termed to be the benefit received by the party, rather it is the long overdue amount that was payable towards them and hence the same does not warrant any interference for return.

Rahul Deswal, Advocate, with Umang Goyal, Advocate, for the petitioner.

Sourav Verma, Addl. A.G. Punjab, for State of Punjab and Department of Industries and Commerce

Vikas Mohan Gupta, Advocate, for PSIDC.

Title: THE JUTE CORPORATION OF INDIA LTD. v. THE STATE OF PUNJAB AND OTHERS

Citation: 2024 LiveLaw (PH) 117

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