Karnataka High Court
State Bank Of India, By Its Manager vs Nagesh Hariyappa Nayak And Ors. on 22 January, 2003
Equivalent citations: III(2003)BC201, ILR2003KAR1435, 2003(4)KARLJ68
Bench: A.M. Farooq, D.V. Shylendra Kumar
JUDGMENT Shylendra Kumar, J.
1. This appeal under Section 96 of the Code of Civil Procedure is by the plaintiff/bank which is aggrieved by the Trial Court declining to decree the suit claim as against the Guarantors also and in having decreed the suit as against the principal borrower only.
2. The principal borrower was the first defendant in the suit and the guarantors are defendents 2 and 3 in the suit. The suit was filed for the recovery of a sum of Rs. 5,42,456-00 with current and future interest at the rate of 20.75 % per annum and had been decreed only against the first defendant/borrower for the entire suit claim with current and future interest at 17.5% p.a. The plaintiff/ bank has preferred this appeal questioning the decision of the Trial Court in so far as it relates to the dismissal of the suit as against the guarantors.
3. The brief facts leading to the above appeal are that the plaintiff/bank had entered into an agreement with the first defendant/ borrower to lend a sum of Rs. 1,00,000/- in what is known as Cash Credit Hypothecation Limit Loan Transaction for a sum of Rs. 1,00,000/- bearing interest at 1% above the State Bank Advance Rate to the minimum of 17.5% and that the validity period of extending the limit was for one year which can be renewed thereafter if the transaction in the account was to the satisfaction of the Bank. This agreement between the parties to which the guarantors also subscribed is evidenced by Ex.P.3. In pursuance of this agreement, the hypothecation agreement of even date as per Ex.P.4 was executed by the borrower. The agreement of hypothecation and guarantee which is a composite document under which the borrower had hypothecated certain goods by way of security for repayment of loan and defendants 2 and 3 stood as personal guarantee for the repayment of the same amount.
4. The agreement for hypothecation and guarantee is in pursuance of an agreement for lending money in the cash credit hypothecation account of the borrower under Ex.P.3. The execution of this document by the first defendant/borrower and the defendants 2 and 3/guarantors is not in dispute and on the other hand, it is admitted. Other incidental documents also were signed by the parties as on the date. That the plaintiff/bank has pleaded that the first defendant/borrower utilized this facility to the maximum but, later on committed default in the repayment of the loan amount and failed to maintain sufficient stock and failed to produce stock statements for the purpose of ensuring sufficient security for the goods hypothecated in favour of the bank to secure repayment of the loan.
5. It appears that the bank had issued notice dated 27.2.1990 calling upon the borrower to rectify these discrepancies and the borrower having failed to comply and not forthcoming by holding of sufficient stocks to support the repayment of amount borrowed, a legal notice was issued to the defendants as on 16.6.1990 which has been duly received and acknowledged by the defendants and while the first defendant/borrower assured repayment, the guarantors had disputed their liability and in such circumstances, the bank was constrained to file the suit for realization of the amount with interest etc.
6. The plaintiff/bank also pleaded that the defendants had acknowledged their liabilities as per revival letters given by them as on 5.10.1989 by the first defendant and given as on 23.11.1989 by the second defendant/guarantor and on 25.4.1989 by the third defendant. In support of the suit claim the statements of accounts indicating the position in the loan account of the first defendant/ borrower was produced and the suit claim itself was the amount which was outstanding in this account as on the date of filing of the suit. It is pleaded that the defendants were liable jointly and severely and as such, prayed for decreeing the suit jointly as against all defendants.
7. The defendants entered appearance and contested the suit. The suit claim having been decreed in so far as the first defendant/ borrower is concerned and this defendant being not in appeal, it is not necessary for us to go into the defence taken by the first defendant. It is only the defence put forth by the defendants 2 and 3 the guarantors, which will be of relevance for us in this appeal as this appeal of the plaintiff is against the dismissal of the suit against these defendants.
8. The defendants 2 and 3 while admitting the transactions and execution of the documents in connection there with contended that their liability was confined to the extent of Rs. 1,00,000/- which was the limit permitted under the original agreement and that this limit was allowed for a period of one year as per the agreement and the bank having varied the terms of the agreement between the bank and the first defendant thereafter and having permitted the first defendant to draw amounts over and above this limit, such excess drawings was not binding on the guarantors and at any rate does not create any liability on them. The guarantors also pleaded that the validity of the period during which the amount was permitted to be borrowed by the first defendant was one year from 12.12.1986 and thereafter, it was incumbent upon the bank to have taken steps for recovery of the amount and the bank having failed to take steps for recovery of the amount from the borrower and on the other hand, having permitted further borrowings from the bank subsequently, their guarantee stands discharged in view of the conduct on the part of the bank. That the guarantors are in no way liable for the transactions subsequent to the period from 12.12.1987 ie., after the expiry of the period of one year and as such, they were not liable in respect of the suit claim.
9. The guarantors also disputed the execution of the so called revival letters on their part. They have specifically pleaded so in paragraphs 3 and 5 of their written statement. The other pleadings in the written statements may not be very important material for the purpose of disposal of this appeal.
10. In the light of such defence on the part of the guarantors the relevant issue framed by the Trial Court on these aspects of the matter are Issue Nos. 2, 3 and 4 which reads as under:
ii) Whether the defendants 2 and 3 prove that the plaintiff has allowed defendant No. 1 to draw the amount beyond the scope of sanction limits and against the agreed terms?
iii) Whether the defendants 2 and 3 prove that they cannot liable for the reasons stated in para 3 of the W.S.?
iv) Whether the plaintiff proves the execution of revival letter as contended?
11. The issue numbers 2 and 3 were answered in favour of the defendants 2 and 3 and in the positive. So far as issue No. 4 is concerned, it was also answered in the positive and in favour of the plaintiff/ bank and it was held that the defendants 2 and 3 had also executed the revival letters.
12. However, the Trial Court having answered issues 2 and 3 against the plaintiff/bank the suit claim was decreed only as against the first defendant and was dismissed as against defendants 2 and 3. It was held that the guarantors cannot be made liable for any amount which has been drawn after 12.12.1987. In such circumstances, the plaintiff/bank is in appeal praying for a decree as against the guarantors also.
13. The evidence let in on behalf of the plaintiff/bank and in the form of documentary evidence which is not in dispute, mainly comprised of the terms and conditions of the loan agreement Ex.P.3, an agreement for hypothecation and guarantee bond Ex.P.4, the demand promissory note for the sum of Rs. 1,00,000/- executed by the parties as per Ex.P.1 and the D.P. note delivery letter Ex.P.2, Ex.P.5 to 7 constitute revival letters.
14. The plaintiff/bank had examined one Devendrappa Manjunatha Prabhu, Manager of the Bank and had the documents marked. On behalf of the defendants, the first defendant as well as the second defendant were examined. In so far as the liability of the guarantors are concerned, it is not in dispute that they stood guarantee for the repayment of the sanctioned loan amount of Rs. 1,00,000/- which the bank had permitted the borrower to draw from the account over a period of one year and in respect of which certain goods had been hypothecated for securing repayment. Two essential aspects of this agreement for lending money was that the maximum amount is Rs. 1,00,000/- and the period within which the account can be operated is for a period of one year and it is in respect of this transaction the guarantors executed their personal guarantees assuring repayment by the borrower. The guarantor's liability is to the extent of the amount drawn from the account by the borrower subject to a maximum of Rs. 1,00,000/- and within a period of one year. At the end of one year, the liability of the guarantor gets crystallized to the extent of amount outstanding in the loan account of the borrower subject to the condition that the borrower had not been permitted to draw beyond the ceiling of Rs. 1,00,000/-. The guarantors liability is not necessarily a sum of Rs. 1,00,000/- but includes the interest which will have become payable on the borrowings.
15. In the instant transaction, it appears that the bank had permitted the borrower to operate on the account beyond the period of one year and in fact, had extended further facilities by enlarging the limit. On a perusal of the statement of accounts produced by the bank debit balance in the account of the borrower as on 12.12.1987 is in the vicinity of Rs. 3,00,000/-. It is not clear from either the evidence on record in the form of its statements or from the deposition of the witness examined on behalf of the bank as to whether the bank had confined to the limit of Rs. 1,00,000/- during this period and the amount in excess of Rs. 1,00,000/- reflects the interest portion. The account indicates that it is a running account with borrowings, withdrawals and deposits regularly and in such state of affairs, it was incumbent upon the bank to show as to when the limit of Rs. 1,00,000/- had reached and as to how that limit of Rs. 1,00,000/- had remained outstanding on the last day of the transaction. Be that as it may, in sofar as the liability of the guarantors are concerned, that liability gets crystallized as on 12.12.1987 and the amount with the limitations indicated above is the amount which is required to be repaid by the borrower on that day which is the amount required to be guaranteed by the guarantors for repayment and on the failure of the borrower to repay this amount, the guarantors will have to pay the same. In the absence of clear and cogent material indicating as to what exactly was the amount outstanding in the account subject to the limit of borrowing on that account as on that day, we can proceed only to the extent that the liability was to the tune of Rs. 1,00,000/-. In fact, PW-1 admits that so far as the guarantors are concerned, the liability is only Rs. 1,00,000/- and not more.
16. The Trial Court accepted the version of the second and third defendants in this regard that the outstanding amount in the account to the extent of Rs. 1,00,000/- has been repaid by the borrower subsequent to this period and the entire amount to the extent of Rs. 1,00,000/- having been repaid by the borrower subsequently, the liability of the guarantors was discharged and as such, they were not liable to pay any further amounts as the suit claim represent the amounts that the bank had advanced to the borrower subsequent to 12.12.1987. The guarantors also had pleaded and stated that the amounts lent to the borrower subsequent to 12.12.1987 and not part of the original transaction. That their liability cannot be made dependent on such subsequent transactions and liability as on 12.12.1987 having been met by the borrower they stand discharged from the suretyship.
17. This version was found to be correct and as such, accepted by the Trial Court and it is as such the suit claim has been dismissed as against the guarantor by the Trial Court. The Trial Court has also held that the reliance placed by the bank on the revival letters which the Court found had been executed by the guarantors also, would not make any difference to the situation in as much as the amount that was outstanding as on the day when the guarantors liability got crystallized having been repaid by the borrower, their liability ceased thereafter and the revival letter will not create any fresh liability on the part of the guarantors.
18. Sri Surya Prakash, learned Counsel appearing for the plaintiff7bank who is in appeal before us has made twofold submissions. The learned Counsel firstly submits that for determining the liability of the guarantors the terms of guarantee is to be looked into and submits by drawing our attention to Clause-17A of the deed of guarantee which reads as under:
"17A - The Guarantor(s) hereby agree(s) that notwithstanding any variation made in the terms of the General Agreement and Supplemental General Agreement if any and7or any Ancillary Agreement (s) or any other Agreement or letter inter alia including variation in the rate of interest, extending the date of payment of the instalments (here incorporate such other variations in terms of the said Agreements that you have in mind) and on which the loan has been made or any composition made between the Bank and the borrower or any agreement on the part of the Bank to give time to or not to sue the borrower or the bank parting with any of the securities given by the borrower the Guarantor(s) shall not be released or discharged of his/their obligations under this Guarantee provided that in the event of any such variation or composition or agreement the liability of the Guarantor(s) shall notwithstanding anything herein contained be deemed to have accrued and the Guarantor(s) shall be deemed to have become liable hereunder on the date or dates on which the borrower shall become liable to pay the amount/amounts due under the above referred to Agreements as a result of such variation or composition or agreement."
19. The submission of Surya Prakash on this term of the agreement is that the liability of the guarantors continued not only beyond the period of one year but also in respect of additional amounts which the bank had permitted the borrower to draw from his account and in view of such unconditional categorical undertaking given by the guarantor, the liability of the guarantors continued and shall be extensive with the liability of the borrower and to the extent that the bank can obtain a decree as against the borrower, it can equally seek for a decree as against the guarantors and in view of this position, the Trial Court has committed an error in dismissing the suit claim as against the guarantors.
20. The learned Counsel for the appellant in the alternative also submits that assuming for arguments sake that the limit of the guarantors is confined to the sum of Rs. 1,00,000/- and the period also during which the account could have been operated is restricted to a period of 1 year in respect of the liability which had crystallized at the end of the year, the guarantors were bound to make good the amount on the failure of the borrower and at least to this extent, the Trial Court should have decreed the suit as against the guarantors. The submission is that the outstanding amount in the loan account of the borrower at the end of the first year which represent the amount due from the bank at the borrower is the amount which is never the less binding on the guarantors notwithstanding any subsequent variations in the terms between the bank and the borrower and to this extent, the guarantors are not absolved of their liability and as such, in the alternative, a decree should have been passed to the extent of such amount as against the guarantors.
21. Sri Gopal Hegde, learned Counsel appearing for the respondents/ defendants on the other hand submits that the liability of the guarantors is to the extent of the principal amount and within the period stipulated in the document itself and the subsequent transactions varying the terms will have the effect of discharging or relieving the guarantors from their obligations. The learned Counsel also submits that in view of the categorical finding given by the Trial Court that the amount that was outstanding to the bank from the borrower as on 12.12.1987 having been subsequently repaid by the borrower, the guarantors stand discharged and the subsequent transactions between the bank and the borrower under which there is further liability on the borrower will not make any dent on the extent of liability on the borrower.
22. Sri Surya Prakash, learned Counsel appearing for the appellant/ Bank to make home his submissions has drawn support from the two decided cases one and other in .
23. In the decision reported in R. LILAVATI v. BANK OF BARODA, , a learned Single Judge of this Court had an occasion to consider the scope of Section 141 of the Contract Act and as to when it can be said that a surety is to be discharged of his liability in view of subsequent variations. It was held that notwithstanding the provisions of Section 141 it was always open to the parties to contract out of the said provision and if the deed of guarantee in itself has indicated that any benefits under Section 141 of the Contract Act has been waived by a person who stands as a surety, such person cannot plead the defence to which he was entitled to under Section 141 and as in that case it was found that the surety bond which had been executed by the guarantor was in the nature of a continuous guarantee, the guarantors could neither set up this plead for limitation nor to plea variations in the terms which could discharge them from their obligations under the deed of guarantee. It is essentially having regard to the terms of a particular guarantee bond that the liability of the guarantor is determined. In the facts and circumstances of the case, as found in the case referred to above, the Court found that the party who stood guarantee had conceded and in terms of the guarantee bond waived his rights and as such cannot turn round and plead contrary to the contract. The position is not the same in the present case.
24. Though the learned Counsel would submit by drawing our attention to Clause 17-A of the deed of guarantee that in the present case also, the liability of the guarantors can vary and it may even go beyond, we are not inclined to accept this decision for two reasons. First is that the deed of guarantee is in support and supplementary to the hypothecation cash credit agreement which clearly stipulates that the limit was Rs. 1,00,000/- and the period of its validity was 12 months. All terms in the hypothecation/ guarantee deed should be interpreted and understood in the light of this principal agreement between the parties (creditor and the borrower). It cannot be interpreted to create a liability on the guarantor much beyond what was contemplated under the very loan agreement. So called variations and extensions in the rate of interest and the time limit within which the amount can be repaid should all operate within the limits as stipulated in the principal agreement for lending money which provide for the period of one year and on the ceiling of one lakh. We cannot interpret a document which is a supporting document to the main agreement for loan as one providing for additional liabilities. It can operate only with in the limits of the main agreements.
25. The other decision relied upon by the learned Counsel appearing for the appellant/bank is SHIVA MACHINE TOOLS v. CANARA BANK, In this decision, another learned Single Judge of this Court has held having regard to the intrinsic terms found in the guarantee agreement whereby the guarantor had agreed to stand as guarantee to whatever amounts that may become due in respect of the original borrowing of Rs. 30,000/- mean that the liability of the guarantor had been confined to the sum of Rs. 30,000/- but included other amounts which get added by way of interest, insurance etc., on the amount of Rs. 30,000/- which was the principal amount of borrowing. It might have got swollen due to addition of interest and insurance charges and to this extent the guarantor was found liable. There is no difficulty in applying the principle of law as indicated in this decision. In the instant case also if the bank had made good on evidence as to what exactly was the amount which was outstanding as on the last date of the permitted time i.e. 12.12.1987 and what amounts were added by way of interest and other incidental charges, to that extent the liability of the guarantor was enforcible and could have been enforced. But in the instant case, on a perusal of the statement of accounts which the bank itself had produced and which the bank had relied upon for the purpose of the suit claim, under Ex.P.13 clearly indicates that the amounts which the borrower had repaid subsequent to 12.12.1987 add up to much more than several lakhs, leave alone the sum of one lakh which was the amount up to which the borrower could have operated the account with the bank till the end of the period. If this is the factual position, in so far as the borrowing of one lakh is concerned, the borrower has repaid that amount and when once the borrower has repaid the amount to the extent of this one lakh, the surety or guarantor gets discharged and there is no further liability on the part of the guarantor. If any further transactions between the bank and the borrower are entered into and amounts are lent by the bank, drawn by the customer, interest added on that and the borrower has failed to make payment of these amounts it does not have any effect on the guarantor when once the guarantor stands discharged, subsequent liability is of no consequence, particularly when the subsequent liability is created after the period of one year which is the period stipulated in the original agreement.
26. In fact, it is precisely for this reason the Trial Court has rightly held that there is no effect of the revival letters. There is no consequence in law even if the guarantor had signed the so called revival letters though we are not inclined to go into the question of a guarantor's liability to be revived by a mere acknowledgment or signing of such revival letter and refrain from answering this question in this appeal as it really does not arise particularly in view of the fact that the borrower had repaid the amount which was the amount due in the original agreement and as such, after repayment even if a revival letter assuming it had been signed by the guarantor will not give any right to the creditor to claim amounts over and above the amount which was originally agreed to between the parties in so far as the guarantors are concerned. No person can ask for payment over and above the amount that it is due under a document or transaction if the amount has been subsequently repaid not withstanding that prior to such repayment certain revival letters had been executed by the parties. No bank can claim double payments based on revival letters.
27. In the circumstances, we find that the Trial Court was perfectly justified in dismissing the suit claim so far as guarantors are concerned. We do not find any error in the judgment and the decree passed by the Trial Court. No scope for interference in this appeal. Accordingly, appeal is dismissed with costs.