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Andhra Bank Vs. K. Anji Reddy and ors. - Court Judgment

LegalCrystal Citation
CourtDRAT Madras
Decided On
Judge
Reported inI(2004)BC154
AppellantAndhra Bank
RespondentK. Anji Reddy and ors.
Excerpt:
.....the guarantee executed by d4 to d7 was no longer available to the bank after 19.10.1982 and the bank guarantee cannot be enforced by the bank as against d4 to d7. following the decision of the apex court in air 1967 sc 1634, i find that the contentions raised by the counsel for the appellant bank are wholly untenable and after the period of guarantee the bank cannot enforce the guarantee as against d4 to d7. so the guarantee period being over by 19.10.1982, for the suit claim made by the bank in the year 1987, the defendants 4 to 7 are not liable.15. even with regard to the case of d7, even though d7 has given collateral security for rs. 2 lakhs to the appellant bank for another year, that collateral security also got extinguished on expiry of that period. counsel for the appellant.....
Judgment:
1. The Bank filed Original Application (OA) before the DRT, Hyderabad, and the PO, DRT, partly allowed the OA declaring that the defendants 1, 2, 3, 8, 10, 11, 13 and 14 are liable to pay the decree amount and dismissed the claim as against the defendants 4, 5, 6 and 7. Aggrieved against that order dismissing the claim of the Bank as against defendants 4 to 7, the Bank has come forward with this appeal.

2. Counsel for the appellant Bank submits that the defendants 4, 5, 6 and 7 are the previous Directors of the Company and they are also liable for the claim till the end of the guarantee period i. e. till 19.10.1982 because they executed the guarantee till that period and only afterwards the new Directors will be liable for the suit claim and till the period of the guarantee the defendants 4 to 7 are also liable i.e. till October, 1982 and the order passed by the PO, DRT, is liable to be set aside, Counsel for the respondents-defendants 4 to 7 submitted that subsequent to the Agreement entered into between the old Directors and the new Directors, the old Directors, namely D4 to D7 executed the guarantee only for a period of one year i.e. upto 19.10.1982 and afterwards they are no longer liable and within that period the Bank did not make any claim and only in the year 1987 the Bank filed the Suit and after the guarantee period executed by defendants 4 to 7, D4 to D7 are no longer liable being the old Directors and only the new Directors will be liable for the Suit claim and after the expiry of the guarantee period they are no longer liable and the order passed by the PO, DRT, is perfectly justified and it does not require any intervention by this Appellate Tribunal.

3. To substantiate the contention of defendants 4 to 7, Counsel for the defendants-respondents relied upon the Agreement entered into between the old Directors, namely the respondent and the new Directors and also the letters executed by D4 to D 7 to the Bank. The Agreement was entered into between the old Directors and the new Directors on 30.9.1981. The First Part represents the old Directors and the Second Part represents the new Directors. It is reiterated in the Agreement that the Second Part have agreed to purchase the said Shares for consideration and thus take over the entire Company and the First Part also agreed they shall transfer to the parties of the Second Part the entire block of the shares and the manner of payment and taking away of the shares are stated in that Agreement. Clause 7 of the Agreement provides that-- The above said damages, compensation, penalty have been specifically agreed to insofar, as the parties of the First Part have given personal guarantees for securing the loans obtained from the Andhra Bank for and on behalf of the Company M/s. Deccan Solvent Oil Extractions Ltd. and though the parties of the Second Part is taking over the entire block of shares belonging to the parties of the First Part and taking over possession of the Company along with its assets, liabilities, etc., the Bankers have not agreed to release the personal guarantees given by the parties of the First Part and the parties of the First Part having agreed to divest themselves of the interests whatsoever they have in the said Company, are not interested in continuing their personal guarantees but so as to accommodate the parties of the Second Part, they have agreed to do so. Therefore, the parties of the Second Part shall be bound to relieve the parties of the First Part of their personal guarantees given by them, to M/s. Andhra Bank for and on behalf of the said Company as early as possible in such manner as is acceptable to the Bankers so that the parties of the First Part are completely relieved of their obligations whatsoever vis-a-vis the said Company and the Bankers.

4. Clause 7 of the Agreement specifically reads that the parties of the Second Part shall be bound to relieve the parties of the First Part of their personal guarantees given by them to M/s. Andhra Bank as early as possible in such manner as is acceptable to the Bankers so that the parties of the First Part are completely relieved of their obligations.

Relying upon this Clause 7 that "in such manner as is acceptable to the Bankers", Counsel for the respondents submitted that after his Agreement the Bankers wanted the old Directors namely, D4 to D7 to execute the guarantee for a period of one year and accordingly Ex. A52 Guarantee was executed by defendants 4 to 7 for a period of one year only from 19.10.1981 and after the expiry of the period of one year i.e. 19.10.1982, the defendants 4 to 7 are no longer liable for the claim of the Bank and they are absolved of their liability. Much reliance is placed upon by the Counsel for the respondents D4 to D7 on the last clause in Para 16 of the Ex. A52 Guarantee which states that "Notwithstanding any thing mentioned in the above recitals this guarantee shall be valid for one year insofar as old promoters, directors and their associates are concerned". The defendants 4 to 7 have also given letter Exs. A83, A84, A85 and A86 to the appellant Andhra Bank stating that they agree to continue the personal guarantee to the Andhra Bank for one year. They have specifically stated in the letters that they are agreeable to continue the guarantees for the existing liability of the Company, namely M/s. Deccan Solvent Oil Extractions Ltd., in their personal capacity for one year.

5. Further, in the Guarantee the words 'continuing security' has been struck off and also the word 'continuing guarantee' has been struck off. So, it is crystal clear that it is not a continuing guarantee and what was agreed between the old Directors and the Bank is that the guarantee is valid only for a period of one year i.e. up to 19.10.1982.

Counsel for the appellant Bank submits that till that period 19.10.1982, the defendants 4 to 7 are liable for the Suit claim and the right to sue by the Bank accrues to the Bank only when the principal debtor defaults and the right to sue accrue to the Bank only in the year 1987 and since the defendants 4 to 7 being the guarantors, only when the right to sue accrues to the Bank on the default by the principal debtor that Suit can be proceeded against the guarantors also and till then the guarantors cannot be proceeded with and the Bank is armed with the right of limitation and till the Bank gets right to sue the principal debtor even though the guarantee period expires, the guarantors D4 to D7 can also be proceeded with and they are also liable upto the guarantee period. Counsel for the appellant Bank relies upon Section 126 of the Contract Act. Section 126 of the Contract Act states that-- "A 'contract of guarantee' is a contract to perform the promise or discharge the liability of a third person in case of his default.

The person who gives the guarantee is called the 'surety', the person in respect of whose default the guarantee is given is called the 'principal debtor', and the person to whom the guarantee is given is called the 'creditor'. A guarantee may be either oral or written." 6. Counsel for the appellant Bank relies upon Section 28 of the Contract Act and submits that agreements in restraint of legal proceedings is void. Section 28(a) reads that-- "Every agreement by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary Tribunals, or which limits the time within which he may thus enforce his rights is void to that extent." 7. Relying upon this, Counsel for the appellant Bank submits that even though the guarantee period was over by 19.10.1982, the period of limitation is available to him and that cannot be restricted from absolutely enforcing the rights of the Bank in respect of the contract and the Bank can file the Suit only when the right to sue accrues i.e.

when the principal debtor defaults and that right cannot be taken away.

Clause (b) of Section 28 was introduced only by amendment in the year 1997. Clause (b) states that-- "Every agreement which extinguishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights is void to that extent." 8. This Clause (b) is not available to the appellant Bank since it was introduced in the year 1997 and for the contract of the year 1982, this Clause (b) of Section 28 is not applicable. Counsel for the appellant Bank also relies upon the decision of Kerala Electrical and Allied Engineering Co. Ltd. v. Canara Bank and Ors., AIR 1980 Kerala 151, in which it has been observed that-- "It is the limiting of the time within which the rights are to be enforced that is made void under Section 28 of the Act. So, it goes without saying that rights to be enforced under the contract should continue to exist even beyond the shorter period agreed for enforcing those rights, to make such an agreement void. But a condition in the contract that the rights thereunder accruing to a party will be forfeited or released if he does not sue within a time - limit will not offend Section 28. This is because as per the contract itself, the rights accrued to the party cease to exist by the expiry of the limited period provided in the contract. In such a case, in effect, there is no limiting of the time to sue. So, an agreement which provides for a simultaneous relinquishment of rights accrued and the remedy to sue for them, will not be hit by Section 28. But, at the same time, an agreement relinquishing the remedy only, by providing that if a suit is to be filed that should be filed within the time - limit - the time limit being shorter than the period of limitation provided by Limitation Act - will be hit by Section 28. This is because the rights accrued continue even beyond the time - limit as the same are not extinguished. In such a case, there is really a limiting of time to sue prescribed by the Limitation Act." 9. In the above said decision, since specific period is prescribed in that contract it was held that beyond the shorter period agreed upon, the rights under the contract cannot be kept alive and no limiting of the time to enforce the rights under the contract arises and hence the agreement putting a time - limit to sue will not be hit by Section 28.In National Insurance Co. Ltd. v. Sujir Ganesh Nayak & Co., AIR 1997 Supreme Court 2049, the Apex Court has held that-- "From the case-law referred to above the legal position that emerges is that an agreement which in effect seeks to curtail the period of limitation and prescribes a shorter period than that prescribed by law would be void as offending Section 28 of the Contract Act. That is because such an agreement would seek to restrict the party from enforcing his right in Court after the period prescribed under the agreement expires even though the period prescribed by law for the enforcement of his right has yet not expired. But there could be agreements which do not seek to curtail the time for enforcement of the right but which provides for the forfeiture or waiver of the right itself if no action is commenced within the period stipulated by the agreement. Such a clause in the agreement would not fall within the mischief of Section 28 of the Contract Act. To put it differently, curtailment of the period of limitation is not permissible in view of Section 28 but extinction of the right itself unless exercised within a specified time is permissible and can be enforced. If the policy of insurance provides that if a claim is made and rejected and no action is commenced within the time stated in the policy, the benefits flowing from the policy shall stand extinguished and any subsequent action would be time-barred. Such a clause would fall outside the scope of Section 28 of the Contract Act. This, in brief, seems to be the settled legal position." 11. Counsel for the respondents relies upon the decision of the Supreme Court in State of Maharashtra v. Dr. M.N. Kaul (dead) by his LRs. and Anr., AIR 1967 SC 1634, wherein the Apex Court has held that-- "Guarantor cannot be made liable beyond terms of his engagement and enforceability of the guarantee also depends upon its terms.

Whether a guarantee is enforceable or not depends upon the terms under which the guarantor bound himself. To this there are some exceptions. In case of ambiguity when all other rules of construction fail the Courts interpret the guarantee contra proferentem that is, against the guarantor or use the recitals to control the meaning of the operative part where that is possible.

But whatever the mode employed, the cardinal rule is that the guarantor must not be made liable beyond the terms of his engagement.

In the instant case though the guarantor bound himself to pay on demand the sum of Rs. 18,240.06 P. only in the event of writ petition being dismissed, the guarantor put a limit on the guarantee. According to the last paragraph of the letter of guarantee the , contract was to remain in force-(i) for one calendar month after the pronouncement of the judgment and/or (ii) (a) a period of 12 months from the date of the execution of the guarantee whichever be later and/or (b) the drawing and sealing of the order (as the case may be) of the Supreme Court finally disposing of the petition.

Under (i) time for enforcement was available till April 15, 1965.

Under (ii) (a) as the guarantee was executed on March 23, 1962 one year expired on March 23, 1963. Thus the last date for enforcement of the guarantee was April 15, 1965. No attempt was made so to enforce it and the guarantee was not available thereafter. The guarantee in this form was accepted by the party concerned as well as this Court and it was impossible to ignore the time-limit which was an integral part of the guarantee. The contention of the Bank that the guarantee was no longer enforceable was, therefore, right." 12. Counsel fpr the appellant Bank submitted that in the decision of the Apex Court in AIR 1967 SC 1634, it was the case of the appellant Bank that there was mention with regard to the enforcement of the guarantee and in the case on hand it is simply stated that the guarantee is valid for a period of one year and there is no specific recital in the guarantee that the guarantee will be extinguished after the period of one year and so the principles of the decision in AIR 1967 SC 1634 are not applicable to the instant case. Counsel for the respondents O4 to D7 submitted that in the decision cited supra i.e.

AIR 1967 SC 1634, also it was not the case of guarantee for a period of one year and after that period of one year from the date of the execution of the guarantee and one calendar month after the pronouncement of the judgment and after the period mentioned in the contract the guarantee is extinguished and it cannot be enforced at all.

"The National and Grindlays Bank Limited, Delhi, declares that this Guarantee shall remain in force until one calendar month after the date of the pronouncement of the judgment and/or a period of twelve months from the date of the execution of the guarantee whichever is later and/or the drawing the sealing of the order (as the case may be) of the Supreme Court finally disposing of the said petition filed by Dr. M.N. Kaul of Delhi.

The question is whether this guarantee is enforceable. That depends upon the terms under which the guarantor bound himself. Under the law he cannot be made liable for more than he has undertaken. It is often said that a surety is a favoured debtor, for in the expressive phrase of Lord Westbury L.C. in Blest v. Brown, (1862) 4 De GF & J 367 at p. 376 : "you bind him to the letter of his engagement.

Beyond the proper interpretation of that engagement you have no hold upon him". These observations have been recalled in cases of guarantee and suretyship by the Judicial Committee and also this Court. The cardinal rule is that the guarantor must not be made liable beyond the terms of his engagement.

Judging of the letters of guarantee from this standpoint it is clear that the Bank bound itself to pay on demand the sum of Rs. 18,249.06 P. only in the event of the writ petition being dismissed and/or this Court holding Dr. M.N. Kaul liable. The guarantor, however, put a time-limit on the guarantee. According to the last paragraph the contract was to remain in force-- (i) for one calendar month after the pronouncement of the judgment and/or (ii) (a) a period of 12 months from the date of the execution of the guarantee whichever be later and/or (b) the drawing and sealing of the order (as the case may be) of the Supreme Court finally disposing of the petition of Dr. Kaul. The Sales Tax authorities can take advantage of any of the above conditions. It will be recalled that the order of this Court was passed on March 15, 1965. Under (i) time for enforcement was available till April 15, 1965. Under (ii) (a) as the guarantee was executed on March 23, 1963. Condition (ii) (b) does not apply because no order was drawn up or sealed. Thus the last date for enforcement of the guarantee was April 15, 1965. No attempt was made so to enforce it and the guarantee was not available thereafter." 14. The Apex Court has clearly held that after the time-limit on the guarantee that guarantee cannot be invoked. It has been specifically stated in the decision cited supra by the Apex Court that when the last date for enforcement of the guarantee was over and no attempt was made to enforce it, the guarantee was not available thereafter. In the case on hand, the last date for enforcement of the contract was 19.10.1982 and no attempt was made by the Bank to enforce the guarantee contract till that period and the guarantee executed by D4 to D7 was no longer available to the Bank after 19.10.1982 and the Bank guarantee cannot be enforced by the Bank as against D4 to D7. Following the decision of the Apex Court in AIR 1967 SC 1634, I find that the contentions raised by the Counsel for the appellant Bank are wholly untenable and after the period of guarantee the Bank cannot enforce the guarantee as against D4 to D7. So the guarantee period being over by 19.10.1982, for the Suit claim made by the Bank in the year 1987, the defendants 4 to 7 are not liable.

15. Even with regard to the case of D7, even though D7 has given collateral security for Rs. 2 lakhs to the appellant Bank for another year, that collateral security also got extinguished on expiry of that period. Counsel for the appellant Bank pointed out that since D7 has given collateral security, the Bank can proceed against D7 on that collateral security. Since that collateral security was to be continued by D7 only for a period of one year. On the expiry of that period, that also got existinguished and the Bank cannot have any more claim on D7 on the collateral security.

16. The PO, DRT, has rightly held that Ex. A52 the crucial document filed by the applicant Bank reveals that the words "Continuing Guarantee" wherever occurred were struck off and Clause 16 also specifically stated that notwithstanding anything mentioned in the above recitals, this guarantee will be valid for a period of one year insofar as old promoters and their associates are concerned and Ex. A52 is the General Form of Guarantee signed by the new set of Directors and the old set of Directors being the defendants 4 to 7 and the operation of Ex. A52 guarantee is restricted for a period of one year only from 19.10.1981 and the defendants 4 to 7 can never be fastened at any rate with any liability on the basis of Ex. A52 after 19.10.1982. After the guarantee period of one year after 19.10.1982, the defendants 4 to 7 are not at all liable. The order passed by the PO, DRT, Hyderabad, does not suffer from any infirmity.


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