Karnataka High Court
Shiv Machine Tools vs Canara Bank on 28 September, 1995
Equivalent citations: ILR1996KAR732, 1996(5)KARLJ406
JUDGMENT Murgod, J.
1. This Appeal is preferred by defendant-3 in the Trial Court under Section 96 CPC challenging the judgment and decree dated 7.11.1986 passed in O.S. No. 722 of 1982 by the learned First Additional City Civil Judge, Bangalore, decreeing the suit for Rs. 63,415-80ps. with interest against defendants 1 to 3 jointly and severally but restricting the liability of the third defendant - appellant to an extent of Rs. 50,000/- only.
2. The Appeal arises in the following circumstances :-
Defendant-1 with defendant-2 as co-obligant raised a loan of Rs. 30,000/- from the plaintiff Canara Bank on 15.10.1977 repayable with interest for buying the machinery. The loan was repayable in 24 equal monthly instalments of Rs. 1250-00 each; promissory note and other documents were executed. Defendants 1 and 2 executed a hypothecation agreement hypothecating the existing machinery and the machines to be purchased. Third defendant who is the appellant before this Court, stood as a guarantor and executed a Guarantee Agreement on 15.10.1977 restricting its liability in the sum of Rs. 50,000/-. Defendants 1 and 2 acknowledged their liability in writing on 8.7.1980. Since there was default, the Bank instituted the suit against defendants 1 to 3 claiming the amount due on the loan.
3. Defendants 1 and 2 were proceeded exparte, Defendant-3 alone contested the suit. Defendant-3 denied the plaint allegations with regard to executing the Guarantee Agreement and contended that the validity of the Guarantee Agreement and other documents was the subject matter of the suit in O.S. 303 of 1982 and that suit was pending and therefore the present suit required to be stayed. It further contended that its liability is discharged because of the acts of commission and omission on the part of the plaintiff-Bank. According to third defendant, by the negligent acts of the Bank, securities available to it were lost and in that view liability of the third defendant stood discharged.
4. The Trial Court raised the following issues:-
"1. Whether the plaintiff proves that the third defendant stood as guarantor to the 1st defendant by executing articles of guarantee dated 15.10.1977?
2. Whether the plaintiff proves that the third defendant's Managing Partner Smt. Sathyalaxmi assigned her LIC policy as collateral security?
3. Whether the guarantee of defendant No. 3 is discharged because of the acts and omissions on the part of the plaintiff in allowing the valuable security being lost?
4. To what relief the plaintiff is entitled to?"
5. After the trial, the Court held that the appellant had executed the Guarantee Agreement and that the appellant had failed to prove the omissions and commissions on the part of the plaintiff-Bank resulting in the alleged discharge of the liability of the third defendant. Therefore rejecting the contentions of the third defendant, the learned trial Judge proceeded to decree the suit as stated above. In this Court defendants 1 and 2 are not impleaded as parties to the Appeal and the plaintiff Bank alone is the respondent.
6. In view of the submissions made on behalf of the parties, the following Points arise for Consideration :-
1. Whether the finding of the trial court that the appellant stood as guarantor in respect of the loan advanced to defendants 1 and 2 and executed the Guarantee Agreement dated 15.10.1977 is correct?
2. Whether the claim of the plaintiff-Bank against the appellant is barred by time as contended?
3. Whether the finding of the trial Court that the liability of the guarantor is not discharged by the alleged commissions and omissions on the part of the creditor-Bank is correct?
4. What order or decree?
7. Point No. 1:- The appellant took up the contention that no Guarantee Agreement as set-up at Ex.P.4 was executed. Appellant contended that as a customer of the respondent-Bank it used to avail certain facilities such as Bank Guarantee for giving E.M.D. and securities in respect of its dealings with the Government and other agencies and in that connection the Bank had taken signatures on blank forms of the proprietor of the appellant and those forms had been subsequently filled up and made use of to create documents like Ex.P.4 and in fact Ex.P.4 has not at all been duly executed by the proprietor of the appellant by going over to the office of the respondent-Bank. In support of this version, the partner of the appellant as D.W.1 Smt. C.R. Satyalaxmi gave evidence to counter the evidence adduced in that behalf by examining the Manager and other witnesses of the respondent-Bank. P.W.1 Sri T.K. Kannan the Manager of the Bank at the relevant time and its clerk P.W.2 P.K. Harikar have asserted that along with the borrowers D.W.1 the proprietor of the appellant had come to the Bank Office and had signed the Guarantee Form Ex.P.4. Though D.W.1 asserted that Exs.P.4 and P.5 were blank Forms when she signed, she had admitted in her cross-examination that without studying Ex.P.4 she had signed it. The appellant is a dealer in machines and it is appellant who has supplied the machines to the main borrowers defendants 1 and 2 and the payment made for the purchase of the machinery has admittedly gone to the credit of the appellant. The appellant has also issued a notice as per Ex.D.10 denying execution of the Bank Guarantee. If the appellant had been deceived by the fabrication of the Bank Guarantee as found at Ex.P.4 placed on record by the respondent-Bank, then it was upto the appellant to have complained against the Bank-officials to their superiors; appellant could have also lodged a complaint to the police for fabricating the false document. Subsequent conduct of the appellant is not at all consistent with the probabilities of the defence set up in the case. D.W.1 has asserted that she was residing in Madras and she was visiting Bangalore Office on occasions and she never went to the Bank and she had her Liason Officers incharge of the Bangalore Office at Bangalore and she used to receive the documents for signatures from them. None of them is examined to support her version. D.W.1 has not taken any steps against the Bank officials for allegedly fabricating the documents. Therefore taking into account the positive evidence of the Bank officials, the circumstances and the probabilities of the case, the Trial Court has with cogent reasons negatived the contention of the appellant and has rightly held that the Bank Guarantee at Ex.P.4 has been executed by the appellant.
8. Point No. 2:- Admittedly the loan has been availed on 15.10.1977. On that day as spoken to by the witnesses examined on behalf of the creditor-Bank and as per the documentary evidence placed before the Court, principal borrowers executed a pronote at Ex.P.1 for having borrowed Rs. 30,000/- only payable with interest at 5 1/2 percent per annum above the Reserve Bank of India rate with a minimum of 14 1/2 percent per annum, compounded quarterly. Covering letter of the pronote is produced at Ex.P.2. The principal borrowers executed Hypothecation Deed Ex.P.3 and Ex.P.6. The Guarantee Agreement however is executed by the appellant through its partner D.W.1 Smt. Satyalakshmi. There is an acknowledgement obtained from the principal borrowers at Ex.P.7 on 30.6.1980 acknowledging the liability in a sum of Rs. 46,390/- as on 8.7.1980 Inclusive of interest, expenses, incidental charges and other service charges debited from time to time to their account. However this acknowledgment has not been signed by the appellant. Therefore it is contended by the learned Counsel for the appellant that though the suit claim is in time as against the principal borrowers, the same is barred by time as against the guarantor. He submitted that though this plea was not put-forth in the Trial Court, he is entitled to urge the same in this Appeal as it in the duty of the Court to consider the claim being in time as per Section 3 of the Limitation Act. Section 3(1) of the Limitation Act, 1963 lays down that every suit instituted, appeal preferred and application made after the prescribed period shall be dismissed although limitation has not been set up as a defence.
9. The learned Counsel for the respondent-Bank submitted that the Article of limitation applicable to the facts of the case against the appellant-guarantor is Article 55 and not Articles 19 and 21 of the Limitation Act, 1963 and according to him, it is a continuing guarantee and the terms of Ex.P.4 and surrounding circumstances amply demonstrate that it is a continuing guarantee and in that behalf limitation starts when the contract is broken and suit can be instituted within three years from the breach. If the contention of the respondent-Bank is correct, then the claim will be in time and if for any reason the contract of guarantee is held to be not a continuing one, then the contention of the appellant needs to be accepted.
10. Elucidating his contentions, the learned Counsel for the appellant submitted that according to the plaint averments, the plaintiff-Bank has advanced machinery loan in a sum of Rs. 30,000/-to improve the business of the borrowers on 15.10.1977 and that was the loan of single transaction and to repay the liability incurred in that behalf, Promissory Note and Hypothecation Deeds were executed and there is nothing in the plaint averments to show that the Guarantee Agreement was intended to cover a series of transactions as required under Section 129 of the Contract Act. The plaint averment found in this behalf in paragraph 4(c) is to the effect that the appellant has stood as a guarantor for the first defendant in respect of the loan amount and executed and Agreement of Guarantee dated 15.10.1977 in favour of the plaintiff-Bank and the liability under the said Guarantee is restricted to a limit of Rs. 50,000/-.
11. The appellant relied on two Decisions, the first one is an unreported Judgment of this Court in VIJAYA BANK, SANTHEPET BRANCH v. CHANDRASHEKAR, P.W.D. CONTRACTOR AND ANR., C.R.P. 2600 of 1982 DD 25.6.1985 and the second one is SYNDICATE BANK v. BASAPPA, . The second Decision is an authority under Section 19 of the Limitation Act holding that if surety does not join the principal debtor in passing the acknowledgement, the debt cannot be enforced against the surety, though it can be enforced against the principal debtor. In the instant case the acknowledgement Ex.P.7 is not signed by the appellant guarantor. Therefore the limitation against the guarantor is not saved by the acknowledgement as held in Syndicate Bank v. Basappa referred to above. If the guarantee is held to be a continuing guarantee as urged on behalf of the respondent, the appellant's contention has to fail.
12. As against the above submissions, the learned Counsel for the respondent with reference to the terms of the Guarantee Agreement at Ex.P.4 contended that the nature of guarantee in the case on hand is one of a continuing guarantee and not restricted to a single transaction. He submitted that a continuing guarantee covers all transactions including those arising in future and which are in the contemplation of the parties and are based on the existing contract. He submitted revocability is the sine qua non of a continuing guarantee which is in the nature of a standing offer and alt those requirements are present in the contract of guarantee under Ex.P.4.
13. Before proceeding to examine the authorities referred to on behalf of the respondent, it is necessary to note that the respondent-Bank advanced a loan called 'machinery loan' to the principal borrower defendant-1 with co-obligant defendant-2, for purchasing machines manufactured by the appellant and on the proforma invoices, the plaintiff-Bank sanctioned the loan and ultimately paid the loan amount to the credit of the appellant. In the Guarantee Bond Ex.P.4 executed by the appellant the following are the material clauses:-
"THIS AGREEMENT WITNESSETH that in consideration of the premises the Guarantor doth hereby agree to, indemnify the Bank against all loss and to pay and satisfy to the Bank on demand "the general balance" due from the Borrower and the expression "general balance" shall be deemed to include all and every the sum and sums of money, which are now or shall at any time be owing to the bank in any of its offices on any account whatsoever whether from the "Borrower" solely or from the Borrower jointly with any other or others in partnership or otherwise whether as principal or surety or otherwise and whether such liabilities have matured or not and whether they are absolute or contingent including all liabilities in respect of advances, guarantees, letters of credit, cheques, Hundies, Bills, Notes, Drafts and other negotiable instruments, drawn, accepted, endorsed or guaranteed by the Borrower and in respect of interest at the rate agreed upon with quarterly rests, commission and banking charges and in respect of all costs, charges and expenses which the Bank may incur in paying any rent, rates, taxes, duties, calls, instalments, legal and other professional charges or other outgoings whether for the insurances repair maintenance, management, realisation or otherwise in respect of any property movable or immovable or any chattels or actionable claims or scrip securities or title deeds pledged, mortgaged or assigned to or deposited with the Bank as security for the due payment and discharge of Borrower's liability to the Bank.
PROVIDED always that the total liability ultimately enforceable against the guarantor under this guarantee shall not exceed the sum of Rs. Fifty thousand only together with interest thereon on 7 1/2% P.A. above the Reserve Bank of India rate with a minimum of 16 1/2% per annum from date of demand by the Bank upon the Guarantor for payment.
NOTWITHSTANDING the Borrower's account or accounts with the Bank may be brought to credit or the credit given to the Borrower fully exhausted or executed howsoever the said financial accommodation be varied or changed or renewed from time to time, notwithstanding any payments from time to time or any settlement of Accounts or payments in full settlement of the balance that may be due from time to time, this agreement shall to the extent aforesaid, be a continuing guarantee for payment of the ultimate balance to become due to the Bank by the Borrower, until notice in writing of revocation of the Guarantee as hereinafter provided is received by the Bank."
14. The learned Counsel for the appellant with regard to his contention that the facts in the Appeal disclosed only a single transaction and the Guarantee Agreement executed in that behalf is a guarantee for the single transaction and not a continuing guarantee relied upon the unreported Decision in Vijaya Bank v. Chandrashekar and Anr. In that Decision in paragraph 4 the Court said that the question for consideration there was whether the liability in that case was a continuing guarantee and whether defendant-2 as a guarantor would be bound by the acknowledgement of the debt by defendant-1. The Court held that the acknowledgement had been signed only by the principal debtor and the guarantor defendant-2 had not signed the acknowledgement and as such the loan was not saved as against defendant-2 though there was no such bar against the principal debtor by virtue of the acknowledgement of the debt.
15. In Vijaya Bank's case, to urge that the guarantee was a continuing guarantee, the clauses in the Guarantee Agreement pressed into service have been reproduced in para 5 of the order rendered by the Court. Those clauses reads as under:-
"4. I/We hereby consent to you making any variance that you may think fit in the terms of your contract with the principal to your determining, enlarging or varying any credit to him/them, to your making any composition with him/them or promising to give him time or not to sue him/them and to your parting with any security you may hold for the guaranteed debt."
"10. I/We further agree that the amount hereby guaranteed shall be due to you on demand after notice requiring payment of the same shall have been delivered or sent through the post by registered letter addressed to me/our or our representative's last known place or business or residence."
"12. And it is further agreed and declared that this guarantee shall be continuing guarantee irrespective of any sum or sums which may be paid into the account of the principal at any time during the continuance of the Guarantee and shall remain in force until cancelled under your written authority. The amount then due shall be subject to this Guarantee and be secured thereby."
16. The Court in Vijaya Bank v. Chandrashekar referred to illustration (c) to Section 129 of the Contract Act and relying on the definition of "a continuing guarantee" which extends to a series of transactions concluded that in that case (Vijaya Bank's case) the borrowing was limited to a single transaction of Rs. 2,000/- and the guarantee was only in respect of that borrowing and the condition No. 12 was a redundant clause in the guarantee agreement and the clauses pressed into service to make out a case of continuing guarantee were totally of little help to the creditor Vijaya Bank and the clauses also did not say that the guarantor would be responsible even in the case of an acknowledgement given by a debtor. Laying stress on the plaint allegations about only one transaction of Rs. 2,000/-between the plaintiff-creditor and the defendant No. 1 and the absence of other transactions mentioned therein the Court concluded that the nature of the guarantee under consideration was not a continuing guarantee. Therefore what is obvious is that having regard to the particular facts, the Court in Vijaya Bank's case decided that it was not a case of continuing guarantee.
17. In the instant case from the terms of Ex.P.4 referred to above the definition of 'general balance' includes all and every sum and sums of money, which shall "at any time be owing to the bank" in any of its offices of any account whatsoever and it also included the liability in respect of advances, guarantees, letters of credit, etc. and in respect of interest at the rate agreed upon with quarterly rests, commission and banking charges and expenses which the Bank may incur in paying rent rates, taxes, or outgoing whether for the insurances, repair, maintenance, management, realisation of otherwise in respect of any property etc. The evidence in the case discloses that the amounts claimed include periodical claims on account of interest and payment of insurance premium fees for issuing legal notices etc. P.W.3 the Manager of the Canara Bank has stated that the Bank is having records to show that it has paid Rs. 210/- as C.G.C. (Credit Guarantee Corporation fee).
18. The account extract at Ex.P.8 produced in the case shows that the suit claim consists of loan granted, interest accruing from time to time, premiums paid for insurance, C.G.C. commission, insurance renewal from time to time and fees paid to Lawyer for issuing notice. These amounts are spread over the period from 15.10.1977 to 27.2.1982. All these claims are covered by the definition of 'general balance' found in Ex.P.4. Further in express terms- the clauses reproduced from Ex.P.4 above show that the guarantee shall be to the extent aforesaid, namely Rs. 50,000/- only and shall be a continuing guarantee for payment of the ultimate balance to become due to the bank by the borrower until notice in writing of revocation of the guarantee as provided is received by the Bank.
19. Admittedly there is no notice issued by the guarantor revoking the guarantee signed under Ex.P.4. In para 162 dealing with duration of a guarantee in Halsbury's Laws of England, 4th edition, Volume 20 it is stated as under: -
162. Duration of a guarantee:- The duration of the surety's liability depends upon the terms of the guarantee. Some guarantees are intended to cover a single credit and transaction only, while others, called "continuing guarantees", are framed so as to apply to a series of credits and transactions. In the case of a single credit and transaction the surety's liability extends only to the one credit or transaction agreed upon, while in the case of a continuing guarantee the liability endures until the credits and transactions contemplated by the parties, and covered by the guarantee, have been exhausted or until the guarantee itself has been revoked.
It is often difficult to determine to which class a particular guarantee belongs. In cases of ambiguity the surrounding circumstances by means of which mercantile contracts like all others are susceptible of explanation may be looked at to see what was the subject matter which the parties had in their contemplation when the guarantee was given, and for this purpose recourse may be had to parol evidence. Being thus satisfied as to what was the parties' intention, the language of the guarantee must then be examined in order to see whether it is capable of being construed so as to carry out that intention. As the language of guarantees and their subject matter and the surrounding circumstances differ in almost every case, the question whether a guarantee is continuing or not cannot be determined by any hard and fast rule."
20. In NEDUNGADI BANK LTD. v. DORAIKANNUAMMAL, AIR 1941 Madras 282 the Court observed that in deciding whether a surety bond provides a continuing guarantee the whole of the surrounding circumstances must be taken into consideration unless the wording of the guarantee is such that the Court is precluded from taking anything else into consideration.
21. The learned Counsel for the respondent referred to T.N.S. FIRM v. V.P.S. MUHAMMAD HUSSAIN , AIR 1933 Madras 756 and read the following from Column I on page 758 as under :-
"But it was contended both in the lower Court and before us that Ex.C which was a request to the plaintiffs to advance moneys to defendant 1 up to a limit of Rs. 20,000/- for his trade purpose covers only a single item of Rs. 20,000/- and does not amount to a continuing guarantee. On the face of it we think it is a continuing guarantee."
22. It is for the first time in this Court the appellant has raised the question of bar of limitation contending that the appellant not having acknowledged the debt along with the principal borrowers in the year 1980, the suit as against him is barred by time. Reliance is placed on the Decision in Syndicate Bank v. Basappa referred to above. Therefore to meet this contention, the respondent-Bank has contended that the guarantee limitation is governed by Article 55 of the Limitation Act, 1963 and therefore the suit is contended to be in time.
23. The learned Counsel for the respondent referred to GAURI SHANKAR v. HINDUSTAN TRUST (PVT) LTD, in which it is ruled that a pure question of law not agitated or abandoned in the lower appellate Court can be allowed to be raised in second appeal under Section 39(2) of the Delhi Rent Control Act but the Court in exercise of its discretion has to consider whether it should be permitted to be raised and while giving permission the Court has to look at all the facts and circumstances, the conduct of the party seeking to raise it being of great importance. In that case it was held that the plea of absence of valid notice terminating the contractual tenancy should not have been allowed to be raised in the circumstances of the case. The plea was sought to be raised eight years after the institution of the proceedings. In the case on hand the suit was instituted in the year 1982 and it is for the first time in this Appeal instituted in the year 1987 this plea of limitation is sought to be raised. As the language of guarantees and surrounding circumstances differ in almost every case the question whether a guarantee is continuing or not cannot be determined by any hard and fast rule as seen above. Nedungadi Bank's case also lays down that in deciding the question as to whether the guarantee is a continuing one, the whole of the surrounding circumstances have to be taken into consideration unless the wording of the guarantee is such that the Court is precluded from taking anything else into consideration. If the question of limitation had been raised in the Trial Court and if the guarantee being a continuing guarantee was put in issue, it would have been possible for the parties to adduce permissible evidence if they so wanted. Now that the plea of limitation is agitated for the first time and in view of the provisions of Section 3 of the Limitation Act, 1963 the question whether the Guarantee Agreement Ex.P.4 is a continuing guarantee is to be decided with the material available on record.
24. There is nothing to indicate in the terms of the Guarantee Deed Ex.P.4 to preclude the Court from considering the surrounding circumstances. The definition of 'general balance' extracted from one of the clauses of the Guarantee Agreement Ex.P.4 above refers to include all and every sum and sums of money which shall at any time be owing to the Bank, which include interest arising subsequently, payments made towards insurance premium, other legal expenses incurred etc. Secondly though the first transaction of loan for buying machinery was limited to an amount of Rs. 30,000/- the clause in Ex.P.4 makes the total liability ultimately enforceable against the guarantor shall not exceed the sum of Rs. 50,000/- only together with interest at 7 1/2 per cent per annum above the Reserve Bank of India rate with a minimum of 16 1/2 per cent per annum from the date of demand by the Bank upon the guarantor. Added to the above the next clause in Ex.P.4 says that the guarantee shall be to the extent aforesaid, be a continuing guarantee for payment of the ultimate balance to become due to the Bank by the borrower, until notice in writing of revocation of the guarantee as hereinafter provided is received by the Bank. These clauses cannot be said to be redundant clauses and there is no reason to draw such an inference. There is nothing contained in the Agreement Ex.P.4 to indicate that the guarantee is restricted only to an amount of Rs. 30,000/- advanced initially for buying the machines. The guarantee given to secure "whatever may be owing" upto the pecuniary limit of the surety's prescribed liability applies, prima facie at least, not to a specific and ascertained sum already due to the creditor from the principal debtor at the date of the guarantee, but to what may afterwards become due : Wood v. Priesner, (1866) LR 2 Exch. 66: (quoted from Note No. 2 to para 162 on page 90 Halsbury's Laws of England, Fourth Edition, Volume 20.) Therefore having regard to the facts and surrounding circumstances and the intrinsic material found in the Guarantee Agreement Ex.P.4 it is held that the guarantee is a continuing guarantee and not restricted to a single item and the limitation Article applicable in this behalf is Article 55 Limitation Act, 1963. For this reliance is placed on MRS. MARGARET LALITA SAMUEL v. INDO COMMERCIAL BANK LTD, , in which in para 10 it is ruled as under:-
"In the case of such a continuing guarantee, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach under Article 115 of the schedule to the Limitation Act, 1908."
25. Point No. 3:- It is the contention of the appellant that the Bank by its commissions and omissions has impaired the eventual remedy of the surety against the principal debtor and therefore the liability of the appellant is contended to have been discharged. In this behalf it is contended that the Bank did not take prompt, measures to seize the hypothecated machines and therefore about four machines have been lost and therefore the liability of the surety is discharged. The Trial Court in this regard has recorded a finding against the appellant surety. In fact the plaintiff bank moved the trial Court and a Commissioner was appointed and as per his Report dated 24.10.1983 based on the mahazar conducted on 5.10.1983 nine machines were available and there was shortage of two machines namely No. 4 hand press and 2 SMT-KST milling machine No. 12. The learned Counsel for the appellant pointed out that one 2 H.P. Motor was alone available as per the mahazar and as per list of Hypothecation Deed, there were two such machines and one of them is stated to be missing. The evidence on record shows that all the new machines purchased except a minor one were there and only one from the old machines and a minor one from the newly purchased machines were not there. It may be noted here that the hypothecated goods are in possession of the principal borrower. It is therefore incorrect to say that the goods are in constructive possession of the creditor-Bank as it has no effective control over them. By hypothecation only an equitable charge is created and nothing more. Therefore in the absence of evidence showing any act or omission on the part of the creditor-Bank proving negligence and resultant loss of security available to the creditor, it is held that the creditor is not guilty of any lapse as contended and the decision of the Trial Court in that behalf is affirmed.
For the reasons stated above, there is no merit in the Appeal and the same stands dismissed.