K.L. Rajgarhia And Ors. vs Canara Bank And Ors.

Ranjit Singh, J

Though order under challenge in this appeal is dated July 30, 2010 where liability of the amount is restricted to Rs. 50 lacs plus pendente lite and future interest only against the recovery of Rs. 10,29,78,153 ordered in favour of the Bank, but the case traces its history to an earlier orders as well. In fact OA filed by the Bank for recovery of Rs. 10,29,78,153/- was allowed by the Tribunal below on September 10, 2004 and all the defendants (including the appellants) were held liable jointly and severally for the total amount of sum along with pendente lite and future interest @ 11%. This was, however, subject to the condition that in case payment is made within the period of three months then the defendants (including the appellants) will be entitled to lower rate of interest @ 10% per annum. Recovery certificate was accordingly issued.

Against this order, the present appellants-guarantors, preferred Appeal No. 6 of 2005 before this Tribunal. The main point raised in the appeal was that there was no demand raised against the guarantors and hence they could not be made liable to pay any amount to the Bank in the absence of this demand. This plea had flowed with the submission that the appellants being guarantors could be made to discharge the liability only on demand as per terms of guarantee.

This Tribunal vide its order dated June 1, 2010 had remanded the case back to the Tribunal below when it found that the evidence on the issue had not been led. The parties were given opportunity to lead evidence as well. It is on this basis that the Tribunal below had proceeded to consider the controversy to see whether any demand had been raised against the guarantors or not.

After considering the evidence and material placed before the Tribunal below, it is held that there was implied demand against the appellants when the OA was filed and so the Tribunal has held the appellants liable to a limited extent of Rs. 50 lacs only. The appellants as well as the Bank have felt aggrieved against this finding returned by the Tribunal below. The appellants have filed Appeal No. 404 of 2010 to challenge this order. The respondent Bank has also filed a separate Appeal No. 433 of 2010 to challenge the same order as the Bank is aggrieved against that part of the order whereby liability of the appellants has been restricted to a sum of Rs. 50 lacs only.

To understand and appreciate, the controversy brief narration of the facts of the case may be necessary.

In the year 1979 Shree Padma Paper Mills Ltd. had availed loan facility from the Canara Bank and also from Rajasthan State Industrial Development and Investment Corporation, Syndicate Bank, Rajasthan Financial Corporation and Corporation Bank Ltd. Appellants Shri Kanhiya Lal Rajgarhia and Shri Ask Kumar Rajgarhia were the promoter directors of Shree Padma Paper Mills Ltd. and stood personal guarantee for loan availed by the Paper Mill. The Paper Mill could not maintain the financial discipline and the Canara Bank accordingly filed OA for recovery of the amount as already noticed. Written statement on behalf of the appellants as well as defendant Paper Mill was filed raising different defences. As per the appellants, OA was barred by limitation except for two guarantees alleged to have been executed on March 14, 1980 and October 8, 1980 and that the appellants thereafter had never executed any balance confirmation, letter for acknowledgement of their liability in their personal capacity. It was also urged that the alleged acknowledgement on behalf of the Paper Mill is not binding on the guarantors. The appellants had also pleaded that the credit facility granted to the Paper Mill had become non-operative since last more than a decade at the time of filing of the OA and therefore cash credit account and mortgage account which was operated Gole Market branch has ceased to be an operative account for more than a decade.

It is alleged that the Bank had never served any demand notice upon the appellants/guarantors for payment. As already noticed, this OA was allowed by the Tribunal below for recovery of the sum as claimed vide its order dated September 10, 2004 against which appeal was filed. While deciding Appeal No. 6 of 2005, the only issue touched by the Tribunal was the argument raised by the appellant that no demand was made from the appellants whereas the agreement clearly and unequivocally stated that the demand would be made by the Bank upon the guarantors for payment. The Counsel for the appellants had relied upon ratio of law laid down in different judgments in support of this submission that the guarantee was payable only on demand, as noticed in the order passed by the Tribunal. On the other hand, Counsel for the Bank had argued that this point was never raised before the Tribunal below and so there is no finding returned by the Tribunal on this point. Counsel appearing for the Bank would therefore plead that he had been taken to a surprise. Further plea was that the Bank got no opportunity to lead evidence in this regard. This Tribunal found force in the submissions made by the Counsel for the Bank. The Tribunal was of the view that the parties must avail benefit on the decision on this point by the first Court. This Tribunal accordingly remanded the case back to the Tribunal below in the following terms:

"Keeping in view all the facts and circumstances, I hereby remand the case and direct the parties to appear before the learned DRT on 1.7.2010. The parties are also given liberty to lead evidence in this respect. The evidence, if any, be produced on 1.7.2010 and the learned Trial Court is directed to dispose of this case by the end of July, 2010."

A In the above noted background, the Tribunal below has now passed the impugned order against which both the parties have filed the present two appeals.

The Counsel for the appellants in Appeal No. 404 of 2010 would again repeat his submission that the Bank never raised any demand and despite opportunity having been provided to the Bank, it could not establish or prove that any demand was made. In the absence of demand, liability of the appellants to pay the guaranteed amount would not arise and hence he would challenge the finding returned by the Tribunal below to be erroneous. As per the Counsel, if there is no demand, there will not be any cause of action for the Bank to claim the amount which in any case has to be as per the liability which was restricted to Rs. 50 lacs. Counsel for the Bank, on the other hand, would press here that the appellants were Directors of the Company and had therefore given personal guarantee, which was of total sum of Rs. 2.50 crores as well, which guarantee was signed by the appellants in the year 1984, To counter this, Counsel for the appellants/guarantors would, however, submit that no facility pursuant to this guarantee was extended and it was only the guarantee signed for the purpose of rehabilitation which ultimately did not take place and was not acted upon by the Bank. The Counsel would also refer to the concessions which were extended in terms of this agreement, but later on the Bank had withdrawn those concessions and had charged the full amount as per the original terms of agreement. The Counsel for the appellants would maintain that only guarantee which was offered by the appellants was dated October 8, 1980 and which was for a sum of Rs. 50 lacs. The Counsel would specifically refer to that part of the guarantee where it was recorded that:

"Provided always that the total liability ultimately enforceable against the guarantor under this guarantee shall not exceed the sum of Rs. 50,00,000/- together with interest thereon 11 % p.a. above Reserve Bank of India Rate with a minimum of 14% per annum from the date of demand by the Bank upon the guarantor for payment."

This guarantee further provides that this guarantee shall be to the extent aforesaid to be continuing guarantee by the borrower until notice in writing of revocation of the guarantee as hereinafter provided is received by the Bank. On this basis, Counsel for the appellants would urge that neither the Bank had raised any demand nor it would be entitled to recover a sum of Rs. 50 lacs for which the appellants had given their personal guarantee.

To support his submission that the liability of the appellant cannot exceed Rs. 50 lacs together with interest, the Counsel for the appellants would rely upon that part of the order passed by this Tribunal where, as per him, the Counsel for the appellant had conceded this fact. It is pointed out that along with earlier appeal filed by the appellants, he had moved an application seeking waiver of requirement of pre-deposit. This application was considered by this Tribunal and was disposed of vide an order dated November 19, 2009. The Counsel would refer to that part of this order which, as per him, would show that the Counsel for the Bank had conceded this fact that the liability of the appellants would not exceed to a sum of Rs. 50 lacs. In this regard, the Counsel has referred to the following part of the order dated November 19, 2009:

"The next contention raised by the Counsel for the appellant is that a surety cannot be made liable for more than his undertaking. According to the Agreement, Shri Ashok Kr. Rajgarhia's guarantee of which under no circumstances could exceed the sum of Rs. 50 lacs together with interest, etc. Though the guarantee deed does not mention about it as it was left blank, but that fact was not disputed by the Counsel for the Respondent Bank."

To further substantiate this submission, the Counsel has also referred to that part of the order passed by the High Court when the order passed by this Tribunal on pre-deposit application was put to challenge before the High Court. According to the Counsel for the appellant, the Counsel for the Bank had conceded this fact before the High Court as well. In this regard, the Counsel has made reference to the following part of the order:

"...Appellate Tribunal considered the present case to be a fit one for granting partial waiver/substantial waiver of the pre-deposit amount, it lost sight of the fact that the liability of the petitioners was limited to Rs. 50 lacs in their personal capacity, Therefore, the pre-deposit of Rs. 25 lacs each, in effect, would amount to 100% of the debt due/liability of the petitioners, which, as per the guarantee agreement, was admittedly limited to Rs. 50 lacs."

The High Court has accordingly directed that the pre-deposit amount is reduced to a sum of Rs. 50 lacs. This, according to the Counsel, would show that in any case, liability of the appellants cannot exceed Rs. 50 lacs.

Counsel for the Bank, however, would seriously join issue with the Counsel for the appellants/guarantors on this count. The Counsel would serious contest if the Counsel for the Bank had made any admission in regard to the liability of the appellants/guarantors. Similarly, as per the Counsel, no admission was made before the Hon'ble High Court.

The manner in which the record has been made in the orders would not clearly bring out if the Counsel for the Bank had made any admission that the liability of the appellants/guarantors was restricted to a sum of Rs. 50 lacs together with interest. In the order passed by this Tribunal, it is only recorded that the facts were not disputed by the Counsel for the respondent Bank. Whether this related to the liability being not exceeding Rs. 50 lacs or that it related to the non-mention about it in guarantee deed as it was left blank cannot clearly be made out. The order of the High Court, however, gives an indication that the liability being limited to Rs. 50 lacs was referred to as admitted. Be that as it may, there are other factors also which may help in deciding this issue.

The Counsel for the appellant has referred to OA filed by the Bank to urge that the Bank has not made any reference to the guarantee deed of the year 1984. In this regard, the Counsel for the appellants/guarantors has made reference to the averments made in Para 2(ix) where the Bank has averred that the guarantee signed and executed by respondent Nos. 2 and 3 in favour of the Bank are annexed as Annexure-D. The guarantee deeds annexed with the OA are dated March 14, 1980 and October 8, 1980. From this, the Counsel would urge that the Bank had not even made reference to the guarantee alleged to have been signed by the appellants in the year 1984. The Counsel would further allege that the Bank had conceded this position that the liability of the appellants/guarantors was restricted to Rs. 50 lacs as per its own showing.

The Counsel for the Bank, on the other hand, would submit that the claim in the OA was for a sum of rupees which has ultimately been allowed by the Tribunal below. The appellants/guarantors being Directors of the Company cannot escape from their liability on this basis once they had given personal guarantee. The Counsel would further contend that the appellants/guarantors were held liable jointly and severally and that order passed by the Tribunal still stand. The Counsel, pleads that the remand was only to the limited extent for seeing whether the Bank had raised demand for payment against the appellants/guarantors or not and the Tribunal below had no jurisdiction to reopen the entire issue and to determine the liability afresh.

These submissions, of course, are seriously contested by the Counsel appearing for the appellants/guarantors. He would point out that the Bank had led evidence on all aspects and not only in regard to the demand. He would contend that once the case was remanded by this Tribunal, it would mean that the earlier order was set aside and the Tribunal, therefore, was fully justified in deciding the issue afresh. The Counsel for the Bank, however, would still insist that the case was remanded only to the limited aspect of demand and the appellants/guarantors cannot be permitted to escape the liability on this count. The Bank has therefore challenged the order passed by the Tribunal below.

In views of the conflicting stands taken by the parties, issues which may require consideration by this Tribunal would be about the nature of demand and to see whether there was any demand raised by the Bank or not or finally whether the liability of the guarantors is limited or they would be jointly and severally liable for the recovery of the amount as ordered by the Tribunal below.

The Counsel for the appellants has placed number of judgments before me in support of his plea. He would first refer to Ram Nagappa Shetty v. Syndicate Bank & Ors., 1987(2) Bom.CR 362. This was the case, which was referred to by the Counsel before this Tribunal on earlier occasion as well. The Court, in this case, has held that only after a demand has been made on a guarantor can there be refusal; only upon refusal is there a breach and limitation begins to run. It is urged that if no demand is made on the guarantors no cause of action has arisen thereon. Issue in this case being considered by the High Court was slightly in different contest though in Brown v. Brown, (1893) 2 Chancery 300, it was held that there was a distinction in law between a present debt and a promise to pay on demand on the one hand and a promise to pay a collateral sum on request on the other hand.

Reference is then made to Syndicate Bank v. Channaveerappa Beleri & Ors., III (2006) SLT 518 : II (2006) BC 579 (SC) : AIR 2006 SC 1874. The Court in this case has considered the words used in the guarantee bond. The guarantee bonds states that the guarantors agree to pay and satisfy the Bank 'on demand'. It specifically provided that the liability to pay interest would arise upon the guarantor only from the date of demand by the Bank for payment. The Court has observed in this case that terms of guarantee thus made it clear that the liability to pay would arise on the guarantors only when a demand is made.

In the case of Hiranyaprava Samantray v. Orissa State Financial Corporation & Ors., AIR 1955 Orissa 1, it is held that issuance of notice is not merely a formality and both borrower and the guarantor are entitled to notice. Reference is then made to Masyc Projects Private Ltd. v. Rajiv Rai Sachdev, 2008(152) DLT 762 to urge that suit without accrual of cause of action is liable to be dismissed. State of Bihar v. M. Homi and Another, AIR 1955 SC 472 is referred to state that the guarantee has to be invoked strictly in terms thereof. Reliance is placed on the cases State of Maharashtra v. M.N. Kaul, AIR 1967 SC 1634 and Chittaranjan Banerjee & Anr. v. Deputy Commissioner, Lakhimpur & Ors., AIR 1980 Gau 62 to urge that surety cannot be made liable more than the what he has undertaken reference is made to some judgments to urge that judicial admissions are binding and thus cannot be withdrawn. This is to plead that the Counsel of the Bank had made certain admission about the liability and so cannot now be permitted to withdraw from those admission.

In Syndicate Bank v. Channaveerappa Beleri and Others (supra), it is viewed that extent of liability under a guarantee, and question as to when the liability of a guarantor will arise, would depend purely on terms of contract.

To state that the remand would necessarily mean setting aside the order, the Counsel has referred to Amal Mal Sindhi v. Ram Parkash, 15 (1979) DLT 344. The Court, in this case, has observed that the effect of remand is that the final order is necessarily set aside. It is also held that it depends on the terms of remand order whether any of the interlocutory order are affected by the remand order. It is also observed that the result of remand is only to set aside the final order and remitting the case back to the trial Court for a rehearing and decision on the record except in so far as the record becomes different by the remand order. Normally, the remand would not affect any interlocutory orders unless the remand order expressly says so.

The Counsel for the Bank, on the other hand, has also referred to certain precedents to support that demand need not be specific in writing and it can be implied as well. The Counsel, accordingly, would urge that once the OA was filed by the Bank for recovery of this amount, it could be treated as demand and hence plea raised by the appellants that there was no notice is just a red-herring. Reference is made to the observations in case Harvinder Singh v. Paradise Towers Pvt. Ltd. & Anr. 199 (2013) DLT 25 (CN) where it was held that institution of a suit for ejectment itself amounts to determination of tenancy. In Chemons India Pvt. Ltd. v. Vijay Singh Sandhu, 204 (2013) DLT 260, the Court has held that service of summons of a suit for ejectment on a tenant is by itself a determination of tenancy even if there be any flaw in determination of tenancy prior to institution of suit. On this logic, the Counsel would contend that even if there was no demand earlier, filing of the OA itself would lead to demand. Filing of eviction suit under general law is held to be a notice to quit on the tenant. Accordingly, the Court held that no notice is necessary under Section 106 of the Transfer of Property Act to enable the respondent to get decree of eviction against the appellant. This was so observed in Nopany Investments (P) Ltd. v. Santokh Singh (HUF), 146 (2008) DLT 217 (SC). The Counsel for the Bank would also refer to a decision dated 12th July, 2005 delivered by DRAT at Chennai, in case The Federal Bank Ltd., Puthiyara Branch v. Shri Satya Parkash and Another, RA No. 17 of 2005, where it is held that guarantee is in the nature of a collateral engagement to answer for the debt, default or miscarriage of another is distinguished from an original and direct engagement for the parties own act. In this case, guarantee bonds were executed though on different date subsequent to the principal agreement. Anything done or any promise made for the benefit of the principal debtor must be contemporaneous to the surety's contract of guarantee in order to constitute consideration therefore. A contract of guarantee executed afterwards without any consideration is void.

I have considered the submissions made before me and have also gone through the judgments referred to by the respective parties. The Counsel for the Bank has not been able to satisfactory explains as to why no plea was raised in the OA in regard to the liability of the appellants on the basis of guarantee signed in the year 1984. Once in the pleadings, reliance was place on the guarantee executed in the year 1980 then it will be to late in the day now for the Bank to plead that the appellants had stood guarantee for the amount, in the guarantee deed which was executed in the year 1984.

I have perused the order of remand which was passed on the plea raised by the Bank. The relevant portion thereof has been reproduced above. This Tribunal has held that:

"I hereby remand the case and direct the parties to appear before the learned DRT on 1.7.2010."

The parties were given opportunity to lead evidence in this respect. Can this order be considered to mean that the remand was only to the limited extent of demand? Remand was of the case and it was not specified that it was only to find if there was any demand that may have been the only aspect which the Tribunal was to consider but remand was of a case. This Tribunal did not touch the other issues on merits while hearing the earlier appeal no other issue was decided. The parties have also led evidence on all the aspects and without restricting themselves to the aspect of demand. The parties gave evidence with respect to all aspects of the case without any objection. In any case, it would not be possible for the Bank to improve its case or its pleadings. If the Bank has only pleaded the guarantee which is given in the year 1980, it may not be possible for the Bank to rely upon the guarantee, which is of the year 1984. I see some substance in the submission made by the Counsel for the appellants that no benefit was extended on the basis of this guarantee and this was only for the purpose of helping out the appellants which was subsequently not agreed to by the Bank and had reverted to earlier position and had imposed the same interest liability on the basis of earlier agreement. Viewing this aspect in entirety, it can be said that the remand cannot be termed as a limited remand to see if the demand was made or not. In fact, the Tribunal has also taken it to be so and has passed a fresh order determining the liability whereby the appellants have only been held liable for a sum of Rs. 50 lacs. The Bank does not seen to have pleaded so therefore the Tribunal below as no such submission on aspect of or extent of remand are found noticed by the Tribunal below. I am however unable to accept the submission of the appellants that in this case, the Bank had not raised any demand. The Counsel for the Bank is justified in stating that mere filing of the OA itself could be treated as demand. This submission has force and finds support from the law referred to by the Counsel for the Bank, wherein the Courts have held that filing of suit itself can be taken as notice for determination of lease. Same analogy can be applied to the present case as well and filing of the OA can be held to be demand on the guarantors and they could have easily discharged this liability instead of raising any issue of demand at least after the date when the OA was filed. Accordingly, I am of the view that the Tribunal below has rightly decided the issues in question. In its earlier order, the Tribunal below had held the appellants liable jointly and severally for the amount found due, but now has taken a view and has restricted their liability to the tune of Rs. 50 lacs plus pendente lite and future interest only. I, therefore, find no infirmity in the impugned order and would uphold the order passed by the Tribunal below. There is no merit in both the appeals and these shall, therefore, be disposed of in the light of the observations made above.