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Judgment
Ranjit Singh, J
Appellant Bank had filed an O.A. for recovery of a sum of Rs. 5,38,58,458.95. Initially, respondents who were defendants 1 to 5 in the O.A. were declared ex-parte and an ex parte final judgment was passed on 10.5.2012. Later, respondent No. 1, Mrs. Geeta S. Advani, appeared before the Tribunal and prayed for setting aside of the ex-parte judgment passed against her, by filing M.A. No. 96/2013. This M.A. was allowed and the O.A. was restored as against respondent No. 1. The case set up by the Bank is that respondent through its Directors, including respondent No. 1, had approached the Bank for credit facilities in or around July 2004. The respondents availed Export Facility for Purchase/Negotiation of Documents Against Payment/Acceptance for Rs. 41 crore and Pre-shipment Loan Against Export (LAE) available in FCY for Rs. 4,88,80,000/-. Mrs. Geeta S. Advani and other Directors had executed irrevocable personal guarantees to the extent of Rs. 82,00,00,000/- and Rs. 10,75,00,000/- to cover and secure the payment of outstanding. The borrower company had availed credit facilities from other Banks as well. When an outstanding amount of Rs. 5,07,37,772/- was due to the appellant Bank, the Bank issued recall notice on 25.1.2008. A legal notice was also issued on 5.3.2008 calling upon the borrower to pay the amount with interest @ 17.5% p.a. w.e.f. 25.1.2008 and accordingly a claim of Rs. 5,38,58,458.95 was made.
Since all other respondents were proceeded ex-parte, the O.A. was contested by Mrs. Geeta Advani only. In her written statement, respondent No. 1 pleaded that the O.A. was not signed and verified by authorized person and thus was liable to be dismissed. As per the respondent, O.A. was filed with respect to a particular facility purportedly granted/sanctioned vide Facility Advice Letter dated 10.7.2007 as was averred in paragraph 3 of the O.A. As per the Facility Advice Letter dated 10.7.2007, the following facilities were sanctioned:
It is urged that in the said letter dated 10.7.2007 as security for all limits the personal guarantees of Mr. T.O. Joseph (respondent No. 3), Mrs. Sophy Joseph (respondent No. 4), Ms. Elizabeth Thomas (respondent No. 5) and one Mr. T.O. Thomas only were taken. Respondent No. 1 would accordingly urge that there was no requirement of personal guarantee of the said respondent as per the Facility Advice Letter dated 10.7.2007. The respondent No. 1 would further urge that admittedly the Bank had not filed any letter of personal guarantee signed by her with respect to the facilities granted vide Facility Advice Letter dated 10.7.2007. Respondent No. 1 accordingly had claimed that she was not liable for any amount as claimed in the O.A. and that the O.A. was wrongly filed against her. Respondent would point out that the Bank had admitted and acknowledged that respondent No. 1 was not guarantor to the alleged facility.
Elaborating further, it is pointed out that the Bank had granted credit facility (Packing Credit) to the borrower to the tune of Rs. 10.75 crore and had required furnishing of personal guarantees of Chairman/Directors, i.e., respondent No. 1 and other respondents. As per respondent No. 1, she did not furnish any legal, valid and subsisting personal guarantee. It is urged that on 16.10.2006 the Bank had reduced the current facilities w.e.f. 1.2.2007 while cautioning the borrower company that new facility amount will be available on specific terms and conditions outlined in the said letter. These facilities granted were as under:
As per the terms/requirement, the Bank had obtained the personal guarantees of respondents 3, 4 and 5 only. As per the respondent No. 1, the aforesaid facilities were absolutely new credit facilities granted to the borrower company and were not in continuation of the old credit facilities, i.e. Packing Credit, granted in 2004. The respondent would also urge that even if it was assumed for the sake of argument that the personal guarantee of the said respondent was valid and subsisting for the Packing Credit Facility of Rs. 10.75 crore, the same stood discharged due to novation of the main contract. The respondent No. 1 would urge that except for the signature of the respondent on a printed form, there was no consent, concurrence, knowledge, notice or approval of the respondent to the alleged fresh, new and totally changed credit facilities granted in the year 2006-07. As per respondent No. 1, the Bank had suppressed material facts from the Tribunal inasmuch as there was no mention of sanction letters dated 16.10.2006 and 26.9.2005 in the O.A. There was no mention of grant of documentary credit (D.C.) limit of Rs. 1.50 crore and deferred payment credit of Rs. 1.50 crore. There was neither any mention of grant of fresh credit facilities vide letters dated 26.9.2005 and 16.10.2006 and 10.7.2007 in the O.A. It was the case of non-filing of individual statement of account relating to Packing Credit Limit and other limits. It was also alleged that the Bank did not file copy of the legal notice dated 5.3.2008 mentioned in para 9 of the O.A.
In this background, the Tribunal formulated points which required determination. Two of the points which are relevant were as under:
Whether AW-1/6 agreement dated 23.1.2007 and AW-1/1 agreement dated 10.7.2007 were in variance to the contract of guarantee executed by respondent No. 1 on 21.7.2004 discharging the contract of guarantee of the said respondent?
Whether the demand of personal guarantee from respondents 3, 4 and 5 and execution of the personal guarantee by respondents 3, 4 and 5, AW-1/7, AW-1/8 and AW-1/9 on 23.10.2006 was an express conduct on the part of the Bank in discharging the guarantee of respondent No. 1 executed on 21.7.2004?
The Tribunal below has considered these two issues together.
The Tribunal on the basis of evidence and material before it found that AW-1/1 makes a variance of the prior contract dated 20.7.2004. As per the Tribunal, AW-1/1 was the sanction letter dated 10.7.2007 for which guarantees were obtained from other guarantors but the Bank did not insist on guarantee by respondent No. 1, which would show that there was a clear variation to the contract and by demanding personal guarantee from other Directors and not demanding the guarantee from respondent No. 1 there was an express conduct from the side of the Bank in discharging the guarantee of respondent No. 1 executed on 21.7.2004.
The Tribunal has relied on two Supreme Court judgments in the case of S. Perumal Reddiar v. Bank of Baroda, (1981) 1 MLJ 419 and Pratap Singh Moholabhai & Anr. v. Keshavlal Harilal Setalwad & Anr., (1935) 37 Bom. L.R. 315. In Perumal Reddiar's case (supra), it has been held that the true rule applicable to the contract of guarantee is that if there is any agreement between the principals with reference to the contract of guarantee, the surety ought to be consulted. If the alteration is to the disadvantage of the surety, or its unsubstantial nature is not self-evident, the surety can claim to be discharged. The Court has further held that the contract of surety should not be altered without his consent and the creditor should not undertake to alter the contract and then say that though the contract had been altered, it was not done to the disadvantage of the surety, especially when such alterations were made with respect to material particulars regarding the contract of guarantee affecting the surety. In Pratap Singh Moholabhai (supra), the Court has held that the principle is that the surety, like any other contracting party, cannot be held bound to something for which he has not contracted. If the original parties have expressly agreed to vary the terms of the original contract, no further question arises. The original contract has gone, and unless the surety has assented to the new terms, there is nothing to which he can be bound, for the final obligation of the principal debtor will be something different from the obligation which the surety guaranteed.
The Tribunal has also considered the plea of the appellant that it was a continuing contract that was executed by the guarantor and the guarantor will remain liable. The Tribunal has noticed that the guarantee dated 21.7.2004 was for a sum of Rs. 10.75 crore. Subsequent agreement was for a limit of Rs. 8.20 crore. The guarantees for the subsequent limit were obtained from the Directors of the company and the Bank had decided not to have the guarantee of respondent No. 1. Noticing the basic principle of accounting that any amount paid earlier would be credited to the loan pending, the Tribunal has observed that all the payments up to execution of guarantee deed on 23.1.2006 would have gone to earlier loan transaction and the subsequent debits cannot be charge in the name of respondent No. 1 who is not a guarantor. In these circumstances, the Tribunal found that respondent No. 1 stood discharged from the contract of guarantee by variation of contract. As per the Tribunal, there is express conduct from the side of the Bank in discharging the guarantee of respondent No. 1 executed on 21.7.2004 when the Bank decided not to seek the guarantee of respondent No. 1 and insisted on the guarantee of other Directors.
Aggrieved against the above finding returned by the Tribunal, the Bank has filed the present appeal. The Counsel for the appellant would contend that guarantee is an independent contract and de hors particular facility. As per the Counsel, the guarantee cannot be invoked except by notice as can be seen from Clause 3 of the guarantee deed. Counsel submits that the guarantee is continuing guarantee and the guarantor will remain bound even if there was some variance. As per the Counsel, the finding by the Tribunal is that there is variance but there is no finding that it was a case of novation of contract. Counsel for the Bank even would contend that there was no variance of the contract but only a renewal and it is a case of continuation of earlier facilities.
By making reference to the renewal letter, Counsel for the appellant would contend that the facilities were renewed and made 'runoff. As per the Counsel, Section 130 of the Contract Act would not be attracted, as the parties are permitted to contract out of the statute. In this regard, reference is made to Clause 7 of the guarantee agreement. Counsel for the appellant would also plead that even if guarantee was not obtained from respondent No. 1, it will not affect the liability of the said respondent as guarantee given by her was continuing and had not been revoked. Counsel submits that there was no written contract between the Bank and respondent for novation of contract. In support of his submission, the Counsel has relied on the cases of H.R. Basavaraj (Dead) by his LRs. & Anr. v. Canara Bank & Ors., (2010) 12 SCC 458, and Sita Ram Gupta v. Punjab National Bank & Ors., III (2008) SLT 516 : II (2008) BC 691 (SC) : (2008) 5 SCC 711.
On the other hand, the Counsel for respondent No. 1 would refer to the averments made in the O.A. to urge that the Bank had come up with rather vague averments in the O.A. without elaborating anything of the facilities which were extended to the borrower. Counsel has referred to para 4 of the O.A. where the Bank has averred that as a part of the requirements of the terms and conditions agreed for the facilities provided to borrower company, respondents 1 and 3 to 5 had executed irrevocable personal guarantees in favour of the Bank to the extent of Rs. 8.20 crore. As per the Counsel, this averment was misleading, which had led to the Tribunal passing the final order allowing the O.A. ex-parte against all respondents, including respondent No. 1. It is only when the respondent No. 1 came up to seek setting aside the ex-parte order that the correct position was brought to the notice of the Tribunal to the effect that the said respondent had not given any guarantee for the facilities which were subsequently amended from time-to-time and finally made available on 10.7.2007. Counsel would refer to the averment in the O.A. where the Bank itself has referred that the above facilities subsequently amended from time-to-time till 16.10.2006 and extended on fresh terms agreed between the respondents and the appellant Bank. Counsel has highlighted that part of the pleadings where the Bank has itself referred to the fresh terms agreed between the respondents and the appellant Bank.
Reference is then made to the stand of the Bank projected in the replication which was filed when the correct facts were brought before the Tribunal in the reply filed to the O.A. The appellant has averred in the replication that on 10.7.2007 the Bank had reduced the earlier sanctioned facilities of Rs. 10.75 core to 8.20 crore post-shipment facility. The changed facility though continued to be secured by the personal guarantee of the Directors but the Bank as a matter of abundant caution took the fresh guarantees of those Directors who were the existing Directors of the company. In regard to respondent No. 1 it is stated that on account of non-cooperation of existing Directors the personal guarantee of respondent No. 1 could not be taken. Counsel for the respondent No. 1 would, therefore, contend that the Bank had intended to take personal guarantee for the renewed/changed facilities as well but it could not be obtained as is conceded by the Bank.
The stand of the Bank further is that the credit facilities sanctioned on 10.7.2007 was merely continuation of earlier facilities and more particularly, the facilities were reduced. It is accordingly urged that there was no requirement of taking fresh guarantee of the Directors, but the Bank in its wisdom had obtained personal guarantees from the existing Directors. If that was so, there is no justification in not obtaining fresh guarantee from respondent No. 1. The stand of the Bank is that the guarantee offered by respondent No. 1 was continuing and this guarantee would remain valid notwithstanding any variation/modification of the terms of the credit facilities. Thus, the Bank would concede that there was variation/modification of the terms of credit facilities which otherwise can be made out from the letter dated 10.7.2007.
Perusal of the letter dated 10.7.2007 would show that the Bank had reviewed the Banking facility and had offered renewal to the limits which were made available on the specific terms and conditions outlined in the letter and subject to covenants and conditions mentioned in this letter. Needless to note that earlier facilities for which respondent No. 1 had stood as guarantor was for Packing Credit Facility. The facilities now were for a combined limit of Rs. 8.20 crore. This was Export Facility for Purchase/Negotiation of Documents Against Payment. The relevant part relied upon by the Counsel for the appellant is in regard to Pre-shipment Loan Against Export. Counsel for the respondent would highlight that the guarantee by respondent No. 1 was for Packing Credit Facility whereas now the fresh guarantee obtained was in regard to Pre-shipment Loan Against Export Facility. Counsel would refer to the Import facility where the limit was of Rs. 1.50 crore and the limit along with its sub limits was cancelled. The security for all limits now was first pari passu charge on the stocks and receivables of the company and personal guarantees of Mr. T.O. Joseph, Mrs. Sophy Joseph, Mrs. Elizabeth Thomas and Mr. T.O. Thomas for Rs. 8.20 crore. Thus, the plea is that it is a case of novation of earlier contract whereby respondent No. 1 had stood as guarantor. Counsel would point out that respondent No. 1 had left the company in December 2006. As per the Counsel, this was a second contract which was on run off basis. According to the Counsel, it was a conscious decision of the Bank not to obtain guarantee from respondent No. 1. Counsel would plead that it is not a case of variation or waiving the rights available to the guarantor, but it is a case of novation of contract. As per the Counsel, the right available to a person due to novation of contract under Section 62 of the Contract Act cannot be waived. It is urged that respondent No. 1 had never waived her rights available to her under Sections 129, 130, 131, 132 and 133 of the Contract Act.
Another plea is that the present guarantee was on the lines of English guarantee where no such waiver is postulated. On this aspect, the Counsel for the appellant has joined issue in this regard and in support has referred to paras 3 and 7 of the guarantee deed to urge that it was a continuing guarantee and was to cover any sum or sums of money owed which shall for the time being constitute the balance due from the principal to the Bank upon any account and shall be binding as a continuing security on the guarantor, etc. Clause 7 of the guarantee deed provides that the guarantee shall be in addition to and shall not affect or be affected by any other security, now or hereafter held by Bank on account of the moneys hereby intended to be secured and without further consent from the guarantor without effecting its liability and the Bank's right against the guarantor the Bank may at its discretion, determine, enlarge or vary any credit to the principal or abstain from perfecting or release any other securities held now or hereafter by the Bank. Counsel accordingly submits that renewal or variation would not have any effect on the guarantee given by respondent No. 1, which is a continuing guarantee making her liable.
I have minutely considered the submissions made before me. I have also considered the law laid down by the Hon'ble Supreme Court in the judgments cited before me. The plea by the appellant is that the guarantee given by respondent No. 1 was a continuing guarantee and it is not a case of novation of contract but only renewal of the existing facilities. As per the Counsel, the guarantee being continuing guarantee would make respondent No. 1 liable and she has wrongly been relieved of her liability by the Tribunal below. On the other hand, the Counsel for respondent No. 1 would plead that this is a case of novation of contract or in any event a case of alteration of the contract. According to the Counsel for the respondent, Section 62 of the Indian Contract Act would come into play, which deals with the effect of novation, rescission and alteration of contract. This section provides that if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. Thus, where the parties to a contract agree to substitute a new contract or to rescind or alter it, then the original contract need to be performed. The material alteration to the contract is the one which varies the rights, liabilities or legal position of the parties as ascertained by the deed from its original state, or otherwise varies the effect of the instrument as originally expressed or reduces to certainty some provisions which were originally unascertained and as such void, or which may otherwise prejudice the party bound by the deed as originally executed. It is held that the effect of making such alteration without the consent of the party bound is exactly the same as that of cancelling the deed (See: Janab M.H.M. Yakoob v. M. Krishnan, AIR 1992 Mad 80). Thus, it is not only the novation but even alteration of the contract or rescinding the same has the effect of taking away the liability to be performed by the original contract.
The case set up by the Bank in the O.A., in my view, is rather vague. The averments in the O.A. would show that the Bank has not made a mention of the credit facilities which were allowed and the conditions on which such facilities were allowed on 20.7.2004. These facilities were subsequently amended from time to time and even were extended on fresh terms agreed between the respondents and the Bank. The last agreed terms were of 10.7.2007. Thus, it is a clear case where the facilities were subsequently amended and those were extended on fresh terms agreed between the parties. Respondent No. 1 was not a signatory to this agreement. The agreed terms dated 10.7.2007 were for a combined limit of Rs. 8.20 crore for Export Facility for Purchase/Negotiation of documents and Pre-shipment Loan Against Export. The original facilities were for Packing Credit Facility. This, in a way, led to alteration of the contract and would tend to fall within the purview of Section 62 of the Indian Contract Act.
Even otherwise, the respondent No. 1 had never waived her rights as surety. As per Section 130 of the Contract Act, even continuing guarantee may, at any time, be revoked by the surety as to the future transaction with notice to the creditor. Once the respondent had not signed any fresh guarantee which the other Directors did, it can be said that respondent No. 1 by implication had revoked the continuing guarantee as to the future transaction. The appellant itself had pleaded in its application that fresh guarantee could not be obtained from respondent No. 1 because the existing Directors were non-cooperative. Even respondent No. 1 had not waived her rights under Section 133 of the Indian Contract Act, which talks of discharge of surety by variance in the terms of contract. This section provides that any variance, without the consent of surety concerned, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. Respondent No. 1 had ceased to be the Director of the company in the year 2006. This certainly is a case of variance which was made without the consent of the surety. This, thus, may lead to discharge of respondent No. 1 as to the transaction subsequent to the variance.
The plea by the Counsel for the appellant that there was no variance and it was only renewal would not impress me. Even as per the averments in the O.A., the appellant had referred to the subsequent amendment of facilities, which were on fresh terms agreed between the borrower and the Bank. Thus, it is not a case of renewal, but a case of fresh contract even as per the pleadings in the O.A. A conflicting stand taken by the appellant in the replication to urge that the Bank had intended to obtain the guarantee of respondent No. 1 as well, like that of other Directors, but it could not be had because of non-cooperation of the other Directors would amount to conceding that whatever may be the case the personal guarantee of respondent No. 1 was not taken. If the plea is that there was no need to take fresh guarantee the earlier one being continuing one, then the Bank has not offered any justification as to why fresh guarantees were obtained from the other Directors. The credit facilities extended on 10.7.2007 for which personal guarantees of various Directors Mr. T.O. Joseph, Mrs. Sophy Joseph and Mrs. Elizabeth Thomas and Mr. T.O. Thomas were obtained for securing the limits. That being the position, it would imply that the Bank had relieved respondent No. 1 of the guarantee which she had earlier offered. It is noticed that the clauses waiving the rights available to the guarantor under Sections 129, 130, 131, 132 and 133 of the Contract Act usually found in the guarantee deeds are not incorporated in the guarantee deed given by respondent No. 1. The waiver of such rights as such cannot be assumed or presumed on the basis of Clauses 3 and 7 of the guarantee deed.
Counsel for the respondent has relied upon a judgment in Appeal No. 6/2000, Punjab & Sind Bank v. M/s. Yarnco & Ors., decided on 7.3.2014. This was a case where the borrower M/s. Yarnco was impleaded through its proprietor Ms. Geeta Bhupinder Singh. Besides her, Mr. Bhupinder Singh Bindra, Mr. Hari Singh Madan and Mr. Tejinder Singh Dobia (respondent No. 5) had been arrayed as defendants in the suit. The borrower had applied for financial assistance of Cash Credit of Rs. 1.80 lac and Inland Letter of Credit limit of Rs. 1.80 lac from the Bank. The Cash Credit (hypothecation) was enhanced to Rs. 2.10 lac. Fresh documents were executed on 14.5.1984 and these credit facilities were transferred from Chandigarh branch of the Bank to Ludhiana branch. In this background, the issue arose as to whether respondent No. 5 would remain liable for the outstanding amount for which the Bank took fresh security documents from defendants. The plea by the Counsel appearing for respondent No. 5 was that he stood discharged as guarantor. The Counsel for the Bank had relied upon the case of Sita Ram Gupta (supra) to urge that even if the guarantee is cancelled before a loan amount is actually paid, the guarantor would be liable to pay the decretal amount despite the fact that he revoked the guarantee before the payment of the loan amount. The Court, in this case, has held that the guarantor would not be entitled to protection available under Section 130 of the Indian Contract Act. Reference was also made to the case of Bank of Baroda v. Official Liquidator & Ors., 1990 (ISJ) Banking 406. This Tribunal has viewed that in the case of Punjab & Sind Bank (supra) the guarantee was offered by respondent No. 5 and was extended on a few occasions. The Bank and the principal borrower had entered into a fresh guarantee agreement on 2.11.1988. On that day, the existing liability arising in this case was treated as advance of fresh loan to the principal borrower and that is how they furnished fresh but separate guarantees to secure that loan. Finding that fresh guarantee was executed, this Tribunal had noticed that Section 130 of the Indian Contract Act may apply to the said case. Once respondent No. 5 was found to have not signed on 2.11.1988, he could be taken to have relieved himself of the earlier bonds which he had furnished. Even reference was made to Section 133 of the Indian Contract Act, which provides for variance made without the surety's consent. The ratio emerging from this judgment appears to be relevant in the case at hand.
Counsel for the respondent is justified in relying on the provisions of Section 62 of the Contract Act. As already noticed, this is a case of alteration of the earlier contract and accordingly the ratio of law emerging from the case of Sita Ram Gupta (supra) and H.R. Basavaraj (supra) would not strictly apply to the facts of the present case. The Court in the case of H.R. Basavaraj (supra) has also observed that the basic principle behind the concept of novation is the substitution of a contract by a new one only through the consent of both the parties to the same. As observed by the Court, such consent may be expressed as in written agreements or implied through their actions or conduct. If the rights under the old contract were kept alive even after the second agreement and rights under the first agreement had not been rescinded, then there is no substitution of contracts and, hence, no novation. If we apply these observations to the facts of the present case, then it can be said that rights under the old contract were not kept alive and the new agreement was without the consent of respondent No. 1. The consent can be expressed as written agreement or implied through the actions and conduct of the parties. The actions and conduct in the present case would show that respondent No. 1 was not a party to the fresh terms agreed between the borrower and the Bank, which was secured by fresh guarantees given by the other Directors. Seen from any angle, the view formed by the Tribunal below is based on evidence and material on record which is just, fair and legal. The Tribunal, in my view, has rightly considered the issues and while relying upon the ratio of law emerging from the cases of S. Perumal Reddiar (supra) and Pratap Singh Moholabhai (supra) has rightly relieved respondent No. 1 of the liability. In view of the detailed discussion made, no case for interference in the impugned order is made out. The appeal is accordingly dismissed.