T. Kashavamurthy vs Tourism Finance Corporation Of India Ltd.

S.N.H. Zaidi, J

Mr. Sharma pointing out that respondent Nos. 2 to 9 have not been served with the notice of this Appeal, submits that they be served before the Appeal is heard on merit. Mr. Bansal, however, submits that this Tribunal had, vide order dated 2nd September, 2011, already dispensed with the service of notice upon those respondents on the request of the appellants in the presence of the respondent's Counsel which has not been challenged till date, as such there is no necessity of service of notice of Appeal upon those respondents. I agree with the submission of Mr. Bansal.

Heard parties' Counsel on Appeal. This Appeal has been directed against the order dated 16th May, 2011 of D.R.T.-II, Delhi whereby Original Application No. 457/2000 titled as "Tourism Finance Corporation of India Ltd. v. Hotel Krishna International (India) Ltd., filed for the recovery of Rs. 5,74,11,149/- has been allowed against defendant Nos. 1 to 6 (the appellants and respondent Nos. 2 to 5 herein) jointly and severally together with costs and interest pendente lite and future @ 14% p.a. compounded quarterly from the date of filing the original application.

The circumstances of the case indicate that an erstwhile Company, viz., Sree Venkateswara Tourist Home (P) Ltd., now known as Hotel Krishna International (India) Ltd. (H.K.I.L.), of which the appellants were the Directors, had availed a loan facility of Rs. 510 lacs from Tourism Finance Corporation of India Ltd. (T.F.C.I.) in participation with Industrial Finance Corporation (India) Ltd. (I.F.C.I.) in the manner that Rs. 306 lacs were disbursed by T.F.C.I. and Rs. 204 lacs by the I.F.C.I. for setting up a 3-Star hotel at Bangalore. H.K.I.L. had also availed loans from Karnataka State Industrial Investment and Development Corporation Ltd. (K.S.I.I.D.C.), Karnataka State Finance Corporation (K.S.F.C.) and Canara Bank to the tune of Rs. 90 lacs, Rs. 60 lacs and Rs. 40 lacs respectively. The appellants had stood sureties for those loans and executed the deeds of guarantee in their personal capacity in favour of the lending Financial Institutions and Bank. On 27th February, 1996, a joint meeting of the appellants, representatives of the Financial Institutions and Bank and the 'Bhojwani group' (respondent Nos. 3 to 5 herein) had taken place at the office of I.F.C.I., Bangalore wherein request for the takeover of the management of the borrower Company by the Bhojwani group was unanimously agreed to be acceded to and respondent Nos. 3 to 5 were allowed to be inducted as its co-promoters/Directors on the condition that the assets and liabilities would be taken over by them and the guarantees of the existing guarantors (appellants herein) would be substituted by the guarantee of the new Directors (the Bhojwani group). The T.F.C.I. approved the takeover of the management of the borrower Company by the Bhojwani group, vide its letter dated 10th September, 1996 (Annexure A-2). The controlling interest/management of the borrower was accordingly taken over by the new management and respondent Nos. 3 to 5 executed fresh deeds of guarantee dated 23rd July, 1996 (Annexures A-4 colly.) in their personal capacity in favour of T.F.C.I. and other Financial Institutions/Bank substituting the earlier guarantees of the appellants. When the new management of the borrower Company failed to repay the amounts of loan, T.F.C.I. filed the Original Application for the recovery of its amount of debt due along with the interest and cost. During the pendency of the original application the mortgaged property was sold and a sum of Rs. 6,18,90,535/- was realized. The original application has been allowed by the Tribunal below against defendant Nos. 1 to 6 by the order impugned. The claimed amount has already been recovered and only the amount of the pendente lite and future interest is remained to be recovered. Feeling aggrieved with the order impugned, defendant Nos. 2 and 3 to the original application have come up in Appeal before this Tribunal.

Mr. Bansal pointing out to the minutes of the joint meeting dated 27th February, 1996, Ann. A/1, and the letter dated 10th September, 1996 sent to the borrower (respondent No. 2) communicating the approval for takeover of the management by the Bhojwani Group as per the consensus reached at the joint meeting, Ann. A/2, contends that after the execution of the deeds of guarantee by respondent No. 3 on 23rd July, 1998 and by respondent Nos. 4 and 5 on 7th August, 1998 (Ann. A/4 colly.), in substitution of the personal guarantees of the appellants, on their induction as co-promoters/Directors of the borrower Company and takeover of the management of the borrower by them, the liability of the appellants towards the repayment of the loan amount had come to an end, but the learned Tribunal below has failed to properly consider the circumstances of the case as well as to appreciate the legal implication of the substitution of the guarantees of the appellants by the new Directors of the Company and did not give any reason for not accepting the contentions of the appellants qua those guarantees. According to him,. the appellants stood discharged from guarantees/contract under Section 62 of the Contract Act and the earlier contract had extinguished. Mr. Bansal also points out that respondent No. 1 and other Financial Institutions/Bank had, thereafter started dealing with respondent Nos. 3 to 5 with respect to the existing limits and enhancement thereof and also the other loans availed by respondent No. 2 and the appellants did not sign or execute any document either in favour of T.F.C.I. or any other Financial Institutions or Bank after the said take over. He contends that the order impugned is bad in law so far as it makes the appellants personally liable for the payment of the amount of loan, which stands extinguished.

Mr. Bansal also points out that I.F.C.I., a co-lender, had filed Original Application No. 179/2000 for the recovery of its outstanding amount of debt against the borrower Company and its Directors before the D.R.T., Bangalore, in which the appellants were rightly not made parties and the proceedings were initiated only against H.K.I.L. and its new Directors, respondent Nos. 3 to 5, which was allowed against them. He further points out that Canara Bank, another co-lender, had also filed Original Application 528/2000 before the said D.R.T. for the recovery of its outstanding dues, wherein though the appellants were made defendants and respondent No. 1 was also a party, but the learned D.R.T. by a reasoned judgment and order 19th October, 2009 had dismissed that original application against the appellants and this fact was also brought to the notice of the Tribunal below, but it failed to consider and appreciate the merit of the said order.

Mr. Sharma, on the other hand, submits that the letter dated 10th September, 1996 addressed to the borrower Company, whereby the takeover of the management of the borrower Company by the Bhojwani Group was approved and repayment schedule was refixed by respondent No. 1, was handed over to the appellants but they neither sent any reply to that letter nor made any payment. He further contends that the appellants are liable for the payment of the R.C. amount.

Having considered the submissions of the parties' Counsel and on going through the record and looking to the facts and circumstances of the case I find that the factum of execution of the deeds of guarantee, on takeover of the management of the borrower Company, by the Bhojwani Group in substitution of the existing guarantees of the appellants is not in dispute. In view of this, I agree with the contention of Mr. Bansal that after the said group was inducted as co-promoters/Directors of the borrower Company and its management was taken over by it in pursuance of the approval accorded by respondent No. 3 vide its letter dated 10th September, 1996, and the new promoters had executed the deeds of guarantee substituting the personal guarantees of the appellants, the liability of the appellants towards the repayment of the loan advanced to the borrower Company had come to an end. The assertion in Para 3 of the deed of guarantee is relevant qua this, which reads as under:

That pursuant to the change in the management of the borrower, the borrower has requested to the lender to accept, inter alia, the guarantee of the Guarantors herein in substitution of the existing guarantee/s of the then guarantors and that loan/s be not recalled by the Lenders.

(Emphasis supplied)

I am also of the view that the learned Tribunal below has erred in failing to consider the legal implication of the execution of the deeds of guarantee by the new promoters in substitution of the then guarantors. Since Section 62 of the Contract Act provides that if the parties to a contract agree to substitute a new contract for it, the original contract need not be performed, the appellants cannot be held liable for their contract of guarantee on its substitution by the new guarantee agreements executed by respondent Nos. 3 to 5. The order impugned is also not sustainable in the eye of law as it lacked in reasons for its findings.

In view of above, this Appeal against the order impugned, so far it relates to the appellants, is entitled to be allowed and the same is liable to be set aside to that extent. The Appeal is thus allowed and the order impugned is set aside accordingly. Mr. Bansal pointing out that the Tribunal below, vide order dated 24th October, 2008 passed on I.A. No. 637/2006, had directed the appellants to deposit Rs. 5 lacs subject to the final outcome of the original application and the appellants had accordingly deposited the said amount, which is lying in deposit with respondent No. 1, prays for the release of the said amount in favour of the appellant along-with the accrued interest. Though Mr. Sharma opposes the release of the said amount, yet since the appellants have not been found liable for payment of any amount towards the loan in question and their Appeal has been allowed, they are entitled to get their money back. The respondent No. 1 is accordingly directed to release the said amount to the appellants along with accrued/accumulated interest within a month from today.

Copy of this order be furnished to the parties as per law and be also sent to the D.R.T. concerned.