Union Bank of India vs M/s. Shree Aravali Finlease Ltd. & Ors

Ashok Menon, Chairperson

This is an appeal filed under the provisions of section 20 of the Recovery of Debts Due to Banks and Financial Institution Act, 1993 (‘RDDB & FI Act’ for short). The Appellant Union Bank of India is a Banking Company and was the Applicant in Original Application (OA) No. 261 of 2000 on the files of DRT Ahmedabad. Vide judgment dated 20/10/2005, the Learned Presiding Officer allowed the application in part against defendants nos. 1, 2, 5 and 6 and issued a Recovery Certificate to realise the amount claimed together with interest at the rate of 12% per annum from 09/06/2000 until realisation. The application was dismissed against defendants nos.3 and 4. The Appellant Bank impugns the judgment so far as it was dismissed against defendants no.3 and 4.

The facts can be encapsulated thus:

In July 1993, the Appellant Bank provided financial assistance to the  1st Respondent Company named Shree Araveli Finlease Ltd. with a Cash to Credit Facility against hypothecation of movable assets to the limit of ₹ 50 lakhs. Respondents Nos.1 and 2 to 4 executed various security documents and letters of guarantee in favour of the Appellant Bank. On request made by the Respondents, the credit facility was enhanced to ₹ 100 lakhs during April 1994. Various documents were executed by Respondents Nos. 1 and 2 to 4. During the month of August 1997, the Appellant Bank agreed to continue and/or renew the aforesaid credit facilities. Respondents Nos. 1, 2, 5 and 6 executed various security documents and letters of guarantee for ₹ 100 lakhs. Apart from the various documents executed by the Respondents referred to above they had also executed balance confirmations from time to time. The Respondents defaulted payment and the Appellant Bank filed the OA for the realisation of ₹ 12,146,603/-together with interest.

Respondents 2 to 5 contested the application and filed written statements. Respondents Nos. 3 and 4 admitted executions of the letters of guarantee in the years 1993 and 1994. They however sought discharge on the ground that they had not signed or executed any letter of guarantee in the year 1997 and that they had resigned from the directorship of the 1st Respondent Company. It was also contended that the Appellant Bank failed to protect the hypothecated securities created by the 1st Respondent in favour of the Bank. The Learned Presiding Officer discharged the Respondents Nos. 3 and 4 from the liability on the basis of the discharge applications filed by them.

The appeal has been preferred on the following grounds:

The findings in the impugned judgment to the extent of dismissing the Original Application against Respondents Nos. 3 and 4, are erroneous. Respondents Nos. 3 and 4 had admitted the execution of letters of guarantee dated 02/07/1993, 03/01/1994 and 28/04/1994. They are, therefore, bound by the guarantee with regard to the repayment of the amount by the 1st Respondent Company. The letters of guarantee were made in their individual capacity and not as directors of the company. The Appellant Bank was not bound to take fresh letters of guarantee from the said Respondents because the guarantees executed by them were continuing ones, and lasted till the debt was repaid in full. It is also pertinent to note that the said Respondents had not given any notice to the Bank withdrawing their letters of guarantee. The findings that the renewal of the credit facility by the Appellant Bank would tantamount to discharging Respondents Nos. 3 and 4 are unsustainable. In the letters of guarantee executed by them, the Respondents had waived their rights to get discharged, under the provisions of the Indian Contract Act. To the Bank’s letter addressed to Respondents Nos. 3 and 4 on 01/03/2000 invoking the guarantees, the 4th Respondent gave an evasive reply while the 3rd Respondent did not send any reply at all. The letters of guarantee executed by Respondents Nos. 5 and 6 were by way of additional security and not with the intention to discharge Respondents Nos. 3 and 4 from the liability. The Appellant Bank never intended to relieve Respondents Nos. 3 and 4 from their liability under the letters of guarantee. Under the circumstances, it is prayed that the impugned judgment to the extent dismissing the OA against Respondents Nos. 3 and 4 may be reversed, and a Recovery Certificate issued against Respondents Nos. 3 and 4 also.

Heard Mr Bhavesh Pujari the learned counsel appearing for the Appellant and Mr Prashant Pandit, the learned counsel appearing for Respondents Nos. 3 and 4. The rest of the Respondents did not appear. Records produced.

Mr Bhavesh Pujari argues that it is not open to Respondents Nos. 3 and 4 to revoke the continuing guarantee executed by them in favour of the Appellant Bank as they had agreed to extend the guarantee till the debt was repaid, and hence were bound by the terms and conditions of the said guarantee. The learned counsel relies on the decision Sita Ram Gupta vs. Punjab National Bank and Ors. AIR 2008 SC 2416 to support his argument about the continuing guarantee wherein it was held that when a guarantor entered into an agreement with the Bank as a continuing guarantee the same was to continue and remain in operation for all subsequent transactions. It was, therefore, not open to him to turn around and say that in view of section 130 of the Indian Contract Act, 1872, the guarantee stood revoked. The learned counsel also relies on the decision of the Hon’ble Madhya Pradesh High Court in Bank of Baroda vs. Official Liquidator, Indore and Ors. MANU/MP/0508/1989 wherein it was held that since the guarantor did not send any notice to the Bank revoking the guarantee, the continuing guarantee that they had executed would continue for all subsequent transactions. It was also held that the subsequent guarantees by others could only be treated as an additional guarantee and would not exonerate the earlier guarantors were executed a continuing guarantee. Hence, he seeks interference in the appeal.

Mr Pandit appearing for the contesting Respondents defends the impugned judgment of the learned Presiding Officer by stating that there is no error in that judgment calling for interference. The learned counsel submits that Respondents Nos. 3 and 4 were rightly discharged from liability in view of the fact that there was novation of the contract between the borrower, fresh guarantors and the creditor. The 1st Respondent Company had vide resolution dated 31/07/1997 accepted the resignation of Respondents Nos. 3 and 4. Intimation was also given on 26/08/1997 by the Company to the Registrar of Companies informing about the retirement of Respondents Nos. 3 and 4. Thereafter vide resolution of the Company dated 02/08/1997 Respondents Nos. 5 and 6 were introduced as the new directors. They were also authorised to sign documents pertaining to the loan. The Bank had filed the OA only in the year 2000. The learned counsel relies on a decision of the DRAT Chennai, in Kailash Chandra Gaur vs. Central Bank Of India and others 1 (2006) BC 194, where, in a similar situation one of the guarantors therein had contended that he is not liable for the company's debt because he had resigned as director of the company and thereby the personal guarantee offered by him stood revoked. The Bank had in that case obtained letters of guarantee and other connected documents from another person who had been substituted as director of the company. The DRAT accepted the argument that obtaining a letter of guarantee and other connected documents from the newly added director is a clear variance of the original contract under section 133 of the Contract Act and, therefore, results in the discharge of the director who had resigned. It was accepted that under section 62 of the Contract Act if the parties to the contract agree to substitute a new contract, the original contract need not be performed. It was also accepted that novation of debt operates as a complete release of the original debtor. In that case, also the Bank had contended that there was a continuing guarantee executed by the director who had resigned and therefore, he continues to be liable for the debt as a guarantor, till the debt is cleared. The learned counsel also relies on the judgment to impress upon this Tribunal that the Bank had failed to protect the hypothetical goods when the company had gone into liquidation which shows the lapse or negligence on the part of the creditor in preserving the security and, therefore, the remedy of the surety himself against the principal director is thereby impaired and the sureties get discharged as provided under section 139 and 141 of the Contract Act. Mr Pandit draws the attention of this Tribunal to the decision of the Karnataka High Court wherein the Bank had challenged the aforesaid order of the DRAT in Writ Petition No. 9590/2006, wherein it was held that on the resignation of one of the directors of the company and substituting another person as a director, he steps into the shoes of the earlier director in the company and also substitutes him vis-à-vis the liabilities of that director. It was further observed that if the retired director's guarantees were to continue despite his resignation from the company, then, in that case, there was no necessity to obtain a fresh guarantee from the director who had substituted him. Upholding the findings of the DRAT, the Hon’ble High Court of Karnataka dismissed the Writ Petition. The learned counsel Mr Pandit submits that the facts in the aforesaid decision are analogous to the facts in the case at hand. Mr Pandit also relies on the decision of the Punjab and Haryana High Court in Punjab and Sind Bank vs. Debts Recovery Appellate Tribunal (2008) 3 PLR 159 wherein under similar circumstances, the earlier guarantor was discharged. Reliance is also placed on the decision State Bank of Saurashtra vs.ChitranjanRanganath Raja 1980 SC 1528. In the decision of the Bombay High Court in Central Bank Of India vs. Ali Mohammad and another 1993 (2)Mh. L.J. 1092 it was observed that the surety's ascent to variation of the earlier contract is a must and that by virtue of section 133 or 135 of the Contract Act the sureties are liable to be discharged in view of the novation of contract between the principal debtor and creditor bank. The learned counsel has also invited the attention of this Tribunal to the decision Satish Chandra Jain vs. National Small Industries Corporation Ltd. and Ors. AIR 2003 SC 623 to bolster his submissions

Mr Pandit would also submit that the Bank was negligent in protecting the hypothecated vehicles belonging to the principal debtor in this case, and let those vehicles off the hook without any action. When the principal debtor is discharged of the hypothecation liability pertaining to the vehicles, because the Bank fails to register the charge over the vehicles with the Regional Transport Office, and the vehicles could not be proceeded against, the surety has to be discharged under sections 139 and 141 of the Contract Act. In support of this, Mr Pandit relies on the decision of the Panaji Bench of the Bombay High Court in Jose Inacio Lourence vs. Syndicate Bank and another 1989 Company Cases (65) 698.

In answer to the decisions relied upon by Mr Pandit, the learned counsel appearing for the Appellant points out that the decision of the Karnataka High Court in WP No. 9590/2006(supra) was reversed by the Hon'ble Supreme Court in Central Bank of India vs. Kailash Chandra Gaur MANU/SC/1327/2016 and the High Court of Karnataka was directed to decide the matter afresh. Consequently, the writ petition was considered afresh and vide order dated 19/08/2019, the validity of the continuing guarantee executed by the earlier director was upheld, and the impugned order of the Debt Recovery Appellate Tribunal, Chennai Kailash Chandra Gaur 1 (2006) BC 194 (supra) was set aside. The order of the Hon’ble Karnataka High Court was again challenged before the Hon'ble Supreme Court and the Special leave petition was dismissed as reported in V Nandakumar Central Bank Of India MANU/SCOR/15628/2020. In Satish Chandra Jain vs. National Small Industries Corporation Ltd. (supra) the Hon’ble Supreme Court clearly indicates that where the latter agreement does not say that the earlier agreement of guarantees was terminated nor does it state that the earlier agreement of guarantee continues and when the suit was filed the guarantors were not impleaded as it would clearly indicate that the plaintiff did not regard them as guarantors or persons still bound by the deed of guarantee executed earlier. Hence, it was held that the suit cannot be decreed against them. According to the counsel for the Appellant, the facts in the case in hand do not suggest that Respondents Nos. 3 and 4 were discharged from their liability at any stage. In Mukesh Gupta vs. Sicom Ltd., MANU /MH/ 0714/2003 the Bombay High Court did not accept the contention of the Appellant therein that he could not be proceeded against since he was only a guarantor and that the creditor had not proceeded against the principal debtor, which would be contrary to sections 135 and 137 of the Contract Act. The Hon’ble High Court also observed that the decision in Central Bank Of India vs. Ali Mohammad (supra relied upon by Mr Pandit) that the surety's consent to variation has to be simultaneous with novation does not lay down the correct law. The learned counsel for the Appellant also reveals that the decision in Punjab and Sind Bank vs. Debts Recovery Appellate Tribunal (supra) has been set aside by the Hon'ble Apex Court in Punjab and Sind Bank vs. Debts Recovery Appellate Tribunal MANU/SC/0200/2016 with liberty to the Bank to file a review before the High Court. The learned counsel also draws the attention of this tribunal to the proceedings before the High Court of Gujarat in Company Petition No. 8 of 2000 wherein the 1st Respondent Company was ordered to be liquidated and towards the end of the order, it was also clarified that any liability of the Company, if, arises subsequently, could be proceeded against the ex-directors. The official liquidator was discharged. Under the circumstances, the argument of the learned counsel for the Appellant is that Respondents 3 and 4 can also be proceeded against.

The Ld Presiding Officer has, in the impugned judgment held that Defendants Nos. 3 and 4 are discharged because the creditor has obtained fresh documents from the remaining Defendants/Respondents. It is further observed that even though Defendants Nos. 3 and 4 had signed deeds of guarantee in 1993 and 1994, they did not execute any documents in 1997and fresh documents including personal guarantees were obtained from the rest of the Defendants Nos. 2, 5 and 6. The Ld. Presiding Officer has observed that since Defendants Nos. 3 and 4 had resigned from the directorship of the first Defendant Company and additional directors were introduced to substitute them, there is a clear case of novation of contract. The Ld. Presiding Officer has placed reliance on Satish Chandra Jain (supra) to hold that there is a novation of contract and Respondents Nos. 3 and 4 need to be discharged.

It is pertinent to note that there is no indication of substitution of guarantee executed by Defendants Nos. 3 and 4. There is also no discharge of liability by specific communication by the creditor bank. The guarantee deeds executed by the Respondents Nos. 3 and 4 are continuing guarantees and would, therefore, continue till such time, the creditor communicates its decision. Admittedly there is no such communication by the Appellant discharging Respondents Nos. 3 and 4 from their liability as guarantors of the first Respondent Company. The introduction of new directors who substituted the Respondents Nos. 3 & 4 consequent to their resignation would only mean that an additional guarantee is constituted. Respondents Nos. 3 and 4 ought to have got a discharge from the Appellant Bank on the ground that there is a variance from the original terms of the contract. They did not do so. This would amount to a waiver of their rights to get discharged under Sec. 133 to 141 of the Contract Act. There is no  indication in the subsequent guarantee agreements specifically containing a clause that those guarantees are executed in supersession of all the earlier guarantee agreements. Had it been so, Respondents Nos. 3 and 4 could claim that they are not liable as guarantors. In the instant case, there is no such supersession of earlier guarantee deeds executed by the Respondents Nos. 3 and 4. Hence, I find that Respondents Nos. 3 and 4 are not entitled to get discharged of their liability under the continuing guarantee. Most of the decisions relied upon by the Ld. Counsel Mr Pandit has been set aside. The mere fact that the Appellant Bank is not vigilant in protecting the hypothecated movable assets by itself would not deprive them of their right to proceed against the Respondents. The decision in Satish Chandra Jain (Supra) can be clearly distinguished from the facts in the present case because the creditor, in that case, had not proceeded against the substituted directors and had made very clear their intention of not proceed against them. This act of the creditors would spell out the discharge of the substituted guarantors. There is no such discharge of Respondents Nos. 3 and 4 in the instant case. Hence, I find that the Ld. Presiding Officer was not justified in discharging Defendants Nos. 3 & 4 from the liability. In view of the guarantee deeds executed by them, the fact that the creditor did not proceed against the hypothecated vehicles is of no consequence.

Resultantly, the Appeal is allowed and the impugned order of dismissing the Original Application as against Defendants Nos. 3 & 4 is set aside and O.A. No. 261/2000 on the files D.R.T., Ahmedabad is allowed against all the Defendants therein making them jointly and  severally liable to pay a sum of ₹1,21,46,603/- together with interest @ 12% per annum with effect from 09.06.2000 till realization. A fresh Recovery Certificate shall be issued in the above terms.