Kerala High Court
Union Bank Of India, Ernakulam vs T.J. Stephen And Ors. on 1 February, 1989
Equivalent citations: AIR1990KER180, [1989]66COMPCAS96(KER), AIR 1990 KERALA 180, (1989) 2 BANKLJ 107, (1989) 2 BANK CLR 218, 1989 (2) COM LJ 105, 1989 (1) CURCC 650, 1989 (1) KER LJ 759, (1989) 1 KER LT 627, ILR (1989) 2 KER 513, (1989) 66 COM CAS 96
JUDGMENT Varghese Kalliath, J.
1. This is an appeal by the plaintiff. Plaintiff is a Bank. The suit was for recovery of an amount of Rs. 71,986.50. Plaintiff claimed that defendants are liable to pay the said amount.
2. There are three defendants in this case. First defendant is the principal debtor. Defendants 2 and 3 guarantors. They have executed a continuing guarantee taking up the responsibility that they will also be liable to pay the amount to the Bank. It seems that the amount was advanced for the purchase of a fishing boat and the boat was also hypothecated by the first defendant to the Bank, by the hypothecation goods agreement dt. 21-8-1970. The defendant did not re-pay the amount due to the Bank. The Bank instituted the suit against the defendants for recovery of the amount found due as per the accounts. There is no serious contention about the quantum of liability. The first defendant did not hold out any serious contentions. After considering the contentions raised by the first defendant the court below found that the plaintiff is entitled to a decree for the amounts claimed. Thus the court below decreed the suit as against the first defendant.
3. Defendants 2 and 3 took up the contention that they are not liable to pay the amount even though they have executed a continuing guarantee, The continuing guarantee was executed on 21-8-1970. According to the Bank, the debt was kept alive on account of the acknowledgment of the liability of the debt by the first defendant. The plea of defendants 2 and 3 was that the acknowledgment made by the first defendant is not binding on defendants 2 and 3 and so as regards defendants 2 and 3, there is no cause of action for the Bank since the same has been barred by limitation.
4. The trial Court considered this question in para 11 of its judgment under issues 4 and 6. Issue No. 4 is "whether the suit is barred by limitation" and issue No. 6 is "whether the 2nd and 3rd defendants are liable as sureties". Considering these issues, the Court below held that the fundamental principle is that the liability of the surety is co-extensive with that of the principal debtor. Therefore the suit is clearly barred against defendants 2 and 3 since they have not acknowledged the liability and so they are not liable for the plaint claim. The court below further held that the liability of the first defendant is not barred because of various acknowledgments proved in the suit --Ext. All The Bank took the view that the sureties are also liable for the debt and that the court below has gone wrong in not decreeing the suit against the sureties --defendants 2 and 3. Now the plaintiff-Bank appeals.
5. From the narration of facts, it is clear that he only question that has to be considered in this appeal is whether a decree can be passed against the sureties -- respondents 2 and 3 in this appeal. Learned counsel for the appellant submitted before us that the question is practically covered by the ratio of the decisions reported in AIR 1979 SC 102 (Margaret Lalitha v. Indo Commrl. Bank Ltd'.)', 1961 Ker LT 434(Popular Bank Ltd. v. Union Coir Factories) and 1979 Ker LT 566 : (ATR 1980 Kerala 190) (W. J. Chita v. Mathew).
6. Now what is the theory underlying the doctrine of acknowledgment. Taking stock of the human behaviour and conduct, English Law presumed, if a right or claim has not been exercised or asserted for a long time, the cessation of that right or satisfaction of the claim. In such cases, the English Law adopted such a presumption of payment or satisfaction of the claim and further held that if one wants to rebut that presumption, the only legal method is getting an acknowledgment of liability by the debtor. It was held by a series of English cases that a promise by the debtor to pay the debt, if given within the statutory period of limitation, was sufficient to create a new contract and so to take the case out of the operation of the statute of limitation, the existing debt being a sufficient consideration to support the promise. It was also held that a simple acknowledgment of the debt, without any express promise was sufficient for the purpose of an acknowledgment implying a promise to pay. Some of the earlier cases went so far as to hold that an acknowledgment was sufficient, even with an absolute refusal to pay. But this was not accepted by Lord Testerder C.J. in Tanner v. Smart (1827) 6 B & C 603). The English Law on the subject was variedly precedents by admitting a qualification that the acknowledgment to be efficacious and operative, it should contain expressly or at least by implication a promise to pay. In Spencer v. Hemmerde (1922) 91 LJ KB 941. The House of Lords observed thus:--
"In order to take a debt out of the operation of the Statute of Limitations there must be, within six years before the commencement of the action, an acknowlegment in writing sufficient to satisfy the Statute of Frauds Amendment Act, 1828, in language which does not exclude the promise to pay implied from the acknowledgment, and if any period of time, or condition, is expressed upon which the promise is to take effect, it must be shown that the time has expired, or that the condition has been fulfilled."
7. An implied promise by acknowledgment really spells a new cause of action. A reading of Section 18 of the Limitation Act with the explanation would make it clear that Indian Law does not accept the theory of implied promise. There are ever so many cases of different High Courts and of the Privy Council wherein it has been made clear that an acknowledgment need not contain a promise to pay express or implied. Vide AIR 1950 Bom 94 (Udhavji Anandji v. Bapudas Ramdas), AIR 1936 Madras 939 (Subba-rayudu v. Narasinha Reddi) and AIR 1940 PC 63 (Rama Shah v. Lal Chand).
8. Clause (a) of the explanation to Section 18 of the Limitation Act plainly provides that an acknowledgment may be sufficient though it omits to specify the exact nature of the property or right, or avers that the time for payment, delivery, performance or enjoyment has not yet come or is accompanied by a refusal to pay, deliver, perform or permit to enjoy, or is coupled with a claim to set off or is addressed to a person other than a person entitled to the property or right. On the peculiar facts of the case, Privy Council had occasion to observe in Maniram v. Seth Rupchand (1906) 16 Mad LJ 300 that "an unconditional acknowledgment has always been held to imply a promise to pay because that is the natural inference, if nothing is said to the contrary."
9. In view of Clause (a) of the Explanation to S. 18 providing that refusal to pay will not affect the sufficiency of the acknowledgment to which it is attached, it is not possible to hold that the acknowledgment would implicit in itself a new promise or contract to pay. The true and correct principle that can be decocted from a reading of the provision in the background of the several precedents on the interpretation of the section is that it merely renews the liability and gives the creditor for obtaining repayment a fresh period of limitation according to the nature of the liability which exists at the date of the acknowledgment. An acknowledgment of liability merely extends the period of limitation and does not create a new right of action. Vide Tilak Ram v. Nathu, AIR 1967 SC 935.
10. There is no dispute that under Section 18 of the Limitation Act, 1963, acknowledgment of a liability can save liability only against the person who acknowledges the liability here the first defendant -- the principal debtor. Even in a case of joint contractors, the acknowledgment of liability of one of the parties would keep the liability alive only as against him. The counsel submits that the Courts have distinguished the liability of a co-debtor kept alive by acknowledgment with the liability of the sureties in similar circumstances. It has to be remembered that the sureties have executed a separate contract with the creditor and the limitation in regard to the action against the sureties has to be determined on their contract under Article 55 of the Limitation Act. In 1961 Ker LT 434, this aspect of the matter has been very plainly said. Raman Nayar, J., as he then was, observed:--
"It seems clear that in respect of any debt incurred by the principal during the currency of the guarantee, the surety is liable so long as the debt is recoverable from principal. It does not matter that the principal has kept the debt alive by acknowledgments under Section 19 of the Limitation Act or by payments under Section 20, for, by these acts, there is no renewal of the debt, and no new debt created which is not covered by the guarantee. The debt remains the same, namely, the debt guaranteed; only the bar of time against recovery is postponed. Section 21(2) of the Limitation Act has no bearing, for a mere surety is not a joint contractor. His is a separate and collateral contract for the purpose of ensuring that the principal keeps his contract."
11. If we examine the precedents of different High Courts, it is now well settled that the agreement executed by the guarantors is a separate and collateral contract and it is distinct from the contract of debt between the principal debtor and creditor. This is clear from the fact that the Article for the period of limitation in regard to the contract of guarantee is Article 55. Of course, the guarantor is one who guarantees to perform the promise .
of or discharge the liability of a person for whom he stands guarantee. It is so under Section 126 of the Contract Act. Under Section 128 of the Contract Act, it is plainly clear that the liability of the surety is co-extensive with that of the principal debtor unless it is specifically provided in the contract. Under Section 134 of the Contract Act, the surety gets a discharge if the creditor enters into a contract with the princi pal debtor to discharge the latter. Similarly, if the principal-debtor and the creditor enter into a contract by which the creditor makes a composition with the debtor, or promises to give him time or not to sue, (of course, it is conditioned) normally it is applicable only if a surety does not assent to such a contract.
When a contract is made by the principal-
debtor with the creditor that he will not sue the principal-debtor, the surety's liability is discharged. But, the same is not the case if the creditor for bears from instituting a suit after obtaining an acknowledgment of liability for he is not discharging the liability of the principal-debtor but keeps it, wakeful and animate. So, in this case, the sureties cannot get themselves extricated from their liability under those provisions of the Contract Act which enable them to escape from the liability.
12. Here the question is, what is the real content and width of the contract of guarantee executed by defendants 2 and 3. It has to be understood from the contract of guarantee executed by defendants 2 and 3. Admittedly, it is a Continuing guarantee and the main clause of the guarantee stipulates that this guarantee shall be a continuing security binding on defendants 2 and 3. When in the agreement, defendants 2 and 3 unequivocally agree that they undertake a guarantee that it shall be a continuing security, the court has to examine as to what is the exact meaning purpose and nature of this obligation of the guarantor. For what purpose, the security is given is made clear in Ext.A.2 agreement. The security is for whatever amount that is due to the Bank from the principal-debtor. So long as the agreement Ext.A2 is alive and in force, defendants 2 and 3 are liable for the amount due to the Bank because they have secured the amount by executing the agreement. The effect of such an agreement has been considered very clearly by the Supreme Court in AIR 1979 SC 102 (Margaret Lalita v. Indo Commercial Bank Ltd.). The Supreme Court observed thus:--
"In the case of a continuing guarantee and an undertaking by the defendant to pay any amount that may be due by a company to a Bank on the general balance of its account or any other account, 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, the period of limitation for a suit to enforce the bond could not be said to have commenced running. Limitation would only run from the date of breach under Article 115."
Before the institution of the suit, the guarantors did not withdraw their guarantee or there was no occasion for the refusal on the part of the guarantors to carry out the obligation. The Supreme Court has said that so long as the account is a live account the guarantors are liable. Further the Supreme Court has made it clear what exactly is a live account when it is said that a live account is one that is not settled, that means a live account is one which has not been discharged by payment or by other arrangement.
13. In this case there is no dispute that the amount due to the Bank has not been paid by the principal-debtor or by the guarantors. So, in this case there is an undischarged live liability for which the guarantors have obliged by their agreement that they will be responsible for that liability of the principal-debtor,
14. A somewhat identical question was considered by Raman Nayar, J. as he then was, in 1961 Ker LT 434. In this case the learned Judge very pertinently considered the difference between the extinguishment of a debt and the content of the concept of an enforciability of a debt. Generally the statute of limitation does not and cannot extinguish a debt applying the articles of limitation, of course, except in one case which is dealt with under Section 27 of the Limitation Act. It is pertinent to note that under Section 27 of the Limitation Act, the statute has made it clear that on the determination of the period limited for the institution of a suit for possession or any property his right to such property shall be extinguished. But in regard to all cases where the statute provides a period for instituting a suit, such a provision is absent.
15. Considering the question of a continuing guarantee, Raman Nayar, J. as he then was, said :--
"The claims being alive as against the 1st defendant, it seems to me from the terms of the guarantee bond, Ext.P4, that they are alive so far as the 2nd defendant's guarantee also is concerned, For, Ext.P4 is in very wide terms. Clause (b) shows that it is a continuing guarantee determinable only after three months' notice -- there is no case that it has been so determined -- and Clause (c) states that the guarantee shall be applicable to the ultimate general balance that may become due from the principal, the term, "General balance" being defined in the opening sentence of Ext. P4 as inclusive of all sums of money which may then or at any time be owing to the bank from the principal."
Same is the position in this case. Ext.A2 makes it clear that the guarantee will extend to all indebtedness and liabilities of the principal debtor to the Bank. Further it has to be noted that in the guarantee agreement, the guarantors have agreed that their liability to the Bank shall be that of the principal-debtor and at the Bank's option, the Bank may treat the guarantor as primarily liable for the debt of the principal or the balance from time t'o time due in respect thereof provided always that the amounts for which the guarantor will be liable under the agreement shall not exceed Rs. 40,000/- and interest on such amount or on such less sum as may be due at the rate of six per cent per annum from the date of the principal' default until payment.
16. The question whether a guarantor can be treated in the position of a co-debtor or a co-contractor and if the guarantor is treated as a co-debtor, what is the effect of an acknowledgment by one of the co-debtors has been considered in certain decisions and it was held that the guarantor's liability has to be equated to the liability of a co-debtor and so, the acknowledgment by a debtor -- in this case, the principal-debtor - may be effective as far as the co-debtor and so against the guarantors. This view has not been accepted by Raman Nayar, J., as he then was, in 1961 Ker LT 434. His Lordship observed that surety's contract is a separate and collateral contract for the purpose of ensuring that the principal keeps his contract. For taking this view, His Lordship relied on ILR (1942) 1 Cal 11 and refused to follow ILR 44 Cal 978 : (AIR 1918 Cal 707), AIR 1939 Nagpur 31 and (1934) 24 Trav LJ 1.
17. In 1979 Ker LT 566 : (AIR 1980 Kerala 190), M. P. Menon, J. has also considered this question very elaborately and followed 1961 Ker LT 434. M. P. Menon, J. has observed that by acknowledgment of the principal-debtor, no new contract is created different from the one, the performance of which the surety had guaranteed. So also by acknowledgment, the original contract of debt is not modified and so, the guarantors cannot rely on the fact that the original contract has undergone modification or change. Further it was made clear in the judgment that a debt barred by limitation is not extinguished and an acknowledgment designed to place it beyond the pale of unenforceability cannot certainly alter its nature or character, or that of the contract on which it is founded so as to enable the surety to disown his obligation. This fundamental aspect has been made very clear in AIR 1979 SC 102, by approving the judgment of J. C. Shah, J. of the Bombay High Court. It is observed thus (at p. 107) :--
"On the plain words of the lettes of guarantee it is clear that the defendant undertook to pay any amount which may be due by the Company at the foot of the general balance of its account or any other account whatever..... We are not concerned in this case with the period of limitation for the amount re-payable by the Company to the Bank. We are concerned with the period of limitation for enforcing the liability of the defendant under the surety bond."
Supreme Court held that the passage extracted above from the judgment of Justice Shah is the correct position of law.
18. Now it is clear that so long as the debt is not extinguished; in the case of a continuing guarantee the guarantor/s is/are liable to the creditor and a suit can be instituted against them.
19. In 1979 Ker LT 566 : (AIR 1980 Ker 190), the learned Judge found that the principal-debtor is not liable to pay the amount borrowed from the creditor. This was not on account of the bar of limitation. It has to be noted that the learned Judge found that the principal debtor is not liable to pay the amount because under the statute, the debt stood discharged. In a case where the debt stands discharged, we feel that the question is different from that of a case where the debt is barred by limitation. When it is found that the debt is discharged even if it is by the operation of the statutory provision it only means that the debt stands extinguished. If the debt stands extinguished, we feel that it may not be possible for the creditor to file a suit against the guarantor because the guarantor has only taken the liability to discharge the debt of the principal-debtor and if law intervenes and says that it has been discharged, there cannot be any cause of action against the guarantors. In this view, even though we agree with the principles laid down in the decision in 1979 Ker LT 566 : (AIR 1980 Kerala 190), we have got serious doubt as to correctness of the end result of the decision from the circumstances emerged in the case. To this extent we doubt the correctness of the decision reported in 1979 Ker LT 566 : (AIR 1980 Kerala 190).
20. Learned counsel for the respondents referred to us the following decisions :--
Brojendro v. Hindusthan Co-op. Insurance Society Ltd., AIR 1918 Cal 707, Vaiyaprai v. Seetharama, AIR 1934 Madras 639 and Federal Bank of India v. Son Dev, AIR 1956 Punjab 21. The decision reported in AIR 1956 Punjab 21 has been considered by M. P. Menon, J. in 1979 Ker LT 566 : (AIR 1980 Kerala 190) and His Lordship has disagreed with the dictum laid down in that decision. We also respectfully agree with what His Lordship has said. AIR 1918 Cal 707 is not applicable to the facts of this case. There the question was one relating to joint debtors and the statute of limitation itself has made it clear that the acknowledgment made by one of the joint debtors will not be sufficient to have a cause of action against the other joint debtors. But it is pertinent to note what Mookerjee, J. has observed in this case; His Lordship said "The remedy of the creditor against the surety may continue notwithstanding that the remedy against the principal debtor has become barred." In AIR 1934 Madras 639, the Division Bench of the Madras High Court has followed the decision in AIR 1918 Cal 707. This decision also has no application to the facts of the present case.
21. To sum up, we hold that in a case of continuing guarantee so long as the guarantee has not been with draw or so long as the guarantors have refused to perform their obligation under the agreement of guarantee and a suit has been-filed within the time prescribed under Article 55 of the Limitation Act, the guarantors are liable for the agreement for the amounts found due to the creditor from the principal-debtor. In this case there is no withdrawal of the obligations under the guarantee by the guarantors and there was no previous refusal by the guarantors before the institution of the suit. In the circumstances, we hold that defendants 2 and 3 are also liable for the amounts claimed in the suit by Bank. Hence there will be a decree for the amounts, decreed by the trial, Court as against defendants 2 aria 3 also. We allow the appeal. In the circumstances, we do hot think that this is a fit case where we should order costs.