2011 (8) TMI 1331 - HC - Indian Laws

Liability to Repay the loan - Jointly and Severally - letter of comfort is wrongly interpreted and treated as letter of guarantee - Appellant executed a letter of comfort as per exhibit P14 - Respondent No. 2 committed default and did not repay the amount as agreed - HELD THAT - The apex court in the case of State of Maharashtra v. Dr. M.N Kaul 1967 (3) TMI 107 - SUPREME COURT while dealing with the aspect of the enforceability of the guarantee has observed 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 clear that the contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. If the entire document in question i.e exhibit P14 is read as a whole the same nowhere reveals that the appellant has entered into a contract or an agreement with respondent No. 1 to discharge the liability of respondent No. 2 herein (principal debtor) in case of its default. All through respondent No. 1 as well as other parties including the appellant has understood the document exhibit P14 as a letter of comfort plain and simple. In the cross-examination of PW1 witness for respondent No. 1) he has clearly admitted that the appellant has not undertaken under exhibit P14 that he would repay the amount in case respondents Nos. 2 to 4 herein commit default in payment of the loan. In the light of clear admission of PW1 and having regard to the language employed in exhibit P14 it is clear that the appellant has not undertaken that it would repay the loan amount in case of default by respondents Nos. 2 and 4 herein. Definition of letter of comfort as found in P. Ramanatha Aiyar s Advanced Law Lexicon which reads thus Letter of comfort - A document that indicates one party s intention to try to ensure that another party complies with the terms of a financial transaction without guaranteeing performance in the event of default. Therefore it is clear that the letter of comfort merely indicates the appellant s assurance that respondent No. 2 would comply the terms of a financial transaction without guaranteeing performance in the event of default. Since we find that the appellant has not bound himself for repaying the loans due to first respondent corporation in the event of default by respondents Nos. 2 and 4 the impugned order in so far as it relates to fixing liability on appellant is liable to set aside. Accordingly the same is set aside. Rest of the order passed against respondents Nos. 2 to 4 continues to remain. Appeal is allowed-in-part accordingly.

Summary

Issues:
Interpretation of a "letter of comfort" as a "letter of guarantee" leading to joint and several liability for loan repayment.

Analysis:
The appeal questioned an order holding the appellant liable to pay a loan amount jointly or severally with other respondents. The loan was sanctioned to respondent No. 2, with respondents Nos. 3 and 4 providing collateral security. The appellant issued a "letter of comfort," not a guarantee, confirming the associate company's capability to meet financial obligations. The appellant's counsel argued that the letter did not mandate repayment in case of default by respondent No. 2 or guarantors. Conversely, respondent No. 1 contended that the document was indeed a guarantee based on its wording.

The court examined the "letter of comfort" (exhibit P14) and highlighted its content, emphasizing the appellant's affirmation of ensuring the associate company's financial commitments without explicitly guaranteeing repayment. Reference was made to the Indian Contract Act, defining a guarantee as a contract to discharge a third person's liability in case of default. The court noted that exhibit P14 did not bind the appellant to repay the loan in case of default by respondent No. 2.

Citing legal precedents, the court emphasized that a guarantor cannot be held liable beyond the terms of their engagement. The document in question, exhibit P14, did not indicate the appellant's undertaking to repay the loan in case of default. Witness testimonies and legal definitions supported the understanding that the letter of comfort did not guarantee loan repayment in case of default by the borrower or guarantors.

Based on the evidence and legal principles, the court concluded that the appellant had not committed to repaying the loan in case of default by others. Therefore, the order holding the appellant liable was set aside, while the liability of other respondents remained. The appeal was allowed in part, affirming the appellant's position regarding the nature of the "letter of comfort."