Madras High Court
N. Soundarajan And Ors. vs Union Bank Of India And Anr. on 10 September, 2001
Equivalent citations: [2004]121COMPCAS199(MAD)
JUDGMENT N.V. Balasubramanian, J.
1. This appeal is preferred against the judgment and decree dated February 6, 1986, in O. S. No, 586 of 1982 on the file of the Third Additional Subordinate Judge, Coimbatore. Defendants Nos. 2 to 5 in the suit are the appellants herein. Defendants Nos. 2 to 5 are the guarantors and they are defendants Nos. 2 to 5 in the suit and the first respondent in the appeal is the plaintiff and the second respondent in the appeal is the first defendant in the suit. The first defendant is the principal debtor. The suit was decreed against all the defendants in the suit, and in so far as that part of the decree passed against the principal debtor, the first defendant company is concerned, the decree has become final. This appeal is concerned only with the guarantors liability.
2. The parties are hereinafter referred to as described in the plaint.
3. The plaintiff filed the suit for recovery of a sum of Rs. 4,38,327.90 from defendants Nos. 1 to 5 with further interest thereon at 19.50 per cent. per annum from the date of plaint till the date of realisation of the amount and for costs of suit, charges and expenses and also for the relief for the sale of the universal testing machine with all its accessories.
4. The plaintiff-bank advanced money to the first defendant-company. The first defendant-company was originally known as "All Steel Industries Corporation Ltd." and the name of the company was changed to "Lasco Steels Limited" and finally the name was changed to "Dharmapuri Steel Castings Limited" and the changes in the name of the company have been effected with the prior approval by the Government of India.
5. The first defendant-company was managed by Messrs Jayam and Company, a partnership firm and defendants Nos. 2 to 5 were the partners in the said company and they also became directors of the first defendant-company. The plaintiff-bank granted credit loan facilities and made advances under cash credit pledge account, import letter of credit and loan against merchandise account (hereinafter referred to as LAM account). The predecessor of the first defendant opened the letter of credit for a sum of Rs. 1.24 lakhs with the plaintiff-bank in January, 1967, in respect of import of a universal testing machine from Messrs Avery India Ltd. The first defendant-company has failed to retire the documents on presentation of documents, and therefore the plaintiff-bank was compelled to retire the documents by paying a sum of Rs. 1, 23,565 under P.A.D. account to the suppliers namely, M/s. Avery India Limited, and later it was transferred to loan against merchandise account (hereinafter referred to as "LAM" account), of Messrs Lasco Steels Limited.
6. On December 31, 1966, the head office of the plaintiff-bank at Bombay had sent necessary loan sanction order to the plaintiff-bank, in respect of the first defendant-company. In January, 1967, the letter of credit was opened.
7. On November 17, 1967, Messrs Lasco Steels Limited passed a resolution to borrow from the plaintiff-bank a sum of Rs. 3 lakhs against the pledge of stocks and also a sum of Rs. 5 lakhs for opening an import letter of credit and all the four partners of Messrs Jayam and Company, namely, the managing agents of the first defendant-company, namely, defendants Nos. 2 to 5 have agreed to stand as guarantors in their personal capacity and they have agreed jointly and severally to repay up to the said limit and the letter of credit was opened and the loan was also sanctioned. On November 1, 1968, several documents were executed and one such document is the promissory note for a sum of Rs. 5 lakhs executed by Messrs Lasco Steels Limited and the managing agents of the said company agreed to repay the overdraft/cash credit account. The defendants have also promised to repay a sum of Rs. 5 lakhs with interest at 9.5 per cent. per annum. On the same day another document was executed by way of security for the repayment of Rs. 5 lakhs. Though, it is stated in the document that security was given for the repayment of the overdraft/cash credit, the sum of Rs. 5 lakhs really represents the value of the letter of credit for a sum of Rs. 5 lakhs. On the same day, defendants Nos. 2 to 5 have given another letter to the plaintiff-bank stating that they will be jointly and severally liable to discharge the obligation which may be standing in the first defendant-company's name in the account books of the bank on the date of receipt of such notice until all such obligations have been liquidated. The letter of guarantee was executed on the same day by defendants Nos. 2 to 5 and under the deed of guarantee, defendants Nos. 2 to 5 jointly and severally guaranteed to the plaintiff-bank the due repayment and discharge within two days after demand the present and future advances, liabilities, bills and promissory notes whether made, incurred or discounted before or after the date therefrom to or for the principal either alone or jointly with any other person or persons and also of bills, promissory notes or guarantees held by the bank. In the said guarantee letter the rate of interest is mentioned as 6 per cent. per annum on the loan amount of Rs. 5 lakhs, from the date of the principal's default until payment. Exhibit A8 dated February 4, 1970, is the letter of confirmation of the balance by Lasco Steels Limited and also on behalf of the partners of Messrs Jayam and Company, the managing agents of the first defendant-company. Exhibit A18 is the confirmation of the balance by Lasco Steels Limited and exhibit A19 dated April 9, 1973, is another letter of confirmation of balance by Lasco Steels Limited. It is also relevant to mention here that on November 1, 1968, the deed of pledge was entered into between Lasco Steels Ltd., and the managing partners of Jayam and Company. The pledge was in respect of the goods produced and merchandise which were in the custody of the borrower and to be delivered by the borrower to the plaintiff-bank. The first defendant has not only confirmed the balance and as per the plaint, they made certain payments towards interest on several dates, namely, April 15, 1974, May 16, 1974, November 14, 1974, June 10, 1975, November 24, 1979, and on November 25, 1980. The universal testing machine with all its accessories were with the plaintiff-bank. Due to the non-payment of the liability, the first defendant wrote to the plaintiff-bank to arrange for release of the said machine from pledge and bring it under hypothecation and the bank has also agreed to give delivery of the universal testing machine on hypothecation basis subject to certain conditions. But ultimately, the first defendant has not complied with the condition, with the result, the bank has not delivered the said machine to the first defendant on hypothecation basis. The plaintiff thereupon filed the suit for recovery of the amount under the LAM account and the plaintiff-bank also produced the copy of LAM account from the year 1969, till August 28, 1982, claiming that a sum of Rs. 4,38,327.90 was due on that date. In other words, the suit was for the recovery of money under LAM pledge account and the finding of the trial court is also that there was no money due under the cash credit account. The plaintiff in the plaint has given details of the opening of the letter of credit by the bank for the first defendant, and payment by the bank under the LAM pledge account and the execution of several documents, the payment of interest and other amounts by the first defendant and the negotiation between the first defendant-company regarding the grant of concession for reduction in the rate of interest and for delivery of goods to the first defendant on hypothecation, which ultimately failed and also referred to the provisions of the Tamil Nadu Relief Undertakings (Special Provisions) Act, 1969, and taking over of the management of the first defendant-company by the Tamil Nadu Industrial Corporation Ltd. when the first defendant became a sick company. It is stated that the proceedings could not be initiated from October 16, 1976. The plaintiff filed the suit on the basis of cause of action which runs to nearly four pages and ultimately, the claim of the plaintiff is that defendants Nos. 2 to 5 as guarantors are jointly and severally liable for the amount due by the first defendant under the said loan. According to the plaintiff the liability of the guarantors was collateral and when there was only one debt and the payment of interest by the principal would be sufficient to save the period of limitation. According to the bank, as long as the principal debtor's liability was kept alive, the sureties are also bound to discharge the liability. It is submitted that the guarantee is a continuing guarantee and it was not revoked at all and it was liable to be enforced on the date of filing of the suit. By referring to various documents referred to earlier, the plaintiff has stated that the suit claim is not barred by limitation. It is the case of the plaintiff that the guarantors have not terminated their guarantee.
8. The first defendant has filed a separate written statement, but it is not necessary to mention the same.
9. The third defendant filed a separate written statement, which was adopted by other defendants. The stand of the third defendant is that the alleged guarantee has lapsed and they were not aware of the increase in the rate of interest from 9.5 per cent. to 19.50 per cent. per annum. The main case is that the plaintiff is not entitled to the suit claim as the conditions for the grant of loan have been changed without the knowledge and consent of the guarantors. Their case is that the suit is barred by limitation.
10. It is relevant to mention here that the management of the first defendant-company was taken over by the Government of Tamil Nadu under the provisions of the Tamil Nadu Relief Undertakings (Special Provisions) Act, 1969, for a period of one year from October 15, 1976, which was further extended from time to time. In 1979, the first defendant requested for waiver of interest and there was proposal regarding the grant of concessional rate of interest by the plaintiff-bank for the release of universal testing machine. The plaintiff has given details regarding the correspondence exchanged between the parties. The plaint was filed for the recovery of a sum of Rs. 4,38,327.90 under the loan account.
11. The trial court has framed necessary issues. The trial court on consideration of the oral and documentary evidence held that the defendants are liable to pay the money due to the plaintiff-bank and there was no variation in the contract and that the suit is not barred by limitation. The trial court also held that all the defendants would be liable to pay the balance amount and hence the plaintiff-bank is entitled to the decree as prayed for.
12. Mr. C. Harikrishnan, learned senior counsel appearing for the appellants referred to the documents exhibits A4, A5, A6 and A17 and submitted that the management of the first defendant-company was taken over as the Relief Undertaking by the Government of Tamil Nadu under the provisions of the Tamil Nadu Relief Undertakings (Special Provisions) Act, 1969. Learned senior counsel referred to the written statement of the third defendant and submitted that there is no specific guarantee in so far as the transaction under the LAM pledge account is concerned. He referred to the terms of guarantee and submitted that there is no evidence to show that there is a specific guarantee in so far as the LAM transaction is concerned and there is no need to go beyond November 1, 1968, and he referred to the resolution passed by the first defendant and submitted that the resolution distinguishes cash credit advance and the advance made for opening of import letter of credit and submitted that the appellants liability should be calculated separately. He also submitted that there is no evidence to show that any document was executed in pursuance of the resolution. He referred to exhibit A4 and submitted that on the basis of exhibit A4, the liability of the appellants cannot be extended to the amount due under the LAM pledge account. Learned senior counsel also submitted that there is no consideration for the loan or for the deed of guarantee. His further submission was that the clause referring to interest in exhibit A6 is capable of division and submitted that the liability under the promissory note is for a different transaction and it is not applicable to the LAM pledge account. He also submitted that the liability of defendants Nos. 2 to 5 has to be ascertained. His submission is that even though there is a guarantee, the terms of guarantee are self-contained and both the loans under the LAM account and the cash credit are independent and the plaintiff is not entitled to rely upon any other document except the pledge and there is no guarantee for the amount under LAM account. His submission was that the appellants' liability was restricted and independent and the guarantors are bound by the terms of the guarantee. He also submitted that the plaintiff has produced earlier documents prior to November 1, 1968, for the proof of transaction that took place between the first defendant and the plaintiff-bank. According to him, the terms of the deed of guarantee are self-contained and there is a distinction between the loan transaction and pledge and they are independent, the bank is not entitled to rely upon any other document except the document of pledge and there is no guarantee for the pledge, that the rate of interest is also different in all the deeds and in the deed of guarantee the rate of interest is mentioned as 6 per cent. per annum but in the document of pledge it is mentioned as 9.5 per cent. per annum and it is not open to the plaintiff-bank to claim interest on the ultimate balance. He also submitted that there is a variation in the contract and the same was made without the consent or knowledge of the guarantors. He referred to the evidence of P.W.I and submitted that the appellants were not informed and no notice was sent and implied knowledge is not sufficient but express consent is essential. He therefore submitted that the concept of variation is separate and the concept of novation is different. He submitted that once the contract is varied, the guarantor is entitled to get discharged from the liability of the principal debtor.
13. Learned senior counsel for the appellants relied upon the decisions of the Patna High Court in Babulal Marwari v. Tulsi Singh, AIR 1940 Patna 121, and the decision of this court reported in Nuserwanji Cursedji Bhesania and Co. v. Mahamayi Ammal, AIR 1938 Mad 585. Learned counsel also submitted that it is a question of enforcement of the terms of the contract and there was no issue framed by the trial court and there was no finding also in this regard. He referred to the decision of this court reported in Indian Bank, Madras v. S. Krishnaswamy, . He also submitted that the accounts furnished by the plaintiff-bank are not correct as it includes the inspection charges and conveyance charges. He referred to exhibit A24 letter dated October 15, 1976, by the first defendant to the plaintiff-bank requesting to release the universal testing machine and the bank took steps to release the guarantee and he submitted that steps were taken to discharge the guarantors liability. Learned counsel referred to exhibit A9 notice dated May 10, 1972, issued by the plaintiff's counsel to the defendants and also referred to the letters exhibits A9, A22, A23 and A24, i.e., the letters exchanged between the parties and submitted that the fact that the third defendant and the first defendant did not respond to the notice clearly show that the appellants have not paid the money in spite of notices. His submission was that payment by the principal debtor is not sufficient and merely marking a debit entry will not save the limitation and there is no cause of action against the guarantors individually.
14. The main submission was that there was no specific guarantee as regards the liabilities under the LAM account and there was a variation in the contract and the cause of action against the guarantors is independent and the limitation begins to run from the date of notice issued by the plaintiff calling upon the guarantors to pay the debt but the guarantors have not paid any amount. He also submitted that the payment of money by the principal debtor is not sufficient to save the limitation against the guarantors.
15. Mr. K. Srinivasan, learned counsel for the first respondent-bank submitted that the appellants are the managing agents of the first defendant-company and the liability of the guarantors is co-extensive with that of the principal and referred to Section 187 of the Indian Contract Act, 1872, and submitted that defendants Nos. 2 to 5 acted on behalf of the first defendant. His case is that there was no variation in the contract as no document was executed by the first defendant for the release of the pledge and also submitted that the suit is not barred by limitation.
16. On the above facts, the following points arise for consideration :
(1) Whether there is a specific guarantee by the appellants for the loans due under the LAM account ?
(2) Whether there was consideration for the loan ?
(3) Whether there was a variation in the terms of the contract ?
(4) Whether there was discharge of surety by the act of the principal losing or parting with the security ?
(5) Whether the suit is barred by limitation ?
(6) Whether the claim of interest by the plaintiff at the rate claimed in the plaint is justified and what is the liability of the guarantors ?
Point No. 1 : The submission of Mr. C. Harikrishnan, learned senior counsel for the appellants was that there was no specific guarantee by the appellants for the loan due under the LAM account. Messrs Lasco Steels Limited, the first defendant-company, has passed a resolution on November 17, 1967 (exhibit A2) to avail of the cash credit facility to the extent of Rs. 3 lakhs and also to open a letter of credit to the extent of Rs. 5 lakhs on the usual terms and conditions of the plaintiff-bank. The plaint discloses that in January, 1967, a letter of credit was established to import a universal testing machine by the said All Steel Industries Corporation Ltd. (first defendant-company). The said company failed to retire the documents on presentation and therefore the plaintiff-bank was compelled to retire the documents by making payment of Rs. 1, 23,565 to the suppliers namely, Avery India Ltd., and took delivery of the consignment. On November 1, 1968, several documents were executed, which I have already referred to earlier. The promissory note dated November 1, 1968, for value of Rs. 5 lakhs and the guarantee letter dated November 1, 1968, agreeing to repay the ultimate balance remaining unpaid on the overdraft/ cash credit, which was followed by another letter exhibit A5, wherein the appellants undertook that they would be jointly and severally liable to pay the debt due to the first defendant-company as the managing agents of the said company and a letter of guarantee was also executed on the same day by the appellants and in the said deed, the appellants have jointly and severally guaranteed to the plaintiff-bank the due repayment of the loan. The guarantee deed also shows that defendants Nos. 2 to 5 have stood as guarantors guaranteeing the repayment of the loan and for the future indebtedness and liabilities of the first defendant to the bank from time to time in any manner together with all relative interest, commission and other banking charges including legal charges and expenses. It is clear that the deed of guarantee covers all the loans granted or to be granted to the first defendant by the bank. The first defendant-company passed the resolution in the year 1967 for opening cash credit loan as well as for opening the letter of credit. I am therefore of the view that the appellants guaranteed the due repayment of the loan granted on November 1, 1968, and the deed covers the loan due to be paid by the first defendant under the LAM pledge account also. I am of the view that deed of guarantee cannot be read in a restrictive manner to cover the liability under cash credit transaction only. The employment of the natural expression "loan" would cover both kinds of loan, namely cash credit loan and the loan under the pledge account as the loan was existing and present on the date of execution of the deed of guarantee. Further, at the request of the first defendant-company and its managing agents, the bank has extended the credit facility. In my opinion, it is not open to ignore the circumstances that prevailed prior to November 1, 1968. In the resolution passed by the first defendant, there was a request for sanction of cash credit loan for Rs. 3 lakhs and another sum of Rs. 5 lakhs for opening the letter of credit. Hence, it is clear that the first defendant was already indebted to the bank and the appellants guaranteed the repayment of all the present and future indebtedness and liabilities of the principal debtor. Further, the loan account was transferred to LAM pledge account. I, therefore, hold that in the context of the entire circumstances of the case, exhibit A6 would refer not only to the cash credit loan but also the overdraft facility already extended by the bank for opening the letter of credit which was transferred to LAM pledge account.
17. Further, I am also of the view that in exhibit A4, the letter executed on the same date, the expression "overdraft/cash credit" cannot be construed to mean that it is limited to cash credit loan. The letter of guarantee was given for a sum of Rs. 5 lakhs. The credit was extended by the bank for opening the letter of credit up to a sum of Rs. 5 lakhs. Therefore, in the context, the expression in exhibit A4, "overdraft" would refer to the credit for opening of letter of credit.
18. As regards the second point, the submission of the learned senior counsel for the appellants is that the deed of guarantee is not supported by consideration. Exhibit A6 is the guarantee letter executed by defendants Nos. 2 to 5. Exhibits A3 and A4 are the promissory note and the letter executed by the first defendant. The past consideration is a good consideration. The fact that the letter of credit was opened in the bank and ultimately the bank made the payment for the machinery clearly shows that there is a consideration in respect of the guarantee given by defendants Nos. 2 to 5, the appellants herein.
19. As regards the third point, whether there was a variation in the terms of the contract, Mr. C. Harikrishnan, learned senior counsel for the appellants referred to exhibit A59 dated May 13, 1981, which is a hypothecation agreement. His submission is that exhibit A59 was produced by the plaintiff and there was no issue framed on this aspect by the trial court and it is for the plaintiff to establish the same that there was no variation. His submission is that once the contract is varied, the liability of the surety gets discharged. Though the argument of Mr. C. Harikrishnan, learned senior counsel is attractive, it is not acceptable. Section 133 of the Indian Contract Act, 1872, states that any variance made without the surety's consent, in terms of the contract between the principal debtor and the creditor would discharge the surety as to transaction subsequent to the variance. It is the statutory right conferred on the surety that where there is variance in the terms of the contract, between the principal debtor and the creditor without the consent of the surety, the surety is discharged. The learned senior counsel referred to the decision of this court in Nuserwanji Cursedji Bhesania and Co. v. Mahamayi Ammal, AIR 1938 Mad 585, and the decision of the Patna High Court in Babulal Marwari v. Tulsi Singh, AIR 1940 Patna 121.
20. In the decision of this court in Nuserwanji Cursedji Bhesania and Co. v. Mahamayi Ammal, AIR 1938 Mad 585, there was a subsequent agreement between the principal debtor and the creditor which amounted to variation of original contract and hence it was held that the surety was discharged. The Patna High Court was dealing with the case of novation. On the facts of the case, there were certain exchange of letters between the plaintiff-bank and the first defendant regarding granting of concession in the interest rate as well as for the transfer of pledge account into hypothecation account. It is seen that the agreement in exhibit A59 has not come into force at all as the first defendant has failed to pay the instalment of Rs. 10,000 within the time stipulated and the first defendant has not adhered to the instructions given by the central office of the plaintiff-bank. The plaintiff in paragraphs 15 to 25 of the plaint has referred to the various correspondence exchanged between it and the first defendant. The trial court on the basis of the evidence let in before the court has recorded the finding that the plaintiff-bank retained the machinery as pledge and the machinery was not handed over to the first defendant and hence it cannot be said that there was a variation in the contract.
I hold that negotiations for release of the pledge articles fell through due to the failure of the first defendant-company to comply with the conditions imposed by the bank and therefore it cannot also be said that there was variation in the contract. Hence, I hold that there was no variation in the contract and the decision of the Patna High Court reported in Babulal Marwari v. Tulsi Singh, AIR 1940 Patna 121, and the decision of this court reported in Nuserwanji Cursedji Bhesania and Co. v. Mahamayi Ammal, AIR 1938 Mad 585, are not of any help to the appellant.
Though I hold that there is no variation in the contract, I am of the view that even if there is any variation that will not absolve the liability of the appellants on the facts of the case. Under exhibit A6 deed of guarantee executed by the appellants, the guarantors have given the power to the plaintiff-bank that with or without notice or consent to or from the guarantors to grant time or other indulgence to or accept or make any composition arrangement with the principal or any person or persons liable in respect of any indebtedness or liability hereby guaranteed and also vary, abstain from performing, exchange, renew, discharge, release, enforce and deal with in whole or in part and from time to time any bills, notes, mortgages, charges, liens or any securities obligations. Therefore, under Clause 5 of the deed of guarantee, the guarantors have given the full power to the bank to negotiate with the principal debtor and also vary the terms of the guarantee as regards the securities or the obligations. I therefore hold that in view of the specific clause empowering the principal debtor to vary the contract and also in accordance with Section 135 of the Indian Contract Act, it cannot be said that the deed of guarantee has become unenforceable.
21. The Bombay High Court in Central Bank of India v. Multi Block Private Ltd., , the Himachal Pradesh High Court in Anil Kumar v. Central Bank of India, , have taken the view that it is not the correct view that the rights conferred under Chapter VIII of the Contract Act are inalienable and cannot be waived. This court in S. Perumal Reddiar v. Bank of Baroda, , has taken the view that the rights conferred on the surety under Sections 133, 135 and 141 of the Contract Act can be waived if there is a specific agreement. Therefore, I hold that in view of the specific clause in the deed of guarantee, even if we hold that there was a variation, that would not preclude the principal debtor from enforcing the deed of guarantee against the guarantors-appellants.
In so far as the decision of this court in S. Perumal Reddiar v. Bank of Baroda, is concerned, it was found on the facts of the case that there were material alterations in the document of guarantee and on the facts of the case it was held that since there was a material alteration in the deed in respect of the amount and hence the surety was discharged. However, on the facts of the case, this decision is not applicable as there was no variation in the terms of the contract.
22. Learned senior counsel for the appellants referred to the letters exchanged between the parties, namely, exhibits A9, A25 and A33 and the reply under exhibits A7, A15 and A16 and the letter dated August 1, 1978, wherein the first defendant-company was declared by the Government of Tamil Nadu as a relief undertaking under the provisions of the Tamil Nadu Relief Undertakings (Special Provisions) Act of 1969. It is clear that the plaintiff-bank has issued notice dated May 10, 1972, to all the defendants and immediately after that the managing agents of the first defendant-company has sent a letter dated May 19, 1972, stating that the management of Messrs Lasco Steels Limited was taken over by the Tamil Nadu Industrial Development Corporation and a director-in-charge has been appointed by TIDCO. It is also stated in the notice that the Lasco Steels Ltd., proposed to sell the machine for which negotiation was going on and requested the plaintiff not to take legal action against the custodian of the said bank. The first defendant by a letter dated May 27, 1972, under exhibit A16 set out the details regarding the meeting of the custodian and the discussion between the director of the first defendant-company and the finance director of the Tamil Nadu Industrial Development Corporation Ltd. In that letter, the first defendant-company requested to stay the proceedings against the company to realise the dues to the bank. The negotiation took place between the first defendant-company and the plaintiff for the release of the machinery. On December 1, 1976, another notice was issued on behalf of the plaintiff-bank and again the first defendant has approached the plaintiff-bank. There was a discussion between the directors, joint secretary of the Tamil Nadu Industrial Development Corporation Ltd., and it was assured that steps have been taken for rehabilitation of the company as the company has been entrusted with new director in charge. The first defendant sent reply dated December 31, 1976, to the notice dated December 1, 1976. Another notice was issued on July 13, 1978, for which the first defendant sent a reply on August 1, 1978, stating that the first defendant-company is the relief undertaking and that there was a moratorium for one year from November 15, 1977, for the payment of the debt and at the same time assuring that the debt would be cleared within a period of one year. A copy of the Government order is also enclosed for the proof of moratorium period. I am of the view that the first defendant has approached the plaintiff-bank for the waiver of interest and there was a request for the release of the security from the pledge, but ultimately, the plaintiff did not release the machinery from the pledge. It is also relevant to note that defendants Nos. 2 to 5, the directors of the first defendant-company passed necessary resolution for the release of the machinery, but ultimately the first defendant has not complied with the conditions suggested by the plaintiff-bank. All these correspondence between the parties clearly show that there was no extension of time granted by the plaintiff-bank nor was there any compromise entered into between the first defendant-company nor the plaintiff-bank granted any time to make the payment.
23. As a matter of fact in the crucial letters exchanged between the parties, the appellants were the parties as the directors of the first respondent-company and they passed necessary resolution in the meeting of the directors requesting for the release of the universal testing machine. Therefore, it cannot be said that time was granted by the plaintiff-bank to the principal debtor to make the payment. Moreover, when the first defendant became a relief undertaking, the Tamil Nadu Government has passed orders granting moratorium for the repayment of the debts. I therefore hold that the plaintiff-bank was prevented from instituting the suit against the first defendant-company during the period of operation of the moratorium.
24. As regards the point whether there was a discharge of surety by the act of the principal losing or parting with the surety, Mr. C. Harikrishnan, learned senior counsel relied on the decision of the Bombay High Court in the case of Chistovan Vaz v. Indian Overseas Bank [2000] 100 Comp Cas 16. He submits that the principal debtor was negligent in using the security as the machinery was imported in the year, 1967 and by the inaction of the principal debtor the machinery has become useless and therefore the guarantors are to be discharged. The Bombay High Court in the case reported in Chistovan Vaz v. Indian Overseas Bank [2000] 100 Comp Cas 16, was dealing with a case where the bank without informing the guarantors took possession of the vehicle and allowed it to deteriorate and ultimately sold as a scrap. It was found that the bank was negligent which resulted in the deterioration of the vehicle and hence it was held that the bank was accountable for the reduction in the value of the article and the guarantors to that extent was discharged. However, the decision of the Bombay High Court is not applicable to the facts of the case as it is not a case of principal debtor parting with the security, as the machinery which has been pledged with the bank continued to remain with the bank. Therefore it is not the case of parting with the security at all. The next question that arises is whether there was a loss of security.
25. The Supreme Court in Amrit Lal Goverdhan Lalan v. State Bank of Travancore , has held as under (headnote of AIR) :
"The expression 'security' in Section 141 of the Contract Act is not used in any technical sense ; it includes all rights which the creditor has against the property at the date of the contract. The surety is entitled on payment of the debt or performance of all that he is liable for to the benefit of the rights of the creditor against the principal debtor which arise out of the transaction which gives rise to the right or liability. If, therefore, the creditor has lost or parted with the security without the consent of the surety, the latter is by the express provision contained in Section 141, discharged to the extent of the value of the security lost or parted with.
Therefore, in a case where the creditor bank was found to have lost goods of value of Rs. 35,690 pledged with it due to its negligence or for some other reason, it was held, that the surety was discharged of the liability to the bank to the extent of Rs. 35,690."
26. In Karnataka Bank Ltd. v. Gajanan Shankararao Kulkarni, a Division Bench of the Karnataka High Court while construing the provision of Section 141 of the Indian Contract Act, 1872, held as under (headnote) :
"Held, the sureties could not appeal to the provisions of Section 141 which in the facts and circumstances of the case was not attracted. A mere passive inactivity or passive negligence on the part of the creditor by failing to realise the debt from the collateral security is not sufficient, in itself, to discharge the surety, for the reason that the surety can himself avoid consequences of such passivity by himself paying the debt and becoming subrogated to the rights of the creditor. In the absence of a contract to the contrary, the creditor is under no obligation of active diligence for the protection of the surety, so long as the surety himself remains inactive. Thus tested, the inaction on the part of the creditor-bank would not, of itself, mitigate sureties' liability."
27. I hold that there was no passive inaction on the part of the plaintiff-bank. I have already referred to the exhibits dated May 10, 1972, December 1, 1976, and July 9, 1978, whereby the plaintiff-bank issued notices and in reply to those letters, the first defendant-company has assured the payment of loan. Further, the first defendant-company was declared a relief undertaking by the Government of Tamil Nadu, granting moratorium for the repayment of the debt. Hence, it cannot be said that the plaintiff-bank was not diligent in the protection of the security. On the other hand, had the appellants remained active, they could have avoided the consequences by paying the principal debt and subrogate themselves to the rights of the creditor. That apart there is absolutely no evidence from the defendants to show that there was deterioration in the value of the machinery. On the other hand, the letters exchanged between the parties from 1977 and 1978 show that there was an increase in the value of the machinery and that was the reason for the first defendant-company's request to the plaintiff-bank to release the machinery from the pledge on hypothecation of the machinery. The suit was instituted in the year 1982 with the prayer that the machinery may be sold through the process of the court. The defendants have not produced any evidence regarding the value of the machinery in 1967 and its value in the year 1982 and there is absolutely no evidence to show that there was inaction on the part of the bank in bringing the security for sale. I therefore, hold that the decision of the Bombay High Court in Chistovan Vaz v. Indian Overseas Bank [2000] 100 Comp Cas 16 is not applicable to the facts of the case.
28. As regards the point whether the suit is barred by limitation, the submission of Mr. C. Harikrishnan, learned senior counsel appearing for the appellants is that the machinery was imported in the year 1967 and thereafter on November 1, 1968, it was transferred to LAM pledge account. His submission was that the payments were made by the first defendant on April 15, 1974, May 16, 1974, November 14, 1974, June 10, 1975, November 24, 1979, November 25, 1980, and all the payments were made only by the first defendant to the plaintiff-bank. There was acknowledgment in exhibits A8, A18, A19, A23, A32, A40, on February 4, 1970, June 10, 1982, April 9, 1973, March 27, 1976, February 7, 1978, and November 2, 1978, and except the acknowledgment in exhibit A8 dated February 4, 1970, which was issued by the managing agents of the first defendant-company, the other payments were made by the first defendant-company and there is no acknowledgment by defendants Nos. 2 to 5, the appellants herein. He submitted that the first defendant was declared as a relief undertaking only on October 16, 1976, and even before that date, the time-limit for filing the suit against defendants Nos. 2 to 5, had expired. His main submission is that the payment by the principal debtor does not enure to the benefit of the surety. He refers to the relevant passage in Banking Law in Theory and Practice III edition, volume 2, pages 1400 and 1401. He also referred to a decision of this court in Gopilal J. Nichani v. Trac. Industries and Components Ltd. [1978] 2 MLJ 94 and submitted that the contract of guarantee is a separate contract between the creditor and the guarantor and there is nothing in the Tamil Nadu Relief Undertakings (Special Provisions) Act, and particularly in Section 4(b) which suspended either such a contract or the obligations arising therefrom. He therefore submitted that though Section 128 of the Contract Act mentions the liability of the guarantor is co-extensive with that of the principal debtor, the word "co-extensive" would relate only to the quantum of the principal debt and it does not extend to the period of limitation. He relied on the decision of the Calcutta High Court reported in Brojendro Kissore Roy Chowdhury v. Hindustan Co-operative Insurance Society Ltd., [1917] 44 ILR 978 (Cal) wherein it was held that payment of interest by the principal debtor could only be in respect of the debt upon which the interest was paid, namely, the debt of the principal debtor. The fact that interest was paid with the knowledge and consent of the surety and even at his request would make no difference, unless the circumstances could be said to render the payment one on behalf of the surety. He submitted that though the liabilities of the debtor and the surety arose out of the same transaction, the liabilities of two persons are distinct for the purposes of the application of Section 20 of the Limitation Act and the payment by the first defendant could not extend the period of limitation.
According to Section 128 of the Contract Act, the liability of the surety is coextensive with that of the principal debtor. It is true that there can be no quarrel over the proposition of law canvassed by the learned senior counsel for the appellants that the liability of the guarantor is co-extensive with that of the principal debtor refer to the quantum of the liability and it is not relevant in considering the question of limitation. It is necessary to refer to the terms of the guarantee, i.e., exhibit A6. Clauses 5 and 6 of the guarantee read as follows :
"5. The bank shall have full discretionary power with or without referring notice or consent to or from me/us to grant time or other indulgence to or accept or make any composition or arrangement with the principal or any person or persons liable in respect of any indebtedness or liability hereby guaranteed and also vary, abstain from performing, exchange, renew, discharge, release, enforce and deal with in whole or in part and from time to time any bills, notes, mortgages, charges, liens or any securities obligations or decrees now or hereafter held by the bank in respect thereof and generally to treat me/us as through I/we were primarily and severally liable with the principal."
The other relevant clause and the preamble portion, which read as under :
"I/We jointly and severally liable to the bank the due payment and discharge two days after demand of all present and future advances, liabilities, bills and promissory notes whether made, incurred or discounted before or after the date hereof to or for the principal either alone or jointly with any other person or persons and also of bills, promissory notes or guarantees held by the bank bearing his signature or of all present and future indebtedness and liabilities of the principal to the bank from time to time in any manner together with all relative interest, commission and other banking charges including legal charges and expenses."
29. I have already referred to the decision of the Karnataka High Court reported in T. Raju Setty v. Bank of Baroda, , wherein the Karnataka High Court has held that the rights conferred on the surety under Chapter VIII are not inalienable rights nor those rights have nothing to do with the public policy as such. Instead, the public policy is not to defeat the debt of the creditor and it is to ensure that the money of the creditor is secured and is recoverable in accordance with law and the debtor or the surety is not absolved of his liability to discharge the debt except in accordance with law. The same view is taken by the Bombay High Court in Central Bank of India v. Multi Block Private Ltd., , and by the Himachal Pradesh High Court in Anil Kumar v. Central Bank of India, . I am also in respectful agreement with the views expressed by the Karnataka, Bombay and Himachal Pradesh High Courts.
30. In Syndicate Bank v. T. Basappa [1987] 62 Comp Cas 68, the Karnataka High Court has taken the view that where the debt is sought to be recovered both against the principal debtor as well as the surety, the acknowledgment by the surety does not save the period of limitation as against the principal debtor. In R. Lilavati v. Bank of Baroda, , the Karnataka High Court has held that where surety had specifically empowered the principal to give consent on behalf of the surety, in respect of all matters concerning the debt, the acknowledgment of liability given by the principal would be binding on the surety, although the surety was personally not a party to the acknowledgment. Since the acknowledgment given by the principal, would bind the surety, it was held that limitation was saved even as against the surety.
31. In United Commercial Bank v. B.M. Mahadeva Babu, , the Karnataka High Court has considered a similar clause as found in the deed of guarantee and held that the ratio in R. Lilavati v. Bank of Baroda, , would apply to the facts of that case. I am of the view that the relevant clause in the deed of guarantee which empowers the principal to give consent on behalf of the surety in respect of matters concerning the deed is very wide to grant time or grant indulgence or accept or make any composition or arrangement with the principal. The clause also empowers the principal debtor to vary, abstain from performing, exchange, renew, discharge, release, enforce and deal with in whole or in part and from time to time any bills, notes, mortgages, charges, liens or any securities obligations. The agreement gives power to the creditor and any acknowledgment of liability given by the principal would be binding on the surety also even though the sureties were not parties to the acknowledgment. I therefore hold that in view of wide nature of the power conferred in the deed of guarantee, the acknowledgment by the principal would bind the surety. It is relevant to mention here that the appellants, who are the partners of M/s. Jayam and Company were directors and managing agents of the first defendant-company and when the principal acknowledged the liability, it would bind the appellants also, as they stood as sureties for the loan transaction entered into between the plaintiff-bank and the first defendant-company. I am of the view that in the context of the facts and circumstances of the case, the acknowledgment of the principal would bind defendants Nos. 2 to 5. Apart from the specific clause in the agreement, the deed of guarantee provides that the guarantee shall be a continuing guarantee.
32. Moreover, though there were certain notices issued on behalf of the creditor, the first defendant was requesting time for making payment, which was also extended by the plaintiff-bank. The plaintiff-bank has produced its account under exhibit A58 and it is clear from a perusal of exhibit A58 that the account was not settled and hence the decision of the Supreme Court in Punjab National Bank Ltd. v. Shri Vikram Cotton Mills Ltd. , would apply to the facts of the present case. On the facts of the case the ultimate balance remaining to be paid to the bank is not determined and unless it is determined, it cannot be said that the liability on the part of the guarantors would arise and hence it cannot be said that the suit is barred by limitation. The Supreme Court in the above case has held as under (headnote of AIR) :
"The liability of the surety under Section 128 of the Contract Act is coextensive with that of the principal debtor, unless it is otherwise provided by the contract. It is therefore necessary to consider whether in the terms of the bond there is anything which shows that the liability of the surety is not co-extensive with that of the principal debtor.
Where one of the clauses in the contract stipulates that the bond secured 'the ultimate balance' remaining due to the bank, unless and until the ultimate balance is determined no liability on the managing director to pay the amount arises, and where the ultimate balance due is not determined, the suit by the bank against the managing director for the amount remaining due upon the promissory note will not be premature for the bank was under the terms of the bond executed by the managing director entitled to claim at any time the money due from the company, as well as under the promissory note and the bond. Instead of dismissing the suit the court should stay it till the ultimate balance due to the bank from the company is determined."
In this case also there is a continuing guarantee and the amount was not settled and there is no refusal by the guarantor to carry out the obligation and hence the suit is not barred by limitation. In view of the above decision of the Supreme Court, I hold that the suit filed is in time and is not barred by limitation.
33. Rate of interest : I have already held that the suit filed by the plaintiff-bank on August 28, 1982, is not barred by limitation. In so far as the decree passed against the first defendant is concerned, the decree has become final in so far as the first defendant is concerned. Though the liability of the guarantors is co-extensive with that of the principal debtor, it is not well settled that it is essential to determine the liability of the guarantor and the guarantors cannot be made liable for more than what he has undertaken. In Chittaranjan Banerjee v. Dy. Commr. of Lakhimpur, AIR 1980 Gauhati 62, it was held as under (head-note) :
"A surety in the eye of law is a 'favoured debtor' and the surety bonds are to be construed strictly; a surety can only be held to be bound if the condition of liability has been fulfilled. Being a 'favoured debtor', a surety is entitled to insist upon rigid adherence to the term of his obligation by the 'creditor' and cannot be made liable for more than he has undertaken. The nature of the contract cannot be equated with that of an insurer or uberrima fides, it is one 'strictissimi juris'.
The terms of the surety bond must be strictly construed but, the construction must not be so unduly strained as to result in defeating its essential purpose. Therefore, the cardinal rule is that a guarantor or a surety must not be made liable beyond the terms of his engagement. The exceptions are, (1) that when there is an ambiguity and all other rules of construction fail the courts should interpret the guarantee contra proferentem (against the guarantor) or use the recital to control the meaning of the operative part where it is so possible ; (2) that while construing a surety bond, the court must consider the object and purpose of its execution and the construction should not be unduly strained as to result in defeating the essential purpose of the bond."
34. Mr. C. Harikrishnan, learned senior counsel for the appellants referred to change in the levy of rate of interest ranging from 9.5 per cent. to 19.5 per cent. per annum. It is no doubt true that the appellants in exhibit A4 have agreed to stand as sureties for repayment of the ultimate balance or the sum remaining unpaid in overdraft/cash credit. I have already held that the liability under the overdraft would cover the liability of the first defendant-company under the LAM account also as the liability under the LAM account arose anterior in point of time and the term "overdraft" is wide enough to cover not only the overdraft advances, but also the other advances for which accommodation was given.
35. I am of the view that the reading of the document exhibit A4 clearly shows that they agreed to repay the overdraft and cash credit. The promissory note was given only as a security for the repayment of the ultimate balance and the sum remaining unpaid on the overdraft and cash credit. In view of the words found in exhibit A4 and also taking into account exhibit A58 which shows that the account was not settled, the defendants would be liable to repay the ultimate balance which includes, in my opinion, the varying rates of interest as claimed by the bank. Though there are various terms of rate of interest in the deed of guarantee, exhibit A6, and the deed of pledge agreement, exhibit A17, under exhibit A4 the liability of the appellants is to pay the ultimate balance due which is payable by the principal debtor, and if that document is taken into account, the appellants would be liable to pay the ultimate balance. I hold that the trial court was correct in holding that the appellants would be liable to pay interest at the rate claimed by the bank. Since I hold that under exhibit A4, the appellants would be liable to pay the ultimate balance which includes the interest claimed at various rates, I do not accept the submission of Mr. C. Harikrishnan, learned senior counsel that the appellants would be liable to pay interest only at the rate of 6 per cent. per annum as found in the guarantee deed dated November 1, 1968 (exhibit A6).
36. The next submission of the learned senior counsel for the appellants is that the bank has charged commission and other banking charges including legal charges and expenses and this amount should be deleted. I am unable to accept the submission of the learned senior counsel. In exhibit A6 the guarantors have agreed to the plaintiff to pay the interest claimed inclusive of legal charges and expenses. Therefore, I am unable to accept the submission of the learned senior counsel for the appellants that the bank is not entitled to claim legal charges and other expenses.
In the result, the appeal is dismissed. However, there will be no order as to costs herein.