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Judgment
A. Ramamurthi, J.—This petition has been filed u/s 31(aa) of State Finance Corporation Act, 1951 to direct the 2nd respondent to pay a
sum of Rs. 32,43,243.00 with interest at the rate of 16% per annum.
The case in brief is as follows :
The petitioner company has been formed for the purpose of extending financial support to entrepreneurs in the State of Tamil Nadu and
Pondicherry. The first respondent applied for financial assistance to the Corporation. Originally, it was a proprietary concern and the 2nd
respondent was the proprietor. It ventured to purchase Paracetamol. They required financial assistance for purchase of machinery, lab equipments,
generator and construction of building. The Corporation sanctioned Rs. 6.35 lakhs on 12.11.1982, Rs. 76,000.00 on 26.9.1983 and Rs.
26.000.00 on 26.3.1989 under term loan. The 1st respondent executed a Deed of'' Hypothecation on 11.12.1983, 7.10.1983 and 30.3.1989
respectively thereby hypothecated the machineries purchased with the financial aid. The 2nd respondent executed a Deed of Guarantee on
11.5.1983 and on 30.3.1984 whereby agreed to repay the loan. One Kunjithapatham, father of the 2nd respondent, executed a Deed of
Guarantee on 11.5.1983 for the first term loan and on 7.10.1983 for the 2nd term loan. Later, the 1st respondent company was converted into a
partnership firm and all the partners have executed a Deed of Confirmation on 9.10.1986 in respect of the three term loans. The said
Kunjithapatham is no more and the 2nd respondent is his son. The 1st respondent did not repay the loan as agreed upon and in spite of reminders
and warning the payment was not made. The loan was ctosed on 11.10.1988 and possession of unit was also taken over on 21.3.1989. The unit
was also sold in public auction after due publicity on 12.7.1993 for a sum of Rs. 4.01 lakhs and it was also given credit to the loan amount. Legal
notice was also sent on 8.7.1997. Now, the present petition is filed to enforce the guarantee and indemnity.
The 2nd respondent filed a detailed counter and denied all the averments. The present petition is legally not maintainable. He ceased to have any
interest in the partnership firm as he had retired long ago and duly intimated the same to the Corporation and was accepted by them. He is not a
competent person and the claim against this respondent is barred by limitation. As a sole proprietor of the 1st respondent, he availed the term loan
from the Corporation. A simple mortgage was executed and registered on 11.2.1983, both in the capacity as a sole proprietor and in his personal
capacity for a sum of Rs. 1 lakh and not for the entire loan of Rs. 5,35 lakhs. The hypothecated documents are legally invalid. On or before
21.3.1985, the proprietary concern was converted as a partnership concern and two partners namely Rajanmni John Chellaiah and Ajit Rajamani
Abraham Chellaiah, were inducted on 29.3.1985 he duly intimated the Corporation about the change of constitution of the business and also the
induction of two partners, In fact, a copy of the partnership deed was also sent to the Corporation and they were well aware about the change.
The petitioner is also aware of the name and address of the two newly inducted partners, but, they have not been impleaded as parties to this
petition. The newly inducted partners are Foreign National of Indian Origin and sanction from RBI was obtained on 29.4.1986.
The business was running at a very great toss and, as such, this respondent could not keep up the repayment schedule and decision was taken
to convert the business as a partnership firm and two solvent partners were also inducted. All these had taken place to the knowledge of the
petitioner Corporation. All the outstanding arrears to the tune of Rs. 3 lakhs were made by cheque payment in 1985 and 1986 only by the newly
inducted partners and it was also received by the Corporation. The petitioner also sent a letter dated 20.9.1986 to the Indian Bank in this regard.
Even in the certificate issued by the Registrar of Firms, the change of address has been noted. Nothing has been stated in the petition as to why
and how they had exonerated the other two partners, who are equally liable and chose to single out this respondent. Being a public Corporation,
they cannot be allowed to act indiscriminately and arbitrarily. This respondent came out of the partnership vide Deed of Dissolution dated
20.4.1985 and it was duly communicated to the Registrar of Firms. He ceased to have any right or interest with the first respondent firm from
20.4.1985 and the entire business was taken over by the other two partners with the concurrence of the officials of the petitioner. There was no
protest on the part of the petitioner at any point of time. Notice was issued on 18.10.1988 addressed to the first respondent as well as the three
partners. Paper publication was made in ""Daily Thanthi"" on 16.9.1988 for which these respondents also sent a publication pointing out the true
state of affairs that he is no longer acquainted with the company. The petitioner Corporation had completely suppressed the character of the firm as
partnership firm and also duly avoided to mention the two partners. No communication was sent to this respondent. They have not sent any
communication about the sale proceeds and other matters. He was kept in total darkness about the subsequent development and last
communication was received only on 8.9.1992. The said Kunjithapatham died as early as 18.5.1984. The deceased had not left any property and
he is not in possession of any property of the deceased. After a tong lapse of nearly 10 years, the present petition has been filed on 27.11.1997.
The petitioner have now exonerated the two continuing partners and are estopped from proceeding only against the 2nd respondent. The present
claim u/s 31(aa) of State Finance Corporation Act is not maintainable and is liable to be dismissed.
Heard the learned Counsels for the parties.
The points that arise for consideration are :
(i) Whether the petitioner Corporation is entitled to claim the amount from the 2nd respondent ?
(ii) To what relief ?
The 1st respondent firm was originally a proprietary concern and the 2nd respondent was the proprietor. The firm was converted into a
partnership firm since 21.3.1985. The 1st respondent firm has availed term loan under three categories and the 1st respondent had executed a
deed of hypothecation. The 2nd respondent executed a deed of guarantee for due repayment of the loan and similarly his father, Mr.
Kunjithapatham had also executed a deed of guarantee on 11.5.1983 and on 7.10.1983, subsequently he died in the year 1981. The 1st
respondent did not repay the loan in spite of repeated requests and warning. As the amount was not paid, the unit was taken over on 21.3.1989.
The said unit was sold in public auction after due publicity on 12.7.1993 for a sum of Rs. 4.01 lakhs and the sale proceeds were given credit to the
loan account. Now, the petitioner Corporation has filed the claim to direct the 2nd respondent to pay the claim and to enforce the letter of
guarantee executed by him.
Mr. Gunaseelan, officer working in the Finance Section of the petitioner Corporation was examined as a witness. He narrated the averments in
the petitioner. Ex. PI is the sanction order. Ex. P2-P4 are the hypothecated documents, Exs. P5 and P6 are the Deed of Guarantee executed by
2nd respondent. The partners have also executed a deed of confirmation on 9.5.1986. Ex. P7 is the confirmation document, Ex. P8 is the
document to show the foreclosure of the loan. Ex. P9 is the document showing the auction of the property. On 26.11.1997, notice was sent under
Ex. P10 calling upon the 2nd respondent to pay the amount. Ex. P11 is the, statement of the account maintained by the petitioner Corporation.
No oral evidence has been let in on the side of 2nd respondent. There is no dispute that the 1st respondent firm was a property concern and
the 2nd respondent was the sole proprietor. In March, 1985, it appears that the 1st respondent firm was converted as a partnership business and
apart from 2nd respondent, there were two partners inducted and the document filed on the side of the Corporation establish that they are
Srilankan Nationals. The learned Counsel for the petitioner mainly contended that the loan has not been repaid properly and as they have
committed default, the loan was foreclosed and the units were sold in public auction and the sale price was given credit to the loan account. It is
stated that 2nd respondent had executed a Deed of Guarantee and to enforce the same only, the present application is filed. However, the learned
Counsel for the 2nd respondent contended that after the foreclosure of the loan and after selling the machineries, the Corporation is not entitled to
invoke Section 31 of State Fiance Corporation Act. Furthermore, the 2nd respondent at one point of time was the principal debtor and he cannot
be a guarantor. In short, it is stated that the 2nd respondent cannot have a dual role as a debtor and as a guarantor. There is no record to show
that any notice was given to the 2nd respondent either at the time of foreclosure of the loan or subsequently at the time of the seizure of the assets
and bringing it for sale in public auction. No opportunity was given to the 2nd respondent prior to conducting public auction of the properties. The
burden is only upon the petitioner to show that the guarantee executed by 2nd respondent will be valid under law even though he was a debtor.
The learned Counsel relied on Arjunsingh Vs. The State, wherein it is observed that a contract of guarantee presupposes three parties, the
creditor, the principal debtor and the surety. First of all there is a contract between the principal debtor and the guarantor. It may be said to be the
base of the entire transaction. Then, there must be a contract between the surety and the creditor by which the former guarantees the debt to the
latter. The same view has been reiterated in National Traders, a Firm of Merchants in Partnership Vs. Hindustan Soap Works, a Firm of
Merchant, ; Punjab National Bank Ltd. Vs. Shri Vikram Cotton Mills and Another, ; Nagpur Nagarik Sahakari Bank Ltd. and Another Vs. Union
of India and Another, ; and H. Mohamed Khan and Others Vs. Andhara Bank Ltd. and Others, . There is no dispute about these propositions
enunciated in the aforesaid decisions.
The learned Counsel for the respondent also relied on Smt. Hiranyaprava Samantray v. Orissa State Financial Corporation and Ors. I (1995)
BC 376=AIR 1995 Orissa page 1, wherein it was observed that the liability of a guarantee is co-extensive with that of the borrower. Though
Section 29 of the Act does not provide for issuance of any notice, the principles of natural justice and fair play arc not excluded. Where on default
of the borrower in paying in statements of loan, the State Finance Corporation recalled the loan, seized the truck and it was put to public auction. It
was necessary for the Corporation to issue notice to the guarantor regarding the intended auction u/s 29 by the Corporation. On failure of such
notice to the borrower, the Corporation cannot put to auction the property mortgaged by the guarantor by way of collateral security with the
Corporation for realising the shortfall. This decision is also applicable to the case on hand. Reliance is also placed upon Orissa State Financial
Corporation v. Sk. Rasul Baksh, II (2000) BC 297, which also supports the case of the respondent.
It is, therefore, clear from the aforesaid decisions that 2nd respondent cannot have a double role as that of a debtor as well as guarantor.
Moreover, even at the earliest point of time the 2nd respondent had communicated to the petitioner Corporation about the death of his father as
well as the re-constitution of the 1st respondent firm with the induction of two partners, etc. There is nothing on record to show that any action was
taken against the two partners. In view of the legal decisions, I am of the view that the 2nd respondent cannot be a debtor as well as a guarantor
for the loan transactions. Furthermore, the Corporation has not filed any records to show that 2nd respondent was put on notice about the
foreclosure of the loan, repossessing the assets and also putting the properties in public auction. After a tong lapse of so many years, now the
Corporation has proceeded against the 2nd respondent only leaving the other partners. In fact, 2nd respondent had positively established that he
had retired from the partnership tong back and the Corporation has not taken any action so far as the new directors inducted with the 1st
respondent firm. Considering the view that a debtor also cannot function as a guarantor and, as such, it can be safely concluded that the petitioner
Corporation is not entitled to enforce the alleged guarantee said to have been executed by the 2nd respondent. The present petition application has
been filed only in year 1997 and as such it is hopelessly barred by limitation. Hence these points arc answered accordingly.
For the reasons stated above, the petition application fails and is dismissed.