Karnataka High Court
Sri M Gopala Rathnam vs The Federal Bank Limited on 18 August, 2025
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NC: 2025:KHC:32018-DB
WP No. 563 of 2015
HC-KAR
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 18TH DAY OF AUGUST, 2025
PRESENT
THE HON'BLE MR. JUSTICE D K SINGH
AND
THE HON'BLE MR. JUSTICE VENKATESH NAIK T
WRIT PETITION NO.563 OF 2015 (GM-DRT)
BETWEEN:
SRI M. GOPALA RATHNAM
S/O. LATE SRI MADHAVACHAR
AGED ABOUT 62 YEARS
NO:18, 4TH MAIN, HAL II STAGE
KODIHALLI EXTENSION
BENGALURU-560 009.
...PETITIONER
(BY SRI G. KRISHNAMURTHY, SENIOR COUNSEL A/W
SRI KOUSHIK S. KAREGOUDAR, ADVOCATE FOR
SMT. G.K. BHAVANA, ADVOCATE)
AND:
1. THE FEDERAL BANK LIMITED
ALUVA, KERALA
Digitally signed by
MOUNESHWARAPPA
NAGARATHNA
HAVING BRANCH AT
Location: High Court
of Karnataka
NO:11, 1ST CROSS GANDHINAGAR
BENGALURU-560 009
REPRESENTED BY ITS MANAGER.
2. M/S. ASHLEY INTERNATIONAL PVT. LTD.
REGD OFFICE:NO:18, 4TH MAIN
HAL II STAGE
KODIHALLI EXTENSION,
BENGALURU-560 008
REPRESENTED BY ITS MANAGING DIRECTOR.
3. SRI P.K. THEERTH
S/O. LATE SRI P. KARIAPPA
AGED ABOUT 65 YEARS
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NC: 2025:KHC:32018-DB
WP No. 563 of 2015
HC-KAR
NO:18, 4TH MAIN,
HAL II STAGE,
KODIHALLI EXTENSION,
BENGALURU-560 008
(RESIDING AT NO:303, SNS ARCADE
AIRPORT ROAD, BENGALURU-560 078)
...RESPONDENTS
(BY SRI B.S. JEEVAN KUMAR, ADVOCATE FOR R-1;
VIDE ORDER DATED 13-6-2018, SERVICE OF NOTICE
TO R-2 AND R-3 IS DISPENSED WITH)
***
THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227
OF THE CONSTITUTION OF INDIA, PRAYING TO SET ASIDE THE
ORDER DATED 14-8-2014 PASSED BY THE DEBTS RECOVERY
APPELLATE TRIBUNAL, CHENNAI IN R.A.NO.137 OF 2008 AT
ANNEXURE-X AND CONFIRM THE ORDER DATED 18-3-2008 PASSED
BY THE DEBTS RECOVERY TRIBUNAL IN O.A.NO.702 OF 1999 VIDE
ANNEXURE-V.
THIS WRIT PETITION, COMING ON FOR HEARING, THIS DAY,
ORDER WAS MADE THEREIN AS UNDER:
CORAM: HON'BLE MR. JUSTICE D K SINGH
and
HON'BLE MR. JUSTICE VENKATESH NAIK T
ORAL ORDER
(PER: HON'BLE MR. JUSTICE D K SINGH)
1. The petitioner has approached this Court by filing the present writ petition being aggrieved by the order dated 14.08.2014 passed by Debt Recovery Appellate Tribunal at Chennai in Regular Appeal No.137/2008 arising out of O.A.No.702/1999 on the file of Debt Recovery Tribunal, Bengaluru.
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2. The petitioner was the Director of second respondent M/s. Ashley International Private Limited(hereinafter referred to as 'borrower'). The Federal Bank Limited, the first respondent had advanced loan and extended credit facility to the company (hereinafter referred to as 'company') which are as follows:-
Sl.No. Nature of facility Enhanced/fresh loan limit in Rs.
1. Packing credit Rs-70.00 lakhs loan(running)
2. Foreign Usance Bills Rs- 200 lakhs purchase/Foreign documents Bill purchase
3. Instalment payment Rs.20.00 lakhs scheme
4. In. L.C. Rs.10.00 lakhs
5. Bank guarantee Rs.5 lakhs
3. The petitioner stood as personal guarantor to the said loans and credit facilities sanctioned by the bank in favour of the company.
4. According to the petitioner, he has resigned from the company as a Director on 15.07.1998. Form No.32 was filed by respondent No.2 company before the Registrar of Companies mentioning therein that the petitioner had ceased to be the Director of the company with effect from 29th March 1999 and three other Directors Mr. Kanu Patil, Mr. Prakash Kotak and Mr. T. Vijai Kumar had been inducted as Directors on the same day. The company -4- NC: 2025:KHC:32018-DB WP No. 563 of 2015 HC-KAR had mortgaged and created equitable mortgage on its properties in favour of the bank to obtain the loan.
5. The terms of the Guarantee Agreement inter-alia would read as under:-
This guarantee shall be a continuing guarantee and shall not be considered as wholly or partially satisfied or exhausted by any payments from time to time made to the bank or any settlement of any accounts or by reason of the account being brought to credit at any time or from time to time or its being upon to the full extent or exceeding the full extent of the limit from time to time and its being reduced or extinguished and thereafter reopened. The guarantee shall continue in force not withstanding the discharge of the principle by operation of law or by death or the death of all or any of us and shall cease only on payment of the amount guaranteed hereunder either by me or any of us."
6. When the loans and credit facilities advanced by the bank to the respondent No.2 company were not repaid, the bank filed O.A.No.702/1999 before the Debt Recovery Tribunal, Bengaluru. The Debt Recovery Tribunal, vide the order dated 18.03.2008 took note of the fact that the petitioner herein had resigned in the month of July 1998 from the respondent company as Director, which was accepted by the Bank on 02.09.1998 and Form No.32 -5- NC: 2025:KHC:32018-DB WP No. 563 of 2015 HC-KAR was filed in the month of March 1999. As on the date of the petitioner's resignation of the company as a Director, the company was having assets and stocks worth Rs.3.50 crores as against the liability of Rs.90.00 lakhs and therefore, in view of the same, the personal liability of the petitioner had to be released and the petitioner was held not to be personally liable.
7. The petitioner was thus discharged from his liability by Debt Recovery Tribunal, however, recovery certificate was issued in favour of respondent No.2 company directing the company and other guarantors jointly and severally liable to pay a sum of Rs.1,27,76,210/- with interest at the rate of 22.95% p.a. with quarterly rests from the date of application to till the date of realization.
8. The Federal Bank-respondent No.1 being aggrieved by the discharge of the petitioner from the guarantee towards the payment of the loan and credit facilities advanced by the bank in favour of the respondent company filed an appeal being R.A.No.137/2008, and the learned Debt Recovery Appellate Tribunal, Chennai vide impugned order dated 14.08.2014 after taking note of the terms of the guarantee agreement held that the petitioner had executed a guarantee agreement for the credit facilities availed by respondent No.2 company, and the said -6- NC: 2025:KHC:32018-DB WP No. 563 of 2015 HC-KAR guarantee executed by the petitioner was a continuing guarantee. Being a Director of the company or not, would not, in any way, absolve the petitioner from him being a guarantor and therefore, the guarantee agreement being a continuing guarantee, his discharge was held to be not in accordance with law and to that extent, the order passed by Debt Recovery Tribunal was set-aside and the petitioner was held to be liable for the amount to be recovered by the bank in respect of the loan and credit facilities advanced to the respondent No.2 company. `
9. Mr. G. Krishna Murthy, learned Senior Counsel assisted by Sri. Koushik S. Karegoudar for Smt. G.K. Bhavana, on behalf of the petitioner submits that in view of Sections 129, 130, 139 and 141 of The Indian Contract Act, 1872, the petitioner's liability as a guarantor stood discharged, when the bank failed to take appropriate measures in respect of the properties mortgaged to the bank for advancement of the loan and for credit facilities. He further submits that the petitioner has written to the bank for taking appropriate action to protect the assets mortgaged to it for recovery of the amount, and the bank had failed to take appropriate action and therefore, the petitioner should have been held to be discharged from his liability. He has placed reliance on few judgments of the Hon'ble Supreme Court viz., -7- NC: 2025:KHC:32018-DB WP No. 563 of 2015 HC-KAR
1. State Bank of Saurashtra v Chitranjan Rangnath Raja and Another, (1980) 4 SCC 516;
2. State of Madhya Pradesh v. Kaluram, AIR 1967 SC 1105;
3. P. Janakiram Chetty v. Punjab National Bank, Ltd., New Delhi and Another, AIR 1968 Mys 56.
4. Industrial Finance Corporation of India Ltd., v. Cannanore Spinning & Weaving Mills Ltd., and Others, 2002 (5) SCC 54.
10. On the other hand, Sri. B.S. Jeevan Kumar, learned counsel appearing for respondent No.1 Bank submits that the Debt Recovery Appellate Tribunal has correctly held that being nor not being the Director of the company is of no consequence, inasmuch as, the guarantee agreement executed by the petitioner was not co-terminus with the directorship of the petitioner. Even if the petitioner had resigned from the Directorship of the respondent No.2 company, it would not absolve the petitioner from his liability from the guarantee of the loan and the credit facilities advanced by the bank to the respondent company. Therefore, the Debt Recovery Appellate Tribunal has rightly held that in view of guarantee agreement being the continuing guarantee, till the loan -8- NC: 2025:KHC:32018-DB WP No. 563 of 2015 HC-KAR liability is discharged fully, the petitioner would be liable for payment of loan liability to the bank.
11. We have considered the submissions and perused the judgments cited by learned Senior Counsel.
12. Section 129 of The Indian Contract Act, 1872 reads as under:-
129. 'Continuing guarantee'.--
A guarantee which extends to a series of transactions, is called a 'continuing guarantee'.
13. There can be no denial of the fact that the petitioner stood as a guarantor and the guarantee to the loan advance and credit facilities to the company is a continuing guarantee.
14. Section 130 is in respect of revocation of continuing guarantee which provides 'A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor'.
15. Here, in the present case, the guarantee is not to the future transaction, but to the loan and the credit facilities advanced at the time when the petitioner was Director and stood as guarantor to the said loan and the credit facilities. Therefore, his -9- NC: 2025:KHC:32018-DB WP No. 563 of 2015 HC-KAR revocation later of the loan and credit facilities for which he stood guarantor is of no consequence.
16. Section 139 is in respect of discharge of surety by creditor's act or omission impairing surety's eventual remedy, which reads as under:-
"If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged'.
17. We have not been able to persuade ourselves to the submissions of learned Senior Counsel that as the bank failed to dispose of the property or take appropriate action towards realisation of the loan amount, the petitioner stood discharged. As soon as the respondent No.2 company did not pay the outstanding dues to the bank, it had filed O.A.No.702/1999 before the Debts Recovery Tribunal, Bengaluru in the year 1999 itself and therefore, the Bank had taken steps possible under the law to realise its dues from the assets of the company as well as its guarantor. Therefore, there is no failure as contemplated under Section 139 on the part of the bank to discharge the petitioner from his agreement of guarantee to the loan advanced by the bank.
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18. Section 141 on which reliance is placed by learned Senior Counsel is also of no help in the facts and circumstances of the petitioner.
19. Section 141 of The Indian Contract Act, illustrations (a), (b) and
(c) to that extent would demonstrate that no such situation has arisen in the present case.
20. The Hon'ble Supreme Court in its judgment in the case of Industrial Finance Corporation of India Ltd., v. Cannanore Spinning & Weaving Mills Ltd., and Others, 2002 (5) SCC 54 after considering Sections 128 and 141 of Indian Contract Act, 1872 has held that 'liability of the guarantor cannot but be stated to be a strict liability and even if the principal debtor is discharged from his liability unless such discharge is through the act of the creditor without consent of the surety/guarantor, the creditor's right of action against the surety is preserved'. Para 36 of the said judgment which is relevant is extracted hereinbelow:-
36. 'This Court in Kaluram case [AIR 1967 SC 1105 : (1967) 1 SCR 266] in its three-Judge Bench judgment upon approval has been pleased to take note of the situation that subject to certain variations Section 141 of the Contract Act
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NC: 2025:KHC:32018-DB WP No. 563 of 2015 HC-KAR incorporates the rule of English law relating to the discharge from liability of a surety when the creditor parts with or loses the security held by him. Incidentally, the decision in Kaluram [AIR 1967 SC 1105 : (1967) 1 SCR 266] as also a later decision of this Court in State Bank of Saurashtra v. Chitranjan Rangnath Raja [(1980) 4 SCC 516] was dealing with a contra-situation and came to a conclusion that by reason of the deliberate act of the principal debtor or the creditor and without the knowledge, consent and approval of the surety, question of further liability would not arise and in the contextual facts discharged the guarantor -- the situation presently, however, is converse thereto by reason of the fact that it is not by any definite act of the creditor or the debtor but by an operation of law for which none of the parties had any control. Significantly, it may be stated that the liability of the guarantor cannot but be stated to be a strict liability and even if the principal debtor is discharged from his liability unless such discharge is through the act of the creditor without consent of the surety/guarantor, the creditor's right of action against the surety is preserved'.
21. In view thereof, we do not find any substance in the submissions made by learned Senior Counsel appearing on behalf of the petitioner and therefore, the petition stands dismissed. However, it is made clear that respondent No.1 -The Federal Bank Limited
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NC: 2025:KHC:32018-DB WP No. 563 of 2015 HC-KAR shall first proceed against the properties mortgaged to it for advancing of loan and credit facilities to respondent No.2 company, subject to the orders passed by the Court/Tribunal and if its liability is not satisfied, it may proceed against the guarantors including the petitioner.
Sd/-
(D K SINGH) JUDGE Sd/-
(VENKATESH NAIK T) JUDGE MN List No.: 1 Sl No.: 46