Thursday, 25 February 2016

When compromise made between creditor and principal debtor is binding on guarantor?

This Court has held in United Bank of India
v. Bengal Behar Construction Company Ltd. and
others, (1998) 8 SCC 653, that the Clauses in the
letter of guarantee are binding on the guarantors
as follows:
“In view of the above, the question regarding
confirmation of the decree against the
guarantors now needs to be settled. ……………… we
see no reason why the guarantors should not be
made liable under the letters of guarantee,
the terms whereof clearly stipulate that on
the failure of the principal debtor to abide
by the contract, they will be liable to pay
the amount due from the principal debtor by
the appellants. Clause 15 of the letter of
guarantee, in terms states that any action
settled or stated between the bank and the
principal debtor or admitted by the principal
debtor shall be accepted by the guarantors as
conclusive evidence. In view of this
stipulation in the letter of guarantee, once
the decree on admission is passed against the
principal debtor, the guarantors would become
liable to satisfy the decree jointly and
severally.”
(Emphasis supplied)
Thus, we see no reason why the Joint Memo, which
states compromise arrived at between the Central
Bank of India and the principal debtors, would not
bind C.L. Vimla when under Clause (2) she has
admitted that any judgment or award obtained by
the Central Bank of India against the principal
debtor would bind the parties.
 The mere fact of ignorance cannot be a valid
ground. The respondent, C.L. Vimala and her son,
N.Surya Bhagavan who signed the joint memo, were
residing in the same house. We see no reason why
the Respondent would not know of the joint memo,
when she could have by reasonable means made
herself aware of the proceedings.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4043 OF 2015
(Arising out of SLP(C) No.10173 of 2011)
Central Bank of India … Appellant
:Versus:
C.L. Vimla & Ors. … Respondents
Citation;2016(1) MHLJ 134

2. These appeals, by special leave, arise from
the Judgment and Order dated 23.12.2010 passed by
the Division Bench of the High Court of Karnataka
at Bangalore in Writ Petition No.3531 of 2007,
Writ Petition No.17320 of 2007 and Writ Petition
No.17544 of 2007, whereby Writ Petition No.3531 of
2007 filed by C.L. Vimla was allowed while Writ
Petition Nos.17320 and 17544 of 2007 filed by the
auction purchaser and Central bank of India
respectively, were dismissed.
3. The facts material to the present case are
that Respondent No.1 C.L. Vimla who is a senior
citizen aged about 85 years, is the guarantor. The
appellant Central Bank of India is the Bank to
whom the property involved in the present case,
was mortgaged. The property involved in the
present case is a residential house which was
purchased by the husband of C.L. Vimla, namely,
C.L.Narsimhaiah Shetty, under a sale deed dated
10.06.1997. She is in possession of the property
along with other family members. Her husband,
during his life time, executed a Will dated
31.05.1995 bequeathing his undivided share in
favor of his sons equally and while settling the
property he granted life interest in favour of the
guarantor. However, he has not authorized her to
sell or mortgage the property. The property was
mortgaged in favour of Central Bank of India
(hereinafter referred to as “the Bank”) for
raising a loan of Rs.17,50,000/- for family
business. The business suffered loss.
Consequently, as the respondents were unable to
repay the mortgage amount, the Bank filed O.A.
No.309/2002 before the Debt Recovery Tribunal,
Bangalore. The Debt Recovery Tribunal referred the
case for settlement before Lok Adalat. The High
Court Legal Services Committee considered the
reference and passed an award whereunder the
borrower have agreed to pay Rs.33,50,000/- as
final settlement of the claim of the Bank. This
settlement was not within the knowledge of the
guarantor C.L. Vimla as she had not signed the
joint memo. One of her sons N. Surya Bhagavan has
signed it. Her advocate has also signed the Joint
Memo. It was only on 5.4.2006 when she learnt that
the property has been ordered to be sold by
auction. She also learnt about the signing of
Joint Memo by N.Surya Bhagavan and the Bank. SoPage 4
4
she filed Writ Petition No.6625 of 2006 before the
High Court of Karnataka for setting aside the
award dated 20.03.2004 of the Lok Adalat, as far
as she was concerned. The High Court by an order
dated 1.06.2006, dismissed the writ petition on
the ground of laches. Thereafter, she filed Writ
Appeal No.899 of 2006, which was permitted to be
withdrawn with liberty to approach the Lok Adalat
for appropriate relief. Thereafter, the guarantor
approached the Lok Adalat by filing an application
under Order 9 Rule 13 read with Sections 21 and 25
of Legal Services Authority Act, 1987 on
03.10.2006.
4. During pendency of the writ petition, the
Recovery Officer conducted auction on 5.10.2006.
The guarantor filed an interim application being
I.A. 1464/2006 on 17.10.2006 before the DRT for
setting aside the same. The office of the DRT
raised an objection stating that the application
amounted to an appeal. The Guarantor requested the
DRT on 2.11.2006 not to confirm the sale since her
case was pending before the Lok Adalat at HighPage 5
5
Court. The copy of the bid sheet did not contain
the full particulars of the auction purchasers.
Thus, she moved an application seeking stay of
delivery of property. On 28.11.2006, the DRT
directed the Recovery Officer not to deliver the
property to the auction purchaser until further
orders. In the meanwhile, the auction purchaser
filed the applications seeking vacation of the
Interim orders. On 22.01.2007, the interim order
was vacated by the DRT in the absence of the
appellant. Thus, the guarantor continued in
possession till 31.1.2007. The auction purchaser
moved an application on 01.02.2007 for recalling
the order dated 22.01.2007. On 5.02.2007, the High
Court Lok Adalat permitted the appellant to
request the DRT to defer the proceedings. An
application made in this regard was dismissed on
22.2.2007. The High Court Lok Adalat held on
5.2.2007 that the guarantor not being a party to
the joint memo to referring the matter to the Lok
Adalat, the decree is not binding on her. While
the guarantor was agitating her right in thePage 6
6
property, the sale conducted is not valid in law,
so she sought for setting aside the sale.
5. In Writ Petition No.17320 of 2007, the auction
purchaser contends that he is the auction
purchaser in the auction conducted by the Recovery
Officer in pursuance of order passed by DRT in OA
No.309 of 2002 and as per Certificate No.3264
issued by DRT on 5.10.2006. The auction purchaser
has purchased the property for Rs.3.27 crores. In
pursuance of the deposit the sale was confirmed on
15.11.2006.
6. The High Court of Karnataka, in the impugned
judgment, has dealt with the issues individually.
The Court had framed issues on the inherent power
of the Lok Adalat, the action of the Debt Recovery
Tribunal (DRT) in deciding the interim
applications filed by the guarantor and the
possession by the auction purchaser and payment of
solatium to the Central Bank of India. On the
issue of the inherent power of the Lok Adalat, the
High Court after relying on a number of decisions
held that as the guarantor was not a party to thePage 7
7
Joint Memo, the decree would not be binding on
her. Regarding the validity of the sale, the High
Court held that the sale was not done as per the
mandate of the sale proclamation which said that
the sale was to be conducted part by part and
stopped as soon as the decree amount was realized.
Thus, the High Court held that the auction was
violative of Order 21 Rule 64. It also rejected
the plea for solatium of 20% of the Central Bank
of India.
7. The learned counsel for the appellant contends
that the respondent cannot seek recalling of the
settlement which was entered into between the
Lender and the Borrower. The appellant contends
that there is no provision under the Legal
Services Authority Act, 1987 (“the Act”, for
short) which entitles the Lok Adalat to set-aside
or adjudicate on its own orders. Under Section 21
of the Act of 1987 the awards of the Lok Adalat
are given the status of a decree of a Civil Court
and finality is given to them. Under Section
21(2), no appeal lies to any Court against thePage 8
8
award. The High Court has erred in upholding that
the settlement entered into between the Bank and
Borrower can be recalled at the behest of the
Guarantor after 3 years of the settlement order
being passed. The High Court has not appreciated
Clause 2 of the Form of Guarantee that was
executed by Respondent No.1 in favour of the Bank.
She cannot escape liability merely on the ground
of being unaware, after 3 years, when a letter
dated 26.12.2006 was written by the learned
counsel for the respondents to the learned counsel
for the Bank, making an offer to settle the matter
by paying Rs.33.50 Lakhs as per award dated
20.03.2004. The High Court has failed to
appreciate that Respondent No.1 and her family
members had availed loan for business purposes.
They were unable to repay the loan amount. Thus,
it is apparent that various proceedings were
initiated by Respondent No.1 with a mala fide and
fraudulent intent to stall the recovery
proceedings. The High Court failed to appreciate
that huge amounts exceeding Rs.52,45,967/- werePage 9
9
due, as on 20.03.2004, to a public institution and
inspite of expiry of more than 10 years the Bank
has not realized the amounts due. The High Court
also failed to appreciate that the sale of
mortgaged property was effected under provisions
of Income Tax (Certificate proceedings) Rules. The
sale was effected as per Rule 60 and Rule 61. The
High Court failed to appreciate that the mortgaged
property comprised of a residential house, car
shed, vacant portico and open space and it was not
possible to sell only a portion thereof. The
learned counsel for the appellant finally
concluded that the High Court was not justified in
rejecting the request made by the appellant that
if for any reason the Court came to the conclusion
that the auction of the property is to be
set-aside, 20 per cent of the bid money should be
awarded to the appellant Bank as solatium.
8. The learned counsel for Respondents contends
that the appellant has suppressed material facts,
that the award passed by the Lok Adalat was
without her consent and further, the salePage 10
10
proceedings were null and void. Originally the
partnership firm called Satyashree Silks had
raised a loan of Rs.17.5 lakhs from Central Bank
of India. The Counsel for the Respondents contends
that she has got nothing to do with the firm. When
the matter was pending before the DRT, N. Surya
Bhagavan, Respondent No.2 signed a Joint Memo for
referring the matter to the Lok Adalat. The
counsel for the Respondents stated that Joint Memo
was not signed by the Respondents. No notice was
issued on the Joint Memo to the Respondents.
Before the Lok Adalat, Respondents alleges that
the Joint Memo was filed whereunder the partners
of Satyashree Silks would repay the sum of
Rs.33,50,000/-. The learned counsel contends that
N. Surya Bhagavan had no authority to enter into a
contract on behalf of the Respondents. After lapse
of two years, the property was attached and notice
of proclamation for sale was published on the
ground of non-payment of amount. It was only at
this juncture that the Respondents came to know of
the settlement. As soon as the answeringPage 11
11
respondent came to know of the proclamation and
auction sale notice of the property, she preferred
a writ petition before the Karnataka High Court,
being W.P. No.6625/2006. The High Court dismissed
the writ petition by its order dated 01.06.2006.
The Respondents thereafter preferred a writ appeal
being W.A. No.899/2006 and the High Court
permitted the Respondents to approach the Lok
Adalat for recalling of the award passed.
9. Learned counsel for the respondents further
contends that when the recall application of the
respondents was pending before the Lok Adalat, the
appellant published sale proclamation. In the
proclamation it was stated specifically that the
property would be put for sale in lots, and it was
further directed that if the amount is realized
from sale of 1st lot, the sale would be stopped
immediately. As per the contention of the
Respondents, this vital document had been
suppressed. As per the sale proclamation itself,
it is clear that the dues as on that day were only
Rs.52,45,967. On that very day the auction wasPage 12
12
finalized for Rs.3.27 crores when actually the
worth of the property was more than 5 crores. The
auction sale was a collusive sale.
10. We have heard the learned counsel for the
parties.
11. We are of the opinion that the questions that
need to be decided by us are regarding the
liability of the guarantor under Section 128 of
the Indian Contract Act, 1872. The legislature has
succinctly stated that the liability of the
guarantor is co-extensive with that of the
principal debtor unless it is otherwise provided
by the contract. This Court has decided on this
question, time and again, in line with the intent
of the legislature. In Ram Kishun and Ors. v.
State of U.P. and Ors., (2012) 11 SCC 511, this
Court has held that “in view of the provisions of
Section 128 of the Contract Act, the liability of
the guarantor/surety is co-extensive with that of
the debtor.” The only exception to the nature of
the liability of the guarantor is provided in thePage 13
13
Section itself, which is only if it stated
explicitly to be otherwise in the Contract.
12. In the case of Ram Kishun (supra), this Court
has also stated that it is the prerogative of the
Creditor alone whether he would move against the
principal debtor first or the surety, to realize
the loan amount. This Court observed:
“Therefore, the creditor has a right to obtain
a decree against the surety and the principal
debtor. The surety has no right to restrain
execution of the decree against him until the
creditor has exhausted his remedy against the
principal debtor for the reason that it is the
business of the surety/guarantor to see
whether the principal debtor has paid or not.
The surety does not have a right to dictate
terms to the creditor as to how he should make
the recovery and pursue his remedies against
the principal debtor at his instance”.
Thus, we are of the view that in the present case
the guarantor cannot escape from her liability as
a guarantor for the debt taken by the principal
debtor. In the loan agreement, which is the
contract before us, there is no clause which shows
that the liability of the guarantor is not
co-extensive with the principal debtor. ThereforePage 14
14
Section 128 of the Indian Contract Act will apply
here without any exception.
13. After a thorough reading of the Form of
Guarantee for Advances & Credit Generally, our
attention has been drawn to Clause 2 where
Respondent No.1, C.L. Vimala and one of her sons
N. Ramesh Babu, have stated under the relevant
part of the clause as under:
“2)……in relation to the subject matter of this
guarantee or any judgement or award obtained
by you against the principal debtor shall be
binding on us….”
14. This Court has held in United Bank of India
v. Bengal Behar Construction Company Ltd. and
others, (1998) 8 SCC 653, that the Clauses in the
letter of guarantee are binding on the guarantors
as follows:
“In view of the above, the question regarding
confirmation of the decree against the
guarantors now needs to be settled. ……………… we
see no reason why the guarantors should not be
made liable under the letters of guarantee,
the terms whereof clearly stipulate that on
the failure of the principal debtor to abide
by the contract, they will be liable to pay
the amount due from the principal debtor by
the appellants. Clause 15 of the letter of
guarantee, in terms states that any action
settled or stated between the bank and the
principal debtor or admitted by the principal
debtor shall be accepted by the guarantors as
conclusive evidence. In view of this
stipulation in the letter of guarantee, once
the decree on admission is passed against the
principal debtor, the guarantors would become
liable to satisfy the decree jointly and
severally.”
(Emphasis supplied)
Thus, we see no reason why the Joint Memo, which
states compromise arrived at between the Central
Bank of India and the principal debtors, would not
bind C.L. Vimla when under Clause (2) she has
admitted that any judgment or award obtained by
the Central Bank of India against the principal
debtor would bind the parties.
15. The mere fact of ignorance cannot be a valid
ground. The respondent, C.L. Vimala and her son,
N.Surya Bhagavan who signed the joint memo, were
residing in the same house. We see no reason why
the Respondent would not know of the joint memo,
when she could have by reasonable means made
herself aware of the proceedings.
16. It appears that respondent No.1 Smt. C.L.
Vimla filed writ petitions one after the other,
being Writ Petition No.6625 of 2006 filed on 1st
June, 2006, and another writ petition, being Writ
Petition No.8186 of 2006, was filed by her two
sons on 20th June, 2006. The said writ petitions
were also dismissed by the High Court. Smt.C.L.
Vimla had life interest of 1/6th share in the
property in question. It is not in dispute that
Smt.C.L. Vimla was residing with her son
respondent No.3 and was under his care and custody
and it appears from the facts that the said
respondent No.3 categorically stated before the
State Legal Services Authority on his behalf and
on behalf of other defendants, including his
mother, the respondent No.1, in respect of the
settlement dated 20th March, 2004. We have further
noticed that the Court on a number of occasions
granted time to deposit the amount to meet the
liabilities of the bank by the respondents. But it
appears that, time and again, they have failed to
comply with the orders.
17. The respondent Nos.3 to 8 who were actual
owners of the property in dispute have remained
ex-parte throughout, i.e. from the date of filingPage 17
17
of Miscellaneous Petition dated 29th April, 2006,
challenging the award dated 20th March, 2004.
Respondent No.1 had the only right of residence in
respect of the property in question. She did not
dispute the fact that she was the guarantor in the
transaction by which her sons took loan from the
Central Bank. It is also not in dispute that the
property was mortgaged with the Bank.
18. We cannot brush aside the fact that respondent
Nos.4, 6 & 7 filed a claim petition before the
Recovery Officer on 4th January, 2007 claiming
their share of balance of sale proceedings after
adjustment of the dues of the Central Bank which
shows that the parties to the dispute have
accepted the award passed by the Lok Adalat. It
appears to us that the High Court did not consider
the said facts and further it has escaped from the
mind of the High Court that the auction purchaser
has purchased the auctioned property for sale
consideration of Rs.3.27 crores and 25% of the
sale consideration was duly paid on 5th October,
2006 and furthermore on 19th October, 2006, thePage 18
18
balance amount of sale consideration was duly paid
by the auction purchaser. We have further noted
that the sale was confirmed on 15th November, 2006.
The sale certificate was also issued in favour of
the auction purchaser after paying the requisite
stamp duty and registration fees which, as pointed
out to us on behalf of the auction purchaser, to
the tune of Rs.30,73,800/-. It is also not in
dispute that auction purchaser was put in
possession of the property and is still in
possession of the property since the sale
certificate was issued and registration was made
in his favour. It is submitted on behalf of the
auction purchaser that he has purchased the
property by availing private borrowing for the
said property and he is paying nearly Rs.5 lakhs
per month as interest. Therefore, in our opinion,
the equity and good conscience also has to play a
role in the matter in question on the given facts
and after considering the conduct of the
respondents (C.L. Vimla and others) in the matter.
In these circumstances, we feel that it would notPage 19
19
be proper for us at this stage to set aside the
sale, as has been done by the High Court without
taking into consideration all these facts.
Further, the High Court has failed to appreciate
these facts and wrongly held that the auction
purchaser is a party to the negligence of the
Recovery Officer and, accordingly, the sale was
set aside. In our opinion, the auction purchaser
had nothing to do in holding the auction. Rather
he deposited the money after bonafidely
participating in the auction and, in fact,
suffered for long time to pay a price by
participating in auction proceedings.
19. In these circumstances, we further noticed
that the principal debtors were not prepared to
pay back the amount to the Bank and did not choose
to defend themselves properly. The conduct of the
principal debtors also cannot be overlooked by us.
20. Accordingly, we set aside the order passed by
the High Court and hold that since the auction
purchaser has already paid the full amount of sale
consideration and is in possession of the property
in question for more than about 8 years, for
equity and good conscience, we do not intend to
interfere with his possession and we, therefore,
set aside the order passed by the High Court, and
allow these appeals.

……………………………………………………J
(J. CHELAMESWAR)
……………………………………………………J
(PINAKI CHANDRA GHOSE)
New Delhi;
April 28, 2015. 
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