Punjab And Sind Bank vs Yamrnco And Ors.

Ranjit Singh, J

This appeal is pending since 1998 and has mostly been adjourned on one ground or the other for which Counsel on both sides has to share the responsibility. When this appeal came up for hearing on 4.2.2014, it was impressed upon the Counsel to make their respective submissions so that this old appeal pending since year 2000 is decided. The appeal has been heard today and is being disposed of accordingly. The appellant, Punjab and Sind Bank, has impugned the order dated 15.7.1997 passed by DRT, Delhi dismissing the suit/O.A, qua respondent No. 5 (defendant No. 5). The Tribunal below, however, has held respondents 1 to 4 liable directing them to pay a sum of Rs. 38,26,822/- together with pendente lite future interest @ 12.5% p.a. from the date of filing of the suit till actual realization in favour of the Bank. The Bank is primarily aggrieved against that part of the order whereby respondent No. 5 has been discharged of his liability and so also the rate of interest allowed which, according to the Bank, is not as per the contractual rate.

The principal borrower in this case is M/s. Yarnco which has been impleaded through its proprietor Ms. Geeta Bhupinder Singh. Besides her Mr. Bhupinder Singh Bindra, Mr. Hari Singh Madan and Mr. Tejinder Singh Doabia (respondent No. 5) had been arraigned as defendants in the suit. It is stated that defendants had applied for financial assistance of Cash Credit of Rs. 1.80 lacs and Inland Letter of Credit limit of Rs. 1.80 lacs from appellant Bank's branch at Chandigarh. This Cash Credit (hypothecation) was enhanced to Rs. 2.10 lacs. Fresh documents were executed on 14.5.1984 in this regard. These credit facilities were transferred from Chandigarh branch of the Bank to Ludhiana branch on 23.5.1984 and the Inland Letter of Credit limit of Rs. 7 lacs and Cash Credit limit of Rs. 4 lacs and Bank Guarantee limit of Rs. 3 lacs were given. This limit was again enhanced on 7.8.1985 and fresh credit facility was granted on 23.6.1986 as well. On this date, a demand promissory note, letter of waiver authorizing the Bank to inspect the hypothecated goods, to cancel or to reduce the credit facilities and other formalities were complied with. According to the Bank, defendants 3 and 5 executed guarantee documents on 23.5.1983 and thereafter defendants 3, 4 and 5 executed letters of guarantee on 7.8.1985 and again on 23.6.1986.

On 2.11.1988, the debit balance in Cash Credit account of defendants 1 and 2 stood at Rs. 23,92,228.35. This was acknowledged by defendants 1 and 2 and a fresh loan documents were executed for the said amount. The averment in the plaint in this regard in Para 22 are as under:

"22. That with the debit of the amount of the said six letters of credits as also the interest on 2.11.1988, the debit balance of the above said Cash Credit account No. 105 became Rs. 23,92,228.35p. In order to acknowledge of the amount of letters of credit, along with interest as also to acknowledge the debit balance in the said CC Account, the defendant No. 2 for self and on behalf of defendant No. 1, executed on 2.11.1988 itself the following security loan documents in favour of the plaintiff Bank at its premises situated at Saban Bazar, Ludhiana:

(i) Demand promissory Note dated 2.11.1988 for Rs. 23,92,228.35.

(ii) Letter of waiver as per form No. 106 undertaking to pay the amount due on the said Demand Promissory Note dated 2.11.1988 without the same being present for payment.

(iii) Authorisation letters per form No. 106 authorising the Bank to recall, cancel or reduce the cash credit limit at any time without notice.

(iv) Form No. 722 agreed to render every assistance for carrying out the periodical inspections of goods, stocks hypothecated.

(v) Form No. 226 stating that the borrower was not the agriculturist and further agreeing that the amount of credit facility would not be used for any purpose connected with or identical to agriculture.

(vi) Form No. 291 agreeing to pay penal interest at the rate of 2.5% per annum over and above the normal rate of interest in cash the borrowers committed some breach of the terms of credit facilities.

(vii) Letter of continuity with regard to Demand Promissory Note dated 2.11.1988.

(viii) An agreement of hypothecation for Rs. 23,92,228.35 to hypothecate all kind of yarn in favour of the plaintiff Bank."

Since defendants 1 and 2 did not stick to the financial arrangement, notices were served on various defendants and accordingly the Bank had approached the Civil Court leading to the present O.A.

A joint written statement was filed by respondents 1 to 4. They had disputed the interest accrued. Respondent No. 5 had filed a separate written statement. He has disputed his signatures appearing on the guarantee deed relied upon by the Bank. It is stated that the purported signatures of respondent No. 5 appear differently on the documents alleged to have been signed by him on different dates. Respondent No. 5 had also raised a plea of limitation. The pleas raised by respondent No. 5 can be summed up as follows:

"(i) That no letter of guarantee was ever executed in favour of M/s. Yarnco through its proprietrix Mrs. Geeta Bhupinder Singh.

(ii) That a bare perusal of letter of guarantee indicates that the signature of defendant No. 5 differ.

(iii) That on 2.11.1988 cash credit facilities (hypothecation limit) and Inland Letter of Credit were merged together and a fresh loan document was executed. To this defendant No. 5 is not a party. As guarantee dated 2.11.1988 is the document on the basis of which the suit has been filed and as defendant No. 5 is not a signatory to this, therefore, the suit is barred by limitation.

It is further pleaded that the real beneficiaries of the whole transactions were defendants No. 2, 3 and 4 and there is a collusion between them and the Bank. It is further pleaded that the Bank should first sell the hypothecated goods and thereafter only the decree can be executed against the guarantor."

On the basis of pleading and evidence ultimately led, the Tribunal has relieved the respondent No. 5 all of his liability as guarantor primarily on the basis of subsequent transaction dated 2.11.1988. This document has been exhibited as AW-4/10. This document was executed by Mr. Bhupinder Singh Bindra (respondent No. 3), Other guarantors who had allegedly signed the documents earlier were not parties to this deed and have not endorsed their signatures on this document. Exhibit AW-4/10 reads as follows so far as the liability of the amount is concerned:

"Provided nevertheless that my/our liability under these presents shall not exceed in the aggregate the sum of Rs. 23,92,228.35 and interest thereon at the rate of 6.5% over Reserve Bank rate subject to a minimum of Rs. 16.50% per annum."

A short submission is made on behalf of respondent No. 5 that the total amount outstanding on 2.11.1988 was Rs. 23,92,228.35 for which the Bank took fresh security and documents from defendant No. 2 and guarantee deed from defendant No. 3. From this, Counsel for respondent No. 5 would urge that his liability as a guarantor stood discharged. The Tribunal, while discharging the respondent No. 5, has noticed the clause in guarantee dated 23.8.1996 (AW-3/10) which provides that the parties had agreed that the Bank could discharge any of the guarantors. It is noticed that in contract of guarantee dated 2.11.1988 (Exhibit AW-4/10), respondent No. 5 is not a party. As per the Tribunal, the irresistible conclusion is that respondent No. 5 was discharged from his responsibility as guarantor. According to the Tribunal, even the evidence led by the Bank would support this conclusion.

To contest this finding, Counsel for the appellant Bank has placed before me a judgment of the Hon'ble Supreme Court in the case of Sita Ram Gupta v. Punjab National Bank & Ors., III (2008) SLT 516 : II (2008) BC 691 (SC) : 2008 (4) ICC 151, where the Court, while refusing to let go of a guarantor, has held that even when 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. In this regard, it is held that the guarantor would not be entitled to protection available under Section 130 of the Indian Contract Act.

To come out of this view expressed by the Tribunal that upon furnishing a fresh guarantee the liability of respondent No. 5 would cease, the Counsel for the appellant has made reference to the judgment of the Hon'ble Madhya Pradesh High Court in Bank of Baroda v. Official Liquidator & Ors., 1990 ISJ (Banking) 406. In this case, the Court has held that the earlier guarantee does not cease to operate after a fresh guarantee taken by the Bank. It is further observed that the liability of the guarantor does not cease on execution of fresh guarantee.

In my view, there observations were made by the Madhya Pradesh High Court having regard to the peculiar facts in this case. Earlier, two Directors had executed first guarantee but when they ceased to be the Directors, fresh guarantee was got executed from other Directors. In this context, it was considered whether the earlier guarantee bond stood revoked and so it is held that the subsequent guarantee could be treated as additional guarantee and the earlier guarantee would not cease to operate.

In the case before me the situation is entirely different. Here the guarantee was offered by respondent No. 5 and was extended on few occasions. Ultimately, the loan account was transferred from Chandigarh to Ludhiana. Apparently, 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 a separate guarantees to secure that loan, which by then had become Rs. 23,92,228.35. This is not a case where the earlier Director who had stood as guarantor was withdrawing being no more the Director. The Counsel for respondent No. 5 is justified in saying that in this case new sets of guarantees were obtained. So, the situation would be different than those existed in the cases cited by the Counsel for the appellant.

The Counsel for the appellant still did make an attempt to show that document AW-4/10 does not say anything that the other guarantees offered earlier were discharged. He would further say that this is a continuing guarantee and the Bank had not discharged any guarantor.

This, to me, seems to be an argument of convenience. The plea offered by the Counsel for the appellant does not find any support from the material and evidence on record. During an unguarded moment the Counsel himself urged that all the documents produced by the Bank were duly proved. AW-4/10 was also a document which was produced and proved by the witness examined by the Bank. This document was also duly proved. If that is the position, it would then clearly indicate that this guarantee was freshly executed to secure the loan that was standing on this date. This was a fresh document and cannot be said to be a continuing guarantee of the guarantees earlier offered. Here, fresh documents are being executed by respondents 2 and 3 giving guarantee to discharge the entire loan liability. In my view, if the guarantee earlier offered was to be pressed against the other guarantors, they ought to have been made parties and made to sign this fresh guarantee. As noticed by the Tribunal, Section 130 may also apply in the present case. This section provides that a continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor. A guarantee which extends to a series of transactions is called continuing guarantee. Once respondent No. 5 had not signed the guarantee on 2.11.1988, he can be taken to have relieved himself of the earlier bonds which he had furnished. As per Section 133 of the Indian Contract Act, variance in the terms of the contract may lead to discharge of surety. This section provides that any variance, made without the surety's consent, in the terms of the contract between the principal (debtor) and the creditor, discharges the surety as to the transactions subsequent to the variance. Obviously, respondent No. 5 never stood guarantee for the amount of Rs. 23,92,228.35. This is a variance made without the surety's consent. If respondent No. 5 was to be bound by this guarantee, he ought to have been made to sign on this guarantee deed. Once that has not happened, he cannot be bound and would stand discharged as surety as to the transactions subsequent to the variance. In view of this, I do not find any fault or infirmity with the view taken by the Tribunal and would, therefore, am not inclined to interfere in the judgment under appeal. I am also not impressed with the submission that the rate of interest allowed is 12.5% simple whereas the contractual rate was 17.5% with quarterly rests. The Tribunal has rightly allowed this interest which, in any case, is not unreasonable in any manner. At this stage, it would not by fair to interfere with that part of the order as it would operate rather harshly.

In view of above, the appeal is dismissed. Parties to bear their own cost.

Copy of this order be furnished to the parties as per law.