Sunday, 27 October 2019

Whether guarantor can waive rights granted under contract Act?


"We are of the view that as the provisions contained in Chapter VII of the Act relating to Indemnity and Guarantee, they deal with one subject and they are to be read together. The liability of the surety as stated in general terms in section 128 of the Act is no doubt coextensive with that of the principal debtor, but this liability is also subject to the terms of the contract; because section 128 of the Act itself specifically provides that the liability of a surety is coextensive with that of the principal debtor unless it is otherwise provided by the contract. Thus the liability of the surety is subject to the terms of the contract as may be arrived at between the parties. The words "unless it is otherwise provided in the contract" occurring in section 128 of the Act will also govern the other provisions contained in Chapter VIII of the Act and enable the surety to give up the rights available to him under sections 133, 134, 135, 139 and 141 of Act. It is a settled legal position of law that a legal right can be given up provided such giving up of a legal rights under any contract is not hit by section 23 of the Act. Section 133 of the Act makes it clear that any variance made in the contract between the principal debtor and the creditor without the consent of the surety, discharges the surety as to the transactions subsequent to variance. This consent of the surety can be obtained either at the time the contract is made between the principal debtor and the creditor to which the surety gives the guarantee for making any change or alteration in the contract to be made or not to claim any right or benefit under Chapter VIII of the Act. In other words, in the surety-bond/guarantee-bond itself the surety can agree to waive his rights available to him under the various provisions contained in Chapter 8 of the act. Such waving of his right by the surety is permissible under sections 133 read with section 128 of the Act."

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

Miscellaneous First Appeal No. 4140 of 2010 (SFC)

Decided On: 25.02.2019

Karnataka State Industrial Investment and Development Corporation Limited Vs  G.C. Lohia and Ors.

Hon'ble Judges/Coram:
Ravi V. Malimath and B.M. Shyam Prasad, JJ.

Citation: AIR 2019 Karn 80


1. The appellant, a company registered under the Indian Companies Act, 1956 which is wholly owned by the Government of Karnataka and declared as a State Financial Corporation under section 31(1)(aa) of the State Financial Corporation Act, 1951 (for short, 'the Act'), has preferred this appeal impugning the order dated 28.1.2010 in Misc. Petition No. 96 of 2000 on the file of the I Addl. District and Sessions Judge, Mysuru (for short, 'the District Judge').

2. The appellant filed the petition in Misc. Petition No. 96 of 2000 under Section 31(1)(aa) of the Act against the Respondent Nos. 1 to 5 to pay a total sum of ` 3,25,98,389.65 as of 20.06.1999 with contractual interest till the date of payment in enforcement of the different Deeds of Personal Guarantee executed by them. The appellant contended that it extended financial assistance of ` 85,00,000/- to M/s. Dunford Engineering Industries Limited vide its Sanction Letter dated 21.3.1985. Similarly, the appellant extended financial assistance of ` 79,00,000/- to M/s. CSI Fabrics Private Limited vide its another Sanction Letter dated 21.3.1985. These two companies executed simultaneously but separate loan agreements, hypothecation agreements and registered mortgage deeds securing the financial assistance extended by the appellant. The respondent Nos. 1 to 5 executed separate Deeds of Guarantee securing the aforesaid financial assistance extended by the appellant to M/s. Dunford Engineering Industries Limited and M/s. CSI Fabrics Private Limited. The details of the Deeds of Personal Guarantee executed by the respondent Nos. 1 to 5 are as follows:



Thereafter, M/s. Dunford Engineering Industries Limited and M/s. CSI Fabrics Private Limited were amalgamated under a Rehabilitation Scheme approved by the Board for Industrial and Financial Reconstruction (for short 'BIFR') in the year 1990 and the respondent No. 6 was incorporated as an amalgamated company. The Appellant, in terms of such Rehabilitation Scheme sanctioned ` 1,28,00,000/- towards repayment of the owner of the amount due towards principal amount by the aforesaid two amalgamated companies, ` 97,99,600.38 towards conversion of overdue interest as a new loan and a sum of ` 36,00,000/- as an additional term loan to the respondent No. 6. The respondent No. 1 and respondent No. 3 executed separate Deeds of Guarantee dated 30.3.1991 and 10.4.1991 guaranteeing the repayment of such further financial assistance.

3. The appellant, at the request of the respondent No. 6, rescheduled the repayments of the outstanding in November, 1992 and May, 1995. But, the respondent No. 6 failed to repay the dues as per such re-scheduling. Therefore, the Operating Agency appointed by BIFR, the State Bank of India, applied for change in the management of the respondent No. 6. The BIFR by its order dated 4.7.1996 directed the respondent No. 6 to pay the outstanding to the appellant in six installments. The respondent No. 6 impugned the order dated 4.7.1996 before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR), but this appeal was rejected.

4. When the respondent No. 6, despite opportunity to pay the outstanding to the appellant, failed in its obligation, the appellant filed an application before the BIFR seeking permission to invoke the personal guarantees executed by the respondent No. 1 to 5 as aforesaid, and the BIFR vide its order dated 31.3.1997 allowed the application permitting the appellant to invoke such Bank Guarantees. Under these circumstances, the appellant caused legal notice dated 12.7.1997 to the respondent Nos. 1 to 5 demanding payment of the outstanding. The respondent Nos. 1 to 6, despite receipt of this legal notice dated 12.7.1997, did not respond or repay the amount outstanding. Therefore, the appellant by its order dated 13.3.1998 resolved to take over the assets of the respondent No. 6. Accordingly, the assets of the respondent No. 6 were taken over by the appellant on 13.3.1998. The Company Court in Comp No. 83 of 1997, on the recommendations of the BIFR, ordered winding up of respondent No. 6 by its order dated 31.3.1999. As the respondent No. 6 continued to default in its obligation to discharge the financial assistance extended by the Appellant as aforesaid, the present petition was being filed.

5. The respondents resisted the petition filed by the appellant contending inter alia that all the respondents were not parties to each of the Deeds of Guarantee executed in the year 1985 and 1986 in favour of M/s. Dunford Engineering Industries Limited and M/s. CSI Fabrics Private Limited, and neither were they parties to the amalgamation proceedings before the BIFR or the AAIFR or the proceedings before the Company Court. The respondent Nos. 1 to 5 were also not parties to the transaction involving grant and disbursement of additional loans to respondent No. 6. The guarantees offered by these respondents were not Continuing Guarantees and as such, the guarantees were time barred. The BIFR vide its order dated 31.3.1997 directed the Operating Agency, M/s. SBI to value the assets and liabilities of the respondent No. 6. The auditor/evaluator valued the assets of respondent No. 6 at ` 7,55,18,000/- and its liabilities at ` 7,33,20,000/-. Therefore, the value of the assets of the respondent No. 6 was much higher than its total liabilities even as of the year 1998. The appellant took over the assets of the respondent No. 1 in defiance of the orders of the BIFR, and the appellant by its willful inaction over a period of five and a half years allowed depletion in the value of the assets of the respondent No. 1. If the appellant were diligent and had taken necessary measures to protect the assets of the respondent No. 6, the appellant need not have invoked guarantees against these respondents.

6. The appellant examined one of its Zonal Manager as P.W. 1 in support of the petition and marked different exhibits including the sanction letter, loan agreements, hypothecation agreements, mortgage deeds and deeds of guarantee, proceedings of the appellant dated 13.03.1998 for taking possession. The respondent No. 1 examined himself as R.W. 1, and also a Registered Valuer (Mr. C.A. Krishna Rangaraju from M/s. Rangaraju Associates) and a Chartered Accountant (Mr. R.A. Srinivas from M/s. R.A. Rajagopal) as R.W. 2 and R.W. 3. The learned District Judge formulated the following questions for its consideration:

"1) Whether the petition is barred by limitation, and

2) Whether the petitioner proves that the respondents 1 to 5 are jointly and severally liable to pay the amount of ` 3,25,98,389.65 as on 20.6.1999 with contractual rate of interest till repayment."

7. The learned District Judge considered the aforesaid two questions simultaneously. As against the respondent No. 2, 4 and 5, the learned District Judge dismissed the petition on the following grounds: (1) the petition was time barred, (2) their liability was discharged as envisaged under the provisions of section 133 of the Indian Contract Act, 1872 (for short, 'the Contract Act') because there was variance in the original contract concluded by the appellant with the respondent No. 6 without the consent of these respondents, and (3) the appellant by its willful inaction over a period of time had caused depletion in the value of the assets of the respondent No. 6 and impaired these respondents' rights as sureties against the respondent No. 6, and therefore, the obligation of the these respondents stood discharged even as provided for under the provisions of section 139 of the Contract Act. However, as against respondent Nos. 1 and 3, the learned District Judge dismissed the petition only on the ground that the appellant by its willful inaction as aforesaid had impaired the rights of even the respondent Nos. 1 and 3 as sureties against respondent No. 6, and therefore, the obligation of these respondents stood discharged as provided for under the provisions of section 139 of the Contract Act.

8. The learned counsel for the appellant contended that the impugned order insofar as it rejects the petition against the respondent Nos. 2, 4 and 5 on the ground of limitation is contrary to law. The assets of respondent No. 6 were sold only in the year 2006 and the appellant was able to recover part of the amount due only after such sale in the year 2006, however the petition is filed in the year 2000. Therefore, the petition could not have been dismissed on the ground of limitation even as against these respondents. Further, the finding that the appellant had been willfully negligent in not taking necessary measures to protect the assets of respondent No. 6, and because of such willful inaction, the assets of the respondent No. 6 were sold for a depleted value is perverse and is not substantiated by the material on record. Furthermore, the learned District Judge erred in accepting the valuation reports relied upon by the respondents to buttress their claim that the assets of the respondent No. 6, as of the year 1998, was ` 7,55,18,000/- as these reports are uncorroborated.

9. The learned counsel for the appellant has relied upon multiple decisions in support of his canvass. On the question of discharge of the Guarantor under section 133-134, 139-141 of the Contract Act, the learned counsel has relied on the following decisions: State of Madhya Pradesh vs. Kaluram MANU/SC/0068/1966 : AIR 1967 SC 1105, P. Janakiram Chetty vs. Punjab National Bank MANU/KA/0120/1968 : AIR 1968 Mys 56, State Bank of India vs. Madras Bolts and Nuts MANU/SC/1208/1998 : (1998) 8 SCC 433 and Amrit Lal vs. State Bank of Travancore MANU/SC/0001/1968 : AIR 1968 SC Page 1432. On the question of limitation for initiation of proceedings against a guarantor, the learned counsel has relied upon Mrs. Margaret Lolita Samuel vs. Indore Commercial Bank MANU/SC/0292/1978 : AIR 1979 SC 102, and Karnataka Bank vs. Gajanan MANU/KA/0084/1977 : 1976 (2) Karnataka Law Journal Page 37.

10. Further, the learned counsel for the appellant, on the question of discharge of a guarantor limited to the extent of the loss of surety, has relied upon, amongst others, State of Saurashtra vs. Chittaranjan MANU/SC/0006/1980 : AIR 1980 SC 1528. The learned counsel, on the question of a guarantor being discharged because the principal debtor is discharged under the provisions of the Companies Act or the Insolvency Act of the Creditor, has relied upon the decisions in MSEB vs. Official Liquidator, High Court of Kerala, Ernakulam MANU/SC/0024/1982 : (1982) 3 SCC 358 and Industrial Finance Corporation of India vs. Cannanore Spinning and Weaving Mills MANU/SC/0317/2002 : AIR 2002 SC 1841.

11. The learned counsel for the respondents, while arguing in support of the impugned judgment, emphasized that it is undisputed that the respondent Nos. 2, 4 and 5 were not parties to the documents or proceedings after they executed the Deeds of Guarantee in the year 1985 and 1986. However, the present petition is filed after a lapse of about 15 years from the date of execution of the aforesaid deeds. As such, the petition as against respondent Nos. 2, 4 and 5 were indeed barred by limitation as concluded by the learned District Judge. The respondent Nos. 2, 4 and 5 had executed Deeds of Guarantee only insofar as the financial assistance's extended by the appellant to M/s. Dunford Engineering Industries Ltd. and M/s. CSI Fabrics Private Limited. When in the year 1990, after the proceedings before the BIFR, these two companies were amalgamated, the appellant entered into further documents with the amalgamated company (the respondent No. 6), and the appellant rescheduled the loan and granted additional financial assistance, the original terms of loan/financial assistance stood varied. Neither the respondents consented to the variation in the original terms nor the appellant sought for the consent of these respondents. Therefore, in terms of section 133 of the Contract Act, the respondent Nos. 2, 4 and 5 were entitled for discharge of their obligations under the Deeds of Guarantee executed by them in the year 1985 and 1986.

12. The learned counsel for the respondents also emphasized that it was undisputed that the appellant had taken possession and custody of the assets of the respondent No. 6 in 1998. The assets and liabilities of respondent No. 6 were valued at the instance of the Operating Agency (State Bank of India) as per the orders of the BIFR on 31.03.1997 by independent evaluators. The valuation reports of these evaluators were produced and marked as exhibits. The appellant had filed its own report on the valuation of the assets and liabilities of the respondent No. 6 as of the year 2000. The value of the assets of the respondent No. 6 in the year 2000, in comparison to the valuation as of the year 1997, was substantially lower. In view of the admitted fact that the appellant had taken possession of the assets and liabilities of the respondent No. 6 in the year 1998 and the aforesaid circumstances, the respondents were able to establish the decrease in the valuation of the assets of the respondent No. 6. As such, the respondents had established necessary ingredients as required under the provisions of section 139 of the Contract Act viz., the impairment of the rights of the respondents as sureties against the respondent No. 6 because of the omissions on the part of the appellant. Therefore, there was no irregularity in the impugned order.

13. The learned counsel for the appellant has relied upon multiple decisions on different questions, including the contentions that a guarantor would not be discharged merely because the borrower (respondent No. 6) could be discharged because of the proceedings under the provisions of the Companies Act or the Insolvency Act and that a guarantor would be entitled to be discharged only to the extent of loss actually suffered by the guarantor. However, in view of the pleadings before the first court viz., the learned District Judge, the reasons assigned in the impugned order and the rival submissions before this court, the dispute would be in a narrow compass. Therefore, the following questions would arise for consideration by this court in this appeal.

a. Whether the learned District Judge has erred in holding that the petition under section 31(1)(aa) of the Act filed on 11.7.2000 was barred by limitation as against respondent Nos. 2, 4 and 5.

b. Whether the learned District Judge has erred in concluding that the obligation of the respondent Nos. 2, 4 and 5 as Guarantors vide the respective Deeds of Guarantee stood discharged as provided for under section 133 of the Contract Act.

c. Whether the learned District Judge has erred in concluding that the obligation of all the respondents as Guarantors vide the respective Deeds of Guarantee stood discharged as provided for under section 139 of the Contract Act.

14. The respondent Nos. 1 and 2 have admittedly executed the Deed of Guarantees dated 21.03.1985 (Exhibit P5) insofar as the financial assistance extended by the appellant to M/s. Dunford Engineering Industries Limited. Similarly, the respondent Nos. 3, 4 and 5 have executed the separate Deed of Guarantee dated 21.03.1985 (Exhibit P6) insofar as the financial assistance extended by the appellant to M/s. CSI Fabrics Private Limited. Further, after M/s. Dunford Engineering Industries Limited and M/s. CSI Fabrics Private Limited were amalgamated in terms of the order of BIFR, the respondent Nos. 1 and 3 have executed two Deeds of Guarantee dated 30.03.1991 and 10.04.1991 (Exhibit P8 and 10) as regards the additional loan extended to the respondent No. 2, the amalgamated company. A perusal of the terms of Deeds of Guarantee, which are the appellant's Standard Form Contracts, indicate that though the terms of these agreements are general and omnibus, they are also categorical. Each of the respondents, though under separate Deeds of Guarantee, have agreed and accepted inter alia that they shall on demand pay to the appellant whole of such principal sum, interest, commitment charges and/or other moneys, which shall be due to the appellant and they will indemnify and keep indemnified the appellant against all loss of principal sum, interest, commitment charges or other moneys secured under the security documents and all costs, charges and expenses whatsoever incurred by reason of any default on the part of the company or in filing any legal proceedings against the company and/or the guarantors for the recovery of the aforesaid sum. Further, the respondents have also accepted that the said agreements are being executed as continuing guarantees.

15. The Hon'ble Apex Court in the case of Syndicate Bank vs. Channaveerappa Beleri and other MANU/SC/2032/2006 : 2006 (11) SCC 506 has considered the meaning of the phrase "on demand" and held that when a contract of guarantee is clear that the guarantor's liability would arise only when the demand is made, the right to sue to the creditor accrues only when a demand for payment is made by the creditor and is refused by the guarantors. When a demand is made requiring payment within a stipulated period, the breach occurs or the right to sue accrues, if payment is not made within the stipulated period. If while making the demand for payment, no period is stipulated within which the payment should be made, the breach occurs or the right to sue accrues when the demand is served on the guarantor. The Hon'ble Apex Court has concluded thus:

"We have to however enter a caveat here. When the demand is made by the creditor on the guarantor, under a guarantee which requires a demand, as a condition precedent for the liability of the guarantor, such demand should be for payment of a sum which is legally due unrecoverable from the principal debtor. If the debt had already become time-barred against the principal debtor, the question of creditor demanding payment thereafter, for the first time, against the guarantor would not arise. When the demand is made against the guarantor, if the claim is a live claim (that is, a claim which is not barred) against the principal debtor, limitation in respect of the guarantor will run from the date of such demand and refusal/non-compliance. Where guarantor becomes liable in pursuance of demand validly made in time, the creditor can sue the guarantor within 3 years, even if the claim against the principal debtor gets subsequently time barred'".
16. It is undisputed that in this case the appellant made a demand on the respondents vide its legal notice dated 12.7.1997 calling upon the respondents, including the respondent No. 2, 4 and 5, to pay the amounts due. Though the legal notice dated 12.7.1997 and the acknowledgements as regards service of such notice on the respondents are not marked as exhibits by the appellant, the witness - P.W. 1, has categorically stated in his evidence-in-chief (paragraph 26) that office copy of the legal notice dated 12.7.1997 and the postal acknowledgement signed by respondent Nos. 1, 2 and 4 for receipt of the legal notice were part of the Court's record, and similarly, the un-served registered postal envelopes in respect of respondent Nos. 3 and 5 were also part of the court records. The respondents, more specifically respondent Nos. 2, 4 and 5, have disputed neither the issuance of the legal notice dated 12.7.1997 nor the receipt of the same.

17. As declared by the Hon'ble Supreme Court in Syndicate Bank vs. Channaveerappa Beleri and other, the limitation for the creditor to sue a guarantor commences, where the period is stipulated in the demand, from the date of refusal to pay or from the date of stipulated for payment; in the event no time stipulated in the demand, from the date of receipt of the demand. In view of the undisputed fact that the appellant caused legal notice dated 12.7.1997 and the same were either received or refused by the respondents, the significant date would be 12.7.1997. The appellant had to file the petition under section 31(1)(aa) of the Act, in any event, within 3 years from this date. It's been held by the Hon'ble Supreme Court in Maharashtra State Financial Corporation vs. Ashok K Agarwal and Others MANU/SC/1724/2006 : AIR 2006 SC 1584 that the limitation for filing the petition under section 31 of the Act would be 3 years as provided under article 137 of the Limitation Act, 1963. The present petition is filed under section 31(1)(aa) of the Act on 11.7.2000. As such, the petition is filed by the appellant within 3 years from 12.7.1997.

18. Further, it is nobody's case that the State Financial Corporation's claim against the respondent No. 6 (the principal borrower-debtor) was time barred, and in fact, it cannot be because admittedly the sale of the assets of the respondent No. 2, pursuant to the orders of the Company Court, was in the year 2008 i.e., after the initiation of the present proceedings. The learned District Judge has not considered the aforesaid circumstances and has concluded that the petition as against respondent Nos. 2, 4 and 5 had to be rejected as being time-barred because the appellant had filed the petition invoking the Deeds of Guarantee after a lapse of 15 years from the date these deeds were executed. Therefore, in the considered opinion of this court, the learned District Judge has erroneously concluded that the petition under section 31(1)(aa) of the Act was liable to be dismissed as against respondent Nos. 2, 4 and 5 on the ground that such petition is time-barred.

19. The other plank of the defense of the respondent Nos. 2, 4 and 5 is that they executed the respective Deeds of Guarantee on 21.3.1985 (Exhibits P5 & P6) and thereafter they have not signed any further deed or document. The Deeds of Guarantee dated 21.3.1985 are executed to secure the financial assistance extended to M/s. Dunford Engineering Industries Ltd. and M/s. CSI Fabrics Private Limited respectively. Thereafter, consequent to the orders of the BIFR in the proceedings in No. 218/1988 approving Rehabilitation Scheme, M/s. Dunford Engineering Industries Ltd. and M/s. CSI Fabrics Private Limited are amalgamated, and pursuant to such Rehabilitation Scheme, the appellant extended further financial assistance to the amalgamated company, respondent No. 6. The appellant secured further documents, including Deeds of Guarantee from respondent No. 1 and 3. Even thereafter, there have been multiple proceedings before BIFR, AAIFR and Company Court, but these respondents are not parties to such proceedings. These circumstances, and the grant of further financial assistance to respondent No. 6 based on the further guarantee offered by respondent No. 1 and 3, has resulted in variance of the original terms of financial assistance extended to the aforesaid two companies which are ultimately amalgamated. The respondent Nos. 2, 4 and 5 have not consented to such variance, and the appellant has also not sought for the consent of these respondents. As such, there was variance of the original terms of contract of guarantee without the consent of respondent Nos. 2, 4 and 5. Therefore, the respondent Nos. 2, 4 and 5 were discharged of their obligations as guarantors under the respective Deeds of Guarantee executed by them in the year 1985 in terms of section 133 of the Contract Act.

20. Therefore, the question would be whether respondent Nos. 2, 4 and 5 are entitled to claim a discharge from their liabilities as guarantors on the ground of variance of the original terms between the appellant and M/s. Dunford Engineering Industries Private Limited and M/s. CSI Fabrics Private Limited, which are later amalgamated into respondent No. 6. This question will also have to be examined in the context of the terms contained in the respective Deeds of Guarantee executed by the aforesaid respondents. A coordinate bench of this court in T. Raju Setty vs. Bank of Baroda MANU/KA/0013/1992 : AIR 1992 Kar 108, while examining the question whether it is open to contract outside the provisions of Chapter VIII, which relate to Guarantees, has held thus:

"We are of the view that as the provisions contained in Chapter VII of the Act relating to Indemnity and Guarantee, they deal with one subject and they are to be read together. The liability of the surety as stated in general terms in section 128 of the Act is no doubt coextensive with that of the principal debtor, but this liability is also subject to the terms of the contract; because section 128 of the Act itself specifically provides that the liability of a surety is coextensive with that of the principal debtor unless it is otherwise provided by the contract. Thus the liability of the surety is subject to the terms of the contract as may be arrived at between the parties. The words "unless it is otherwise provided in the contract" occurring in section 128 of the Act will also govern the other provisions contained in Chapter VIII of the Act and enable the surety to give up the rights available to him under sections 133, 134, 135, 139 and 141 of Act. It is a settled legal position of law that a legal right can be given up provided such giving up of a legal rights under any contract is not hit by section 23 of the Act. Section 133 of the Act makes it clear that any variance made in the contract between the principal debtor and the creditor without the consent of the surety, discharges the surety as to the transactions subsequent to variance. This consent of the surety can be obtained either at the time the contract is made between the principal debtor and the creditor to which the surety gives the guarantee for making any change or alteration in the contract to be made or not to claim any right or benefit under Chapter VIII of the Act. In other words, in the surety-bond/guarantee-bond itself the surety can agree to waive his rights available to him under the various provisions contained in Chapter 8 of the act. Such waving of his right by the surety is permissible under sections 133 read with section 128 of the Act."
21. Further, a Division Bench of Bombay High Court in Mukesh Gupta vs. SICOM Limited, Mumbai MANU/MH/0714/2003 : AIR 2004 Bombay 104, after a conspectus reference to the decisions on the question by the different High Courts, including the aforesaid decision of a coordinate bench of this Court, has concluded that the rights conferred on a guarantor under Sections 133, 135 or 141 of the Act could be waived by specific agreement in a deed of guarantee, and such an agreement would amount to consent within the meaning of the provision of aforesaid clause of the Contract Act. In view of this settled position, it would be imperative to examine whether the respondent Nos. 2, 4 and 5 have agreed to waive their rights under section 139 of the Contract Act.

22. The terms of contract of guarantee (Deeds of Guarantee as per Ex. P5 & Ex. P6) are general, but categorical. In Clause 2 of these Deeds of Guarantee the respondent Nos. 2, 4 and 5 have agreed that the appellant shall have the fullest liberty without in any way affecting the guarantee and discharging these respondents from their liability if there were to be, amongst others, postponement from time to time the exercise of powers conferred on the appellant, or revision/modification/extension of the schedule of repayment of the loan or in postponement of the realization of the amount due to the appellant or any forbearance by the appellant to have recourse to the remedies available to it. This is in addition to the specific covenant that the guarantee offered shall not be determined or in any way affected or prejudiced by any absorption or amalgamation or reconstitution or alteration in the status or in the constitution of the respondent No. 6 or the liability of respondent No. 6, is suspended or taken away because of any reason or for the reason that respondent No. 6 is wound up.

23. These covenants leave no room for doubt that the respondents No. 2, 4 and 5 waived all their rights to seek discharge on the ground of variance as contemplated under Section 133 of the Contract Act. As such, the respondent Nos. 2, 4 and 5 cannot plead that there was variance, without their consent, of the original terms agreed between the appellant and the company, for whose benefit they executed the Deeds of Guarantee, which stood amalgamated with another Company because of the proceedings before BIFR or there was subsequent rescheduling of repayment of loan and grant of additional facility to the amalgamated company. However, the learned District Judge has, without considering these circumstances in the light of the settled law, concluded that the respondent Nos. 2, 4 and 5 would be entitled for discharge of their obligation under the Deeds of Guarantee as envisaged under section 133 of the Contract Act. As such, the District Judge has erred in arriving at this conclusion.

24. The finding of the learned District Judge that the respondents are also entitled for discharge under Section 139 of the Indian Contract Act, 1982 is premised on the finding that the valuation of the assets and liabilities of respondent No. 6, as of 1997, were ` 7,55,18,000/- and ` 7,32,20,000/- respectively, and definitely much higher than the value for which the assets were ultimately sold. The value of assets of respondent No. 6, as of the year 1997, was higher than its liabilities. But the assets of respondent No. 6, even as evaluated at the instance of the appellant in the year 2000, was ` 1,18,00,000/-. The appellant admittedly had taken over possession and control of the assets of respondent No. 6 in the year 1997. Therefore, the appellant, by its willful inaction, was responsible for the depletion in the value of assets of respondent No. 6 to the detriment of the rights of these respondents as against respondent No. 6.

25. It has already been concluded that the respondent Nos. 2, 4 and 5 have, as agreed and accepted by them in the respective deeds of guarantee executed by them, waived their right to claim discharge under section 133 of the Contract Act. The same would apply even insofar as their case that they are entitled for discharge under section 139 of the Contract Act as such terms also encompass the situation pleaded by them for discharge as provided for under section 139 of the Contract Act. Similarly, the defense in this regard would also not be available to respondent Nos. 1 and 3 who have executed separate deeds of guarantee that are similar in terms.

26. Even otherwise, if the respondent Nos. 1 to 5 are to succeed on this ground, it was incumbent upon them to place on record, by way of cogent evidence, that value of the assets of the respondent No. 6 was indeed ` 7,55,18,000/- as of the year 1997. The respondents, except the testimony of R.W. 1 and the evidence of evaluators namely R.Ws. 2 and 3, have not placed any material on this record. Mere fact that this evaluation as stated by R.Ws. 2 and 3 have been done at the instance of the Operating Agency, M/s. State Bank of India, appointed by BIFR cannot lend credence to such evaluation unless necessary material by way of cogent evidence is placed on record to corroborate such evaluation. Therefore, the premise on which the learned District Judge has found that the appellant by their willful inaction have caused the depletion in the value of the assets of respondent No. 6 would be fallacious. Therefore, the District Judge has erred in holding that the respondents were entitled for discharge of all their obligations under Section 139 of the Contract Act.

27. Accordingly, questions formulated for consideration viz., whether the petition filed by the appellant under Section 31(1)(aa) of the Indian Contract Act could be dismissed against the respondent Nos. 2, 4 and 5 as being time barred, whether the respondent Nos. 2, 4 and 5 would be entitled for discharge under Section 133 of the Indian Contract Act 1872, and whether respondent Nos. 1 to 5 would be entitled for discharge under Section 139 of the Contract Act are held against the respondents and in favour of the appellant. Further, in view of the decision of the Hon'ble Supreme Court in Everest Industrial Corporation and Others vs. Gujarat State Financial Corporation MANU/SC/0067/1987 : (1987) 3 SCC 597, the appellant would be entitled to enforce the liabilities of the respondent Nos. 1 to 5 under the respective deeds of guarantee executed by each of them with contractual interest. Therefore the following order:

(a) The appeal is allowed and the impugned order dated 28.1.2010 in Misc. Petition No. 96 of 2000 on the file of the II Addl. District Judge, Mysuru is set-aside,

(b) the petition filed by the appellant under section 31(1)(aa) of the State Financial Corporation Act 1951 in Misc. Petition No. 96 of 2000 on the file of the II Addl. District Judge, Mysuru is allowed declaring that the appellant shall be entitled to enforce the liabilities of the respondents 1 to 5 under respective Deeds of Guarantee executed by them.

(c) No costs.


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