Punjab & Haryana High Court Declares Coerced Settlement on State-Guaranteed PSIDC Bonds Void; Orders Full Contractual Interest Under Sovereign Guarantee

Case Name: The Jute Corporation of India Ltd. CPF Trust v. State of Punjab & Others
Date of Judgment: 12 February 2024
Citation: CWP-25702-2022
Bench: Hon’ble Mr. Justice Vinod S. Bhardwaj

Held: The Punjab & Haryana High Court held that the petitioner’s acceptance of only the principal amount on redemption of PSIDC bonds, in place of the full interest guaranteed under the sovereign bond terms, was not a voluntary settlement but a product of economic coercion and undue influence. The Court ruled that waiver induced by fear of financial loss is not “free consent” under Sections 14, 15, and 16 of the Contract Act. It declared the purported settlement void and directed the State of Punjab and PSIDC to pay the entire contractual interest along with interest on delayed payment, holding that sovereign guarantees are binding, non-negotiable, and cannot be diluted due to financial stress of a public sector corporation.

Summary: The petitioner, a statutory CPF Trust responsible for administering the retirement corpus of employees of the Jute Corporation of India, had invested ₹80 lakh in PSIDC bonds in 2004. These bonds carried explicit sovereign guarantee by the State of Punjab, promising repayment of both principal and interest on scheduled maturities between 2014 and 2017. However, despite repeated reminders, PSIDC failed to honour redemption and continued to assure repayment in future. As delays persisted, PSIDC issued a communication stating that only the principal amount could be released and that acceptance of this “one-time settlement” was necessary to avoid further loss, hinting that principal itself could become uncertain if the trust refused. Fearing erosion of employees’ retirement funds, the trust passed a resolution under compulsion in 2020 to accept principal alone. After receipt of principal, the trust immediately demanded the guaranteed interest, but PSIDC declined. The Court examined the surrounding circumstances, the tone and tenor of PSIDC’s communications, the fiduciary nature of the petitioner as a retirement-fund manager, and the absence of any real choice. Relying on Central Inland Water Transport v. Brojo Nath Ganguly, State of U.P. v. Hindustan Unilever Ltd., LIC v. Consumer Education Research Centre, Pradeshiya Industrial Development Corporation v. HAL, and principles of sovereign liability, the Court held that the settlement was neither voluntary nor equitable. It ruled that unequal bargaining power, threat of loss, fear of irretrievable damage, and the State’s indifference together constituted coercion and undue influence. It emphasised that sovereign guarantee binds the State to secure timely repayment irrespective of PSIDC’s internal financial difficulties. The Court further held that the State cannot evade responsibility by distancing itself from a PSU when the liability emanates from a formal guarantee. It found that the petitioner’s conduct of accepting principal was not waiver but an act of compulsion aimed at protecting workers’ statutory savings.

Decision: The writ petition was allowed. The Court declared the alleged “full and final settlement” void for lack of free consent and directed PSIDC and the State of Punjab to jointly and severally pay the entire contractual interest due on the bonds along with interest for the delayed period in accordance with the original bond terms. All pending applications were disposed of.