Meduri Sri Venkata Bhaskara Satyanarayana Murthy v. State Bank of Mysore, Rajahmundry Branch & Ors.

Judgment

(Per AGR, J) These appeals are directed against common order, dated 22-02-2000 passed in O.S.Nos.21, 22 and 23 of 1989 on the file of the Subordinate Judge, Rajahmundry, respectively whereby and whereunder the suits were decreed. The appellant in all the appeals is one and the same, who is defendant No.5, 6 and 7 respectively in the three suits. For convenience sake, the parties hereinafter will be referred to as they are arrayed in the suits.

2. The brief facts, which are necessary for the disposal of these appeals, are as under: In O.S.No.21 of 1989, the first defendant is a partnership firm dealing in the business of distribution of cattle feed and welding electrodes and other chemicals and defendant Nos.2 to 4 are its

partners. As per the agreement, dated 20-07-1985, the plaintiff-bank sanctioned cash credit lock and key facility limit of Rs.1,00,000/- for the business investment of the first defendant firm, against the pledge of the stock in trade in the godown of the first defendant firm and the amount advanced shall be repaid with interest at 1% over RBI rate with minimum of 17.5% per annum. On 20-07-1985 a take delivery letter and godown certificate were also furnished by the first defendant to the plaintiff-bank in accordance with the terms relating to the lock and key loans, and on the same day cash credit account was opened in the name of the first defendant firm in the books of the plaintiff-bank and Rs.98,600/- was withdrawn by the first respondent firm on the same day. However, defendants 1 to 4 did not adhere to the terms of repayment programme and committed default inspite of repeated demands made by the plaintiff-bank. On 31-12-1985 and 14-10-1986, the first defendant’s managing partner came to the plaintiff-bank and executed a debt confirmation letters acknowledging its liability under the loan account as on the respective dates. Thereafter, defendant No.5 approached the plaintiff-bank on 06-07-1987 and stated that he is offering himself as guarantor for all the amounts due to the plaintiff- bank under the above mentioned loan account and other loan amounts due to the bank from M/s. Auto Engineering Corporation, Rajahmundry, M/s. G.S. Chalapathi Rao Automobiles, Rajahmundry, and the amount due to the plaintiff-bank under the temporary overdraft amounts from G.T.C. Ramakrishnarao, G.V.D. Mallikarjun, Smt. B. Sathyavathi and Sri M.V. Subrahmanyam and in confirmation of the said guarantee, defendant No.5 has executed a letter of guarantee, dated 06-07-1987 and duly got it attested by the Notary Public, Rajahmundry and delivered the same to the plaintiff-bank. On 30-06- 1988, defendant No.3 came to the plaintiff-bank and executed the debt confirmation letter on behalf of the first defendant firm acknowledging its liability at Rs.1,63,899-60 ps. as on that date. After the execution of the letter of guarantee, dated 06-07-1987, the plaintiff-bank demanded defendant No.5 several times for repayment of the amount due under the loan account, but he did not respond. Therefore, the plaintiff-bank tried to auction the stock in the godown as per the agreement, but nobody turned up to participate in the auction as the stock is not in good condition and it became useless due to the negligence and indifference of the defendants and as such, the plaintiff-bank could not realise any amount by auction of the stock. Therefore, the plaintiff- bank filed the suit seeking decree against the in its favour against the assets of the first defendant firm and against defendant Nos.2 to 5 and their property jointly and severally for recovery of Rs.1,80,896-30 ps with subsequent interest and to order seizure and sale of the stocks in the plaint schedule godown in enforcement of the charge thereon and for costs.

3. Defendant Nos.3 and 4 filed written statement denying the averments made by the plaintiff-bank in the plaint. Defendant Nos.1 and 2 filed a memo adopting the written statements filed by defendant Nos.3 and 4.

4. Defendant No.5 filed a separate written statement taking a plea that the suit is not maintainable against him and he is not a necessary party to the suit. He denied about the execution of the letter of guarantee, dated 06-07-1987 and stated that he is a man of ordinary means and not conversant with the bank procedure. He admitted that the fourth defendant is a friend of him and he represented that he did business with others in three firms and they have taken loans from the plaintiff-bank and sustained loss and the plaintiff-bank would sanction further loans to revive the business if suitable personal and property securities are given and requested him to stand as guarantee for the loans to be advanced in future by the plaintiff-bank. Accepting the same, he met the branch manager and the Assistant Administrative Officer of the plaintiff-bank and verified the statement of the fourth defendant, and both of them informed that they would certainly sanction the additional credit facilities, which was already under process, and the first defendant firm and others are ready to repay the existing dues in the normal course and suggested him to give personal and property security for the future loans to be sanctioned and accordingly, he agreed to stand as guarantee personally and also to create equitable mortgage in respect of his properties for the future advances to be given by the plaintiff-bank to the first defendant firm and its sister concerns. As the plaintiff-bank did not advance any further amount to the first defendant firm and its sister concerns after the letter of guarantee, dated 06-07-1987, transaction of personal guarantee remained incomplete which cannot be acted upon. The letter of guarantee, dated 06-07-1987 is ineffective, invalid and unenforceable. The terms and conditions of the letter of guarantee are vague, arbitrary and artificial which are unenforceable. Therefore, there is no cause of action against him in the suit.

5. In O.S.No.22 of 1989, the first defendant is a partnership firm and defendant Nos.2 to 5 are its partners and defendant No.6 is the guarantor for defendant Nos.1 to 5. At the request of the first defendant firm, as per the letter dated 09-06-1985, the plaintiff-bank sanctioned cash credit lock and key limit of Rs.1,00,000/-, against the pledge of automobiles spare parts and two documentary demand bills purchase limit of Rs.1,00,000/-. On the same day, cash credit account was opened in the name of the first defendant firm in the books of the plaintiff-bank and having withdrawn the entire sanctioned amount on 19-06-1985, the first defendant firm and other defendants did not make any repayment inspite of the demands made by the plaintiff’s officials. The first defendant firm has given debt confirmation acknowledgements to the plaintiff-bank on 31- 12-1985, 04-10-1986 and 30-06-1988 admitting its liability for the amounts due as on the respective dates. Due to indifference attitude of the defendants, the plaintiff-bank tried to auction the stocks in the godown of the first defendant firm, but nobody came forward to bid as the stock became useless. On 05-06-1986, the first defendant firm gave a letter debt confirmation letter acknowledging liability as on that date and also acknowledging about the return of 26 bills, and stating that they would furnish equitable mortgage of the properties by defendant No.6 towards security for the loan. On 06-07-1987, defendant No.6 executed a letter of guarantee in favour of the plaintiff-bank in respect of the amounts due under the two loans of the first respondent firm. Therefore, the plaintiff-bank filed the suit to pass a decree in its favour against the assets of first defendant firm and against defendants 2 to 6 personally and their properties jointly and severally for recovery of Rs.4,68,259-96 ps with subsequent interest and to order sale of the stock of all the automobile parts and accessories etc in the plaint schedule godown in enforcement of the charge thereon and for costs.

6. Defendant Nos.1, 2, 4 and 5 filed written statement denying the averments made by the plaintiff-bank in the plaint. Defendant No.3 filed a memo adopting the written statement filed defendant Nos.1, 2, 4 and 5.

7. Defendant No.6 filed a separate written statement reiterating the pleas taken in the written statement filed in O.S.No.21 of

8. In O.S.No.23 of 1989, the first defendant is a partnership form and defendant Nos.2 to 5 are its partners. Defendant Nos.6 and 7 are their guarantors. At the request of the first defendant firm, as per the letter dated 09-02-1985, the plaintiff-bank sanctioned financial assistance of Rs.9.5 lakhs against the pledge of the stock in trade in the godown of the first defendant firm. On 06-05-1985, the first defendant firm availed cash credit facility from the plaintiff-bank and did not make any repayment of the amount. On 31-12-1985, 04-10- 1986 and 30-06-1988, the first defendant firm executed debt confirmation letter acknowledging its liability for the amounts due on the respective dates. On 06-07-1987, defendant No.7 came to the plaintiff-bank and executed a letter of guarantee in favour of the plaintiff-bank in respect of the amounts due under the three types of loans of the first defendant firm. Therefore, the plaintiff-bank filed the suit seeking a decree in its favour against the assets of the first defendant firm and defendant Nos.2 to 7 personally and against their properties jointly and severally for recovery of Rs.7,77,035-92 ps with subsequent interest and to order seizure and sale of the stock in the plaint schedule godown in enforcement of the charge thereon and for costs.

9. The defendant Nos.1, 2, 4 and 5 filed written statement denying the averments made by the plaintiff-bank in the plaint.

10. The defendant No.7 filed separate written statement reiterating the pleas taken by him in the written statement filed in O.S.No.21 of 1989.

11. Basing on the averments made in the plaint and the pleas taken in the written statements, the lower Court framed a common issue in all the suits as to whether D-5, D-6 and D-7 is the guarantee of D-1 to D-4, D-1 to D-5, and D-1 to D-6 respectively, in the respective suits?

12. During the course of trial, on behalf of the plaintiff- bank, PWs.1 to 5 were examined and Exs.A-1 to A-47 were got examined. On behalf of the defendants, DWs.1 and 2 were examined and Exs.B-1 to B-3 were got marked.

13. After considering the arguments and the evidence adduced by both parties, the lower Court held that Ex.A-40, letter of guarantee, covers all the existing loans in the three suits. Ex.A-40 does not mention anywhere about the existing liability and also for future advances. The argument advanced by the learned counsel for D-5 holds good if Ex.A-40 covers all the existing liability and also future advances. But here Ex.A-40 contains only with regard to the existing liabilities of the loans covered under all the three suits. Section 127 of the Contract Act clearly says that anything done or any promise made for the benefit of a principal debtor may be sufficient consideration to the surety for giving guarantee. The section says that anything done or any promise made for the benefit of the principal debtor may be a sufficient consideration for the contract of surety and that no fresh or separate consideration under move from the promisee to the surety and what is done for the benefit of the debtor is of itself, the consideration for the contract by the surety. Accordingly, the lower Court decreed all the suits against the all the defendants through the common judgment dated 22-02-2000. Aggrieved by the same, these appeals are preferred by defendant Nos.5, 6 and 7 in O.S.Nos.21, 22 and 23 of 1989 respectively.

14. The learned counsel appearing for the appellants contended that according to illustration (c) to Section 127 of the Indian Contract Act, there is no consideration for the surety and in the absence of any consideration, or sanction of loan by the plaintiff-bank, after executing the letter of guarantee, no liability can be fastened upon the surety/appellants. He further contended that the lower Court erred in decreeing the suits holding that Ex.A-40, letter of guarantee, covers all the existing loans in the three suits while observing that if Ex.A-40 covers all the existing liability and future advances, the argument that it is without consideration holds good. Therefore, the judgments of the lower Court are liable to be set aside.

15. The learned counsel for the first respondent-bank submitted that the lower Court rightly appreciated the evidence on record and decreed the suits, and there are no grounds to interfere with the impugned judgments.

16. In view of the rival contentions, the point arises for consideration is whether the judgments of the lower Court are sustainable?

17. Section 127 of the Indian Contract Act reads as follows: “Section 127. Consideration for guarantee.—Anything done, or any promise made, for the benefit of the principal-debtor may be sufficient consideration to the surety for giving the guarantee.”

18. Section 128 of the Indian Contract Act envisages that the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. In the present case, Ex.A-40, letter of guarantee, executed by the appellants reads as under: “That the guarantee shall be a continuing guarantee and shall not be considered satisfied by payment of any sum or sums of money towards the said Accounts, but shall extend to cover all moneys due to your Bank notwithstanding such payment subject to the aforesaid conditions. That the guarantee shall not be affected by any change in the constitution of the Bank in the constitution of the firms mentioned above. That any account settled between you and the above said firms and individuals should be conclusive evidence against me of the amount due on the said account and shall not be questioned by me.” A reading of Ex.A-40, letter of guarantee, makes it clear that it is a continuing guarantee and extends to all the moneys payable to the bank. Therefore, it covers all the existing liability and also future advances to be sanctioned by the plaintiff-bank to the respective first defendant firms in the respective suits.

19. So far as the ‘consideration’ is concerned, this Court in Y. VENKATACHALAPATHI REDDY v. BANK OF INDIA [1], while considering illustration (c) to Section 127 of the Indian Contract Act, observed as follows: “The effect of the illustration was considered by a Division Bench of the Karnataka High Court in Jayakunvar Manilal Shah v. Syndicate Bank (1992 1 BankCLR 485). Having surveyed the case law on the issue including the two decisions cited by the learned counsel for the appellant-second defendant, their Lordships of the Karnataka High Court, relying on a decision of the Privy Council in Kali Charan v. Abdul Rahman (AIR 1918 PC 226), held that the execution of the surety bond subsequent to the principal agreement, if it is in compliance with the terms of the principal agreement, that itself is a sufficient consideration for the surety. In the facts and circumstances of the case their Lordships of the Karnataka High Court held "Thus, it is clear that the surety bonds were executed though on a date subsequent to the principal agreement was executed, but the surety bonds were executed in pursuance of one of the terms of the agreement. Thus itself was a sufficient consideration."”

20. Similarly, a Division bench of the Bombay High Court in U.B.I. v. AVINASH P. BHONSLE [2], held that if the language of the text of Section 127 of the Act is clear and unambiguous, the sweep of the text cannot be curtailed by using illustration (c) to Section 127 of the Act to impose a limitation on the expression “anything done or any promise made for the benefit of the principal debtor” that it should be done at the time of giving the guarantee and that the language is wide enough to include anything that was done or a promise made before giving the guarantee and would not restrict the application of the section if the consideration to the principal borrower is not passed contemporaneously.

21. The Supreme Court in KESORAM INDUSTRIES AND COTTON MILLS v. COMMISSIONER OF WEALTH TAX (CENTRAL), CALCUTTA [3], wherein it was observed that: “Standing alone, the word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due.”

22. A Division Bench of the Kerala High Court in E.P. GEORGE v. BANK OF INDIA [4], while placing reliance on KESORAM INDUSTRIES AND COTTON MILLS case (3 supra), observed that a guarantor is also a debtor and, hence, entitled to create a mortgage by deposit of title deeds, and we hold that the second defendant was competent to create a mortgage by deposit of title deeds.

23. Therefore, in view of the settled legal position, the consideration for the surety’s promise does not move from the principal debtor, but from the creditor, though it may move from both creditor and principal debtor. The consideration may benefit the surety, but it is not necessary that the surety should receive any benefit under the contract. The word ‘done’ in the section indicates that past benefit to the principal debtor can be good consideration.

24. As stated above, in the case on hand, Ex.A-40, letter of guarantee, covers both the existing liability and the future advances to be sanctioned by the plaintiff-bank in favour of the respective first defendant firm in the respective suits. Therefore, we find no force in the arguments advanced by the learned counsel for the appellants that there is no consideration for the surety; and that Ex.A-40, letter of guarantee, does not cover the existing liability, but only covers the future advances to be sanctioned after execution of such letter of guarantee.

25. In the above circumstances, we are of the view that the lower Court appreciated the evidence on record in proper perspective and came to the conclusion that Ex.A-40, letter of guarantee, covers all the existing loans, and rightly decreed the suits. Therefore, the judgments of the lower Court are sustainable. Thus, we find no merits in these appeals and they are liable to be dismissed.

26. Accordingly, all the appeals are dismissed. No order as to costs. ________________ A. GOPAL REDDY, J _______________ K.S. APPA RAO, J Date: 02-08-2011 YCR [1] 2002 (6) ALT 412 [2] 1991 (2) BankCLR 578 [3] AIR 1966 SC 1370 [4] AIR 2001 Kerala 207