1. Aggrieved by the order dated 21.11.2003, passed by the DRT at Bangalore, in OA No. 382/1998, the 6th defendant alone has preferred this appeal, 2. M/s. Movers Ltd., the 1st defendant in the OA, had the benefit of various credit facilities by way of Cash Credit Open Loan, Overdraft against Supply Bills and three Term Loans in respect of which, it had executed Promissory Notes, Letter of Continuity and also Hypothecation Agreements in respect of stocks and trade and machinery and also the letter of acknowledgement of debts. Defendants 2 to 7, who were the Directors of the said company at the relevant point of time stood surety for repayment of the amounts due, for which they have executed letters of continuing guarantee to remain in force till the entire amounts due by the 1st defendant are paid and also acknowledgement of debt and confirmation of balance executed by the 1st defendant, are binding and enforceable against the defendants 2 to 7. That in respect of the loans availed by the 1st defendant, it is totally liable to the extent of Rs. 5,10,68,100/- payable with interest at 16.5% per annum compounded once every quarter from the date of suit till the date of realisation.
3. The defendants have filed the written statement and contested the claim. As the 6th defendant namely, Kailash Chandra Gaur alone has preferred this appeal, I feel it would be sufficient to consider the defence of the 6th defendant alone. It is the case of the 6th defendant that he was one of the Directors of the 1st defendant company and he tendered resignation of his Directorship on 6.7.1984, and the 1st defendant company by its letter dated 6.7.1984 addressed to the plaintiff Bank informed about the resignation of the appellant/6th defendant and requested the Bank to relieve him from all the obligations as a guarantor. The 6th defendant also sent a reminder to the Bank on 15.5.1985, requesting the Bank to relieve him from the guarantorship and the Bank by its letter dated 12.6.1985 had informed the 6th defendant that the matter was taken up with their higher authorities for consideration. That thereafter, the plaintiff Bank had not sent any communication to the 6th defendant and even to the legal notice sent to him, the 6th defendant by his reply dated 10.8.1992, made his position clear that he was not liable for any amount due to the plaintiff Bank. The 6th defendant denied his liability mainly on the ground of his resignation as Director of the company and revocation of guarantee as early as on 6.7.1984.
4. The DRT after taking into consideration all the facts and the documents, has held that his liability arising under Exhibits A-?3 and A-24 does not cease and the letters of confirmation and acknowledgement of debt by 1st defendant corresponding to these liabilities marked by the plaintiff Bank are binding upon the 6th defendant and held that the 6th defendant is liable but his liability is restricted only to the extent ascribable to Exhs. A-23 and A-24 only. Aggrieved by the same, the 6th defendant has preferred this appeal.
6. The point of consideration is whether the appellant/6th defendant by virtue of his resignation and revocation of his guarantee dated 6.7.1984, is absolved from the entire liability due to the plaintiff s Bank.
7. The learned Advocate for the appellate contended that the appellant is not liable to pay the debt, on the question of limitation, substitution of contract, laches and negligence and public policy.
Except the loans obtained by the 1st defendant company for which the appellant stood surety under Exhs. A-23 and A-24, other loans were not known to him, is not in dispute. The 6th defendant did not execute the other guarantee agreements on and after 6.7.1984 marked as Exhs, A-32 to A-37, A-40 to A-49 and A-95 to A-99 and, therefore, he is not at all liable to pay any amount on those accounts to the Bank. But, however, the execution of two guarantee agreements marked as Exh. A-23 dated 8.8.1983 for Rs. 76,00,000/- and Exh. A-24 dated 7.6.1983 for Rs. 4,70,000/- are not in dispute, but they are time-barred.
On the contrary, the learned Advocate for the respondent Bank would contend that the guarantee given under Exhs. A-23 and A-24 is continuing guarantee and, therefore, appellant is liable till the debt is discharged. It is also submitted that Clause 2 of the guarantee agreement provides that, "Any admission or acknowledgement in writing by the principal debtor of the amount of indebtedness of the principal debtor or otherwise in relation to the subject matter of the guarantee or any judgment or award obtained by you (Bank) against the principal debtor shall he binding on me/us and we accept the correctness of any statement of account served on principal debtor." As the 1st defendant admitted the liability, Clause 2 in the agreement binds the 6th defendant and, therefore, he cannot extricate himself from his liability. The DRT also took a view that Clause 2 in the guarantee agreement of Exhs. A-23 and A-24 bind the appellant and he cannot avoid his liability. But, however, his liability was restricted to the extent stated in Exhs. A-23 and A-24. This finding of the DRT is not challenged by the Bank also.
8. Now the question is whether the guarantee executed by the 6th defendant, which is a continuing guarantee shall remain in force till all the amounts due and payable to the Bank remains unpaid as per Clause 7 of Ex. A-23 and A-24. It is true that the guarantee executed by the 6th defendant is a continuing guarantee as per Clause 7 of the said agreement. A continuing guarantee is a guarantee which extends to a series of transactions, as defined in Section 129 of the Indian Contract Act. But, however, a continuing guarantee can be revoked at any time but only in respect of the future transactions by notice to the creditor as postulated in Section 130 of the Contract Act. Nothing is immortal in this world. All creations are subjected to decay and destruction guarantee is also liable to revocation. As such, continuing guarantee does not mean that it is perpetual and would continue till one's life time or as long as the sun and moon exist. It is, therefore, clear that the continuing guarantee is not a perpetual one and the same is subject to revocation by the surety and the limitation is that would enure only in respect of future transactions and such revocation by a notice to the creditor.
9. It is the case of the appellant that he by his letter dated 8.7.1984, informed the Bank about his resignation from the Directorship of the 1st defendant company on 6.7.1984, and the same was accepted by the Bank. But the said fact is being disputed by the respondent Bank.
On going through the documents filed by the appellant and the respondent Bank, the letter dated 8.7.1984 said to have been sent by the appellant to the respondent Bank is marked as Ex. D7 and the same is being disputed by the respondent Bank. The appellant has not chosen to file the acknowledgement for the same and in the absence of the same, we cannot safely accept that the appellant had sent the said letter to the Bank on 8.7.1984. But, however, in the letter dated 15.5.1985 (Ex. D8) addressed to the respondent Bank, the appellant once again informed about his resignation and revocation of guarantee and also mentioned that he had already conveyed the same to the Bank vide his letter dated 8.7.1984, along with the copy of the letter received by the Bank from M/s. Movers Private Ltd, which was also addressed to the Bank to relieve him from his liabilities to which the respondent Bank replied on 12.6.1985 (Ex. D9), wherein they state that they are in receipt of the letter dated 15.5.1985 received by them on 12.6.1985 in which the Bank had informed the appellant that they are taking up the matter with the higher authorities with regard to relieving him from the liability as a guarantor to the 1st defendant company. But there is a rider stating that they will communicate to the appellant in the matter, after hearing from their higher authorities in this regard and further stated that his liability continues to exist as a guarantor.
From Exhs. D8 and D9, one thing is made clear that the appellant had already informed about his resignation as a Director and the revocation of his liability and the same was also duly informed to the Bank requesting the Bank to relieve him from the guarantee as the said fact was also reiterated in Ex. D8 and, therefore, the factum of the resignation and revocation of the guarantee by the appellant was also confirmed by the Bank in letter dated 12.6.1985 (Ex. D9). But what all the Bank would say is that relieving the appellant from the liability has got to be considered by their higher authorities and till such time his guarantee continues. It is for the Bank to accept or not to accept, and the guarantor cannot wait till such time and the revocation would take place from the date of notice by the guarantor. In our case, the appellant had sent the letter on 6.7.1984 and the respondent Bank under Ex. D9 had accepted the receipt of the letter dated 15.5.1985 and, therefore, the appellant's liability has come to an end on and from 6.7.1984 itself, irrespective of the fact whether it has been accepted by the respondent Bank or not. The appellant's liability would be till the date of resignation and revocation, which was on 6.7.1984. The liability of the appellant under Exhs. A 23 and A 24 are to the extent of Rs. 76,00,000/- and Rs. 4,70,000/- respectively. The appellant's liability is personal in nature and, therefore, he is liable upto a period of three years on and from 6.7.1984, but whereas, the suit was filed only on 29.7.1992. As such, the claim of the Bank is barred by time. In support of this submission, the appellant relied upon the case of Mrs. Margaret Lalita Samuel v. The Indo Commercial Bank Ltd. , wherein it was held, "We are concerned with the period of Limitation for enforcing the liability of the defendant under the surety bond.... We hold that the suit to enforce the liability is governed by Article 115 of the limitation Act and the cause of action arises when the contract of continuing guarantee is broken," The very same view was taken by the Madras High Court in the case of Indian Bank v. State of Tamil Nadu and Ors. III (2002) BC 261 (DB) : 2002(2) Bankmann 612 (DB). I am in complete agreement with the above said propositions and hold that the claim against the appellant is barred by time.
10. The appellant further contended that after his resignation from Directorship and after revocation of the guarantee, his shares were transferred to one V. Nanda Kumar and the 1st respondent Bank had also obtained letters of guarantee and other connected documents from the said Nanda Kumar, which is a clear variance of the original contract and, therefore, the appellant is discharged from his liability as a surety, as per Section 133 of the Contract Act.
11. The learned Advocate for the appellant further submitted that the appellant's resignation as a Director was accepted not only by the 1st defendant company but also by the Bank and, they have all entered into a new contract of agreement from V. Nandakumar and thereby, there is a substitution in the place of the old contract, which by itself would act as novation of contract as per Section 62 of the Indian Contract Act and, therefore, the appellant is not liable. Appellant relied upon the case of The Indian Bank, Madras v. S. Krishnaswamy and Ors. AIR 1990 MS 115, in which it was observed in Para 12. "It is well settled that under Section 62 of the Contract Act, if the parties to a contract agree to substitute a new contract for it, or to rescind or after it, the original contract need not be performed." The observation in the case of Commercial Bank of Tasmania v. Jones (1893) AC 313, was extracted, which states, "Novation of debt operates as a complete release of the original debtor, and cannot be construed as a mere covenant not to sue him.
12. On the contrary, the learned Advocate for the respondent Bank would contend that the mere resignation of the appellant from the Directorship of the 1st defendant company and the request for revocation of the guarantee, would not absolve him from the liability as the contract between the appellant and the respondent Bank is a continuing guarantee. The claim against the appellant is also not barred in view of Clause 2 of the guarantee agreement, which states that the acknowledgement of principal debtor is binding upon the guarantor and that the principal debtor having acknowledged the debt, it would bind the guarantor also and, therefore, the suit is not barred by time. The respondent relied upon the case of Union Bank of India v.T.J. Stephen and Ors. 1989 Vol. 66 Company Cases 96. In that case also, they relied upon the case of Margaret Lalita, Samuel v. Indo Commercial Bank Ltd. (supra). That was a case where there was no refusal on the part of the guarantor to carry out the obligation. But in our case, the appellant had revoked the guarantee. Respondent also relied upon the case of Subramania Gurukkal and Anr. v. State Bank of India I (2001) BC 552 : 2001 Bankmann 532 (Madras High Court), where also there was no refusal by the guarantor and hence it was held that the suit was not barred by limitation and the facts in the said case are totally different from the case or, hand. Reliance is also made to the case of Pradip D. Kothari v. Czat Financial Services Ltd. I (2001) BC 103 : 2002 Bankmann 319, Madras High Court, and the issue involved in that case was that creditor proceeded only against the surety without impleading the principal debtor as the principal debtor became insolvent by operation of law, and the facts are completely different from the facts in our case. As such, I rely upon the principles laid down in AIR 1990 MS 115 that there is a substitution of contract and, therefore, the original contract to which the appellant was a party need not be performed. Hence, I hold that there is a clear variance of the original contract and there is a substitution of contract also and hence the appellant is discharged from his liability.
13. The learned Advocate for the appellant has further argued that the respondent Bank failed to apply the Clayton's Rule i.e. the 1st respondent Bank failed to put the appellant on notice that, with his resignation and revocation of guarantee, a ruling will be made regarding the liability which existed, on the date of revocation of the guarantee. The Bank also did not reserve any right to adjust the future credits towards subsequent advances. That in the absence of any contract in the contrary, all subsequent credits would go to discharge the earlier debt, which existed prior to the date of revocation and if this doctrine had been adopted and followed, the appellant would not be found liable to any extent. In fact, the Bank has not established whether any liability existed even after applying the Clayton's Rule.
There is nothing on record to show that the respondent Bank has applied the Clayton's Rule and, therefore, I hold that the appellant is not liable to pay any amount to the respondent Bank.
14. Appellant's further's contention is that the 1st respondent Bank failed to take timely action against the drawees of the supply of bills when the supplies were accepted and bills were duly discounted by the Bank. By discounting the bill, the Bank became the holder in due course and once the drawee accepts the bill, the drawer of the bill gets discharged and the holder in due course have to seek the remedy against the drawees alone. Had the bills been discounted and appropriated towards the debt due to the Bank, there might not have been any amount due and payable by the guarantors and the appellant would stand get discharged. There is no evidence to substantiate the same and in the absence of the same, this contention of the appellant cannot be accepted.
15. Appellant also submitted that when the company went on liquidation, the 1st respondent Bank failed to protect the hypothecated goods, which shows the lapse or negligence on the part of the creditor in preserving the security and, therefore, the remedy of the surety himself against the principal debtor is thereby impaired and the surety is discharged as provided under Sections 139 and 141 of the Contract Act. To strengthen this position, the appellant relied upon the case of State Bank of Saurashtra v. Chitranjan Ranganath Raja and Anr.
and State of Madhya Pradesh 16. The above said arguments of the appellant was repelled by the learned Advocate for the respondent Bank by submitting that there is absolutely no negligence on the part of the Bank in preserving the securities of the principal debtor and as the principal debtor was not able to discharge its liabilities, it went into liquidation and that will not absolve the appellant from his liability. Evidence is lacking to hold that the respondent Bank was negligent and hence the appellant's contention is rejected.
17. The learned Advocate for the appellant has further urged that the respondent Bank obtained the signature of the guarantors in prescribed forms and the conditions and covenants of the said agreement are all unilateral and favouring the Bank and the borrowers have no option but to simply sign in the agreement as they were forced to take loan for the survival of their business. It is further submitted that Clause 2 of the agreement would support this contention of the appellant that the terms of the guarantee are opposed to public policy and they attract the provisions of Section 23 of the Indian Contract Act. The appellant also relied upon Clause 7 of the agreement, which states that the guarantee shall not be revoked and shall remain in force till the amounts due and payable by the principal(s) are paid up in full inclusive of interest, charges, etc. Appellant contended that these clauses are ex facie against the public policy and, therefore, they are unlawful and void. This contention was repudiated by the learned Advocate for the respondent Bank placing reliance upon the case of T.Raju Setty v. Bank of Baroda , wherein it was held, "A recital in the surety bond that surety will not be entitled to any of the rights conferred by Sections 133, 134, 135, 139 and 141 cannot be considered to defeat the provisions of Chapter VIII of the Act and as in the case of a contract of guarantee neither the consideration nor the object is unlawful and the recital in question is not opposed to public policy, the agreement with such recital cannot be said to be hit by Section 23." In view of the same, the submissions made by the appellant is unacceptable.
18. In the result, the appeal is allowed and the order dated 21.11.2003 in OA-382/ 1998, passed by the DRT, Bangalore, is set aside as against the appellant/6th defendant only. No costs.