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LIABILITY OF A GUARANTOR

The Supreme Court in Sita Ram Gupta, Appellant Vs. Punjab National Bank and others, respondents, dismissed the appeal. Justice Tarun Chatterjee in a judgment also on behalf of Justice Harjit Singh Bedi said the appeal arises out of the final judgment and decree passed by the High Court of Delhi whereby the High Court had set aside the judgment and decree dated of November 12, 1984 passed by the Additional District and Session judge dismissing the suit filed against the appellant who was guarantor in respect of loans advanced by the Punjab National Bank [in short ‘the Bank’] – respondent no. 1 to M/s. Rangaa Traders and Exports Pvt. Ltd. – respondent no. 2 in this appeal. He added that by the impugned judgment, the High Court affirmed the decision of the Additional District and Session judge and held that the suit filed by the Bank be decreed against the original defendant nos. 1 to 4 for a sum of Rs.42, 874/- including interest at the rate of 19.5 per cent per annum with quarterly rests from the date of filing of the suit till realization.

Justice Chatterjee said that at this stage, he may note that the said decree against the defendant nos. 1 to 4 has now become final as no appeal was preferred by the said defendant nos. 1 to 4 against the said decree. He added that feeling aggrieved by the aforesaid judgment of the High Court, this Special Leave Petition has been filed by the guarantor by the appellant in respect of which leave has already been granted.

Justice Chatterjee said that the only question that was raised on behalf of the appellant was that in view of the statutory provision under section 130 of the Indian Contract Act, 1872 (in short “the Act”), whether the High Court was justified in holding that the appellant who was a guarantor of the loan advanced to the defendant nos. 1 to 4 was liable to pay the decretal amount on the ground that the appellant had revoked the guarantee before such loan was actually paid to the defendant Nos. 1 to 4 and long before the suit was filed by the bank against the defendants for recovery of such loan. He added that in order to decide the question raised by the Counsel for the appellant, he may look into the agreement of guarantee entered into by the Bank with the appellant as guarantor, which reads as under:

The Agreement of Guarantee said “the guarantor hereby guarantee jointly and severally to pay the bank on demand all principal, interest, costs, charges and expenses due and which may at any time become due to the Bank from the borrower, on the accounts opened in respect of the said limits (hereinafter called the ‘said accounts’) down to the date of payment and also all loss or damages, costs, charges and expenses and in the case of legal costs, costs as between attorney and client occasioned to the Bank by reason of omission, failure or default temporary or otherwise in such payment by the Borrower or by the Guarantors or any them including costs (as aforesaid) of enforcement or attempted enforcement of payment by suit or otherwise or by a sale of realization or attempted said or realization of any security for the said indebtedness or otherwise howsoever or any costs (which costs to be as aforesaid) charges or expenses which the Bank may incur by being joining in any proceeding to which the Bank may be made or may make itself party either with or without otherwise in connection with any such securities or any proceeds thereof.”

He added that the agreement also stated “the guarantors hereby declared that this guarantee shall be a continuing guarantee and shall not be considered as cancelled or in any way affected by the fact that at any time the said accounts may show no liability against the Borrower or may even show a credit in his favour but shall continue to be guarantee and remain in operation in respect of all subsequent transactions.”

Justice Chatterjee said that keeping the agreement of guarantee, as noted hereinabove, in mind, he would look into the facts of the present case. He added that it is an admitted position that the guarantee issued by the appellant to the Bank was subsequently cancelled by his letter dated of July 31, 1980 written to the Manager of the Bank and in that view of the matter, the appellant sought to substantiate his case that since his guarantee had stood revoked before the loan was infact taken by the defendants from the bank, in view of Section 130 of the Act, he was not liable to pay the loan taken by the defendants in respect of which the appellant was a guarnator.

Justice Chatterjee said that the trial court, dismissed the suit against the appellant and in appeal by the Bank, the High Court had reversed the decree passed by the trial court and granted decree in favour of the Bank and against the appellant. He added that subsequent to the revocation of gurantee by the appellant there were transactions in respect of the loan between the defendant Nos. 1 to 4 and the bank and the suit was filed for recovery of loan by the bank against the appellant as well as the other defendants nos. 1 to 4 and 6.

Justice Chatterjee said that the Counsel appearing for the appellant, relying on Section 130 of the Act, sought to argue that in view of the fact that Section 130 clearly provides for revocation of a coutinuing guarantee as to future transactions by notice to the creditor and as in the present case, the guarantee was revoked long before the loan was given by the suit filed, the appellant was not liable to pay the decretal amount to the Bank. He added that accordingly, the Counsel submitted that the High Court was not Justified in reversing the judgment of the trial court and in decreeing the suit against the appellant.

Justice Chatterjee said that this submission of the Counsel for the appellant was seriously contested by the Counsel appearing on behalf of the Bank.

According to the Counsel for the Appellant, the submission of the Counsel for the appellant cannot be accepted in view of the clause in the agreement of guarantee itself, as noted by herein earlier. He added that before he proceeded further and in order to decide the submissions made on behalf of the parties before him, it would be appropriate to look at Section 130 of the Act.

Justice Chatterjee said that the general principle is that everyone has a right to waive and to agree to waive the advantage of a law or rule solely for the benefit and protection of the individual in his private capacity which may be dispensed with without infringing any public right or public principle.

Justice Chatterjee said keeping that principle in mind, he would look at the clause of the agreement of guarantee, as noted by him earlier. He added that there cannot be any dispute that the appellant had clearly agreed that the guarantee that he had entered into with the Bank was a continuing guarantee and the same was to continue and remain in operation for all subsequent transactions.

Justice Chatterjee concluded that it was difficult to accept the submission of the Counsel for the Appellant that in view of the statutory provision under Section 130 of the Act, after the revocation of the guarantee by the appellant, he was not liable to pay the decretal amount to the Bank. He added that no other point was raised by the Counsel for the appellant and accordingly, there was no merit in the appeal which was being dismissed by him.


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