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TMI Blog2019 (11) TMI 901X X X X Extracts X X X X X X X X Extracts X X X X ..... or of Respondent No.3 company, Respondent No. 5 is Sh. Raman Mehta and Respondent No. 6 Smt. Geetha Mehta are the new directors of Respondent No.3 company and Respondent No. 7 Sh. Kuldeep Singh had mortgaged his property to Respondent Bank for the loan facilities extended to Respondent No.3 company. The Petitioners have challenged the order dated 25th March, 2015 passed by Debt Recovery Appellate Tribunal ('DRAT') in appeal No. 79/2014 by which the appeal filed by Respondent Nos. 1 and 2 Bank against the present Petitioners and Respondent No. 4 was allowed. The writ petitioner bearing No. 4803/2015 was filed by Sh. Ram Raghubir Pandey who was Respondent No. 4 in petition No. 4802/2015. He has also impleaded the Union Bank of India as Respondent Nos. 1 and 2, M/s Faishan Flairs India Private Limited as Respondent No. 3, Smt. Neeru Malhotra and Rajan Malhotra as Respondents No. 4 and 5 and Respondents No. 6, 7 and 8 are same i.e. Sh. Raman Mehta, Smt. Geetha Mehta and Sh. Kuldeep Singh. The impugned order is the same i.e. order dated 25th March, 2015 passed by DRAT in appeal No. 79/2015 against the Petitioner Ram Raghubir Pandey and Respondent No. 4 and 5 Neeru Malhotra and Rajan Mal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank and the guarantor, the surety is the principal debtor and his liability would be co-extensive to that of the borrower. The Court has accordingly observed that the guarantor himself waived off his rights under Chapter VIII of the Act which conferred on surety. The Court, therefore, approved the decision of Karnataka High Court in T. Raju Shetty vs. Bank of Baroda, AIR 1992 KARNATAKA 108, whereby it had been held that surety can waive off his rights under various provisions of Chapter VIII of the Contract Act. It is further observed that it is in line with long established precedents that anyone has a right to waive the advantages offered by law provided they have been made for the sole benefit of an individual in his private capacity and does not infringe upon the public right or public policy. This principle was reiterated in Lachoo Ma! Vs. Radhey Shyam, (1971) 1 SCC 619. Further on the principles of continuing guarantee, the position was cleared by the decision of the Supreme Court in Sita Ram Gupta vs. Punjab National Bank &Ors., (2008) 5 SCC 711. The Court in this case has held that it is not open to a party to revoke a guarantee when he had agreed to it being a contin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent No.3 on this aspect would submit that recovery against the respondents on the basis of these guarantees would be barred by limitation. The submission by the counsel is that the recovery on the basis of the guarantee given in the year1994 is barred by time. No such plea was taken in the written statement filed by this respondent. However, the said respondent has sought stay of the present suit in terms of Section 10 CPC as the matter in issue is also directly and substantially in issue in a previous suit instituted, which was pending before Civil Judge, Delhi. The plea of the appellant was also that he stood discharged of surety under Sections 134 and 139 of the Contract Act. The counsel has also relied upon the provisions of Section 23 of the Contract Act to urge that the consideration or object of an agreement was not lawful as it involved or implied injury to the person or property of another. The counsel would submit that there is difference between waiver and estoppel and this is a case of waiver whereby the bank had waived its rights to recover the amount form the respondent by entering into a new agreement. The counsel would also plead that on account variance made witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner No. 1and Respondent No. 4, being the Directors, executed the necessary documents in this regard alongwith letters of guarantee for Rs. 6.00 lakhs as Packaging Credit Limit was subsequently enhanced to Rs. 6.00 lakhs. Petitioner No. 2 also signed a letter of guarantee dated 28th March, 1994 for a sum of Rs. 6.00 lakhs. Respondent No. 4 mortgaged his Indian Development Bonds with the Respondent No.1 Bank as the Directors had no immovable property for giving as collateral security against the packaging limit. On 17th October, 1994 the Packaging Credit Limit (PCL) was enhanced and fresh documents were executed by Petitioner No. 1 and Respondent No. 4 of the value of Rs. 10 lakhs in favour of the Bank. Accordingly, a guarantee deed of sum of Rs. 10.00 lakhs and Rs. 16.00 lakhs were executed. 5. Since the Respondent No.3 company was running into losses, so Respondent Nos. 5 and 6 were inducted in the Respondent No.3 company on 7th June, 1995 and on 22nd June, 1995 respectively and the said company was sold to Respondent Nos. 5 and 6, and Respondent No.5 became the sole authority to sign cheques with effect from 14th July, 1995. The earlier directors resigned from the above compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.1 Bank. Apart from this, Respondent No. 7 had also created equitable mortgage of his property in favour of Respondent No.1 Bank for the credit facilities extended to the Respondent No.3 company at the behest of new directors. The fresh Packing Credit Agreement was executed by Bank with new Directors; the terms and conditions have totally changed from earlier Packing Credit Agreement dated 28th March, 1994 and 17th October, 1994 as the interest rate was increased on 22nd July, 1995. Petitioner No. 2 had withdrawn her guarantee by notice dated 17th July, 1995 and accordingly Respondent No.1 had informed Respondent No. 3 company regarding the new credit facility on 1st September, 1995. This PCL was further enhanced on 11th November, 1995 and a Cash Credit Facility (CCL) was also obtained by new Directors for Respondent No.3 company, who executed fresh promissory note, Packing Credit Agreement and deed of Guarantees. Petitioner Nos. 1 and 2 and Respondent No. 4 stated that they had not signed any deed of guarantee after induction of new Directors in the company. 8. It is further stated that Respondent No. 1 bank filed O.A. No. 722/1996 before Debt Recovery Tribunal ('DRT') against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 1 had never signed any paper in their presence or visited the bank on the day when the signatures were purported to have been made. Respondent No.4, who has filed Writ Petition No. 4803/2015, had set up a case that on the date when the purported bank guarantee was executed, he was not in town. The said ex-director had also requested for release of his India Development Bonds on 11th May, 1996 and 10th June, 1996 but the said bonds were not returned. Sh. Ram Raghubir Panday had also filed a suit bearing No. 329/1996 in a Civil Court against the Bank wherein interim relief was granted to release and return the bonds to him. Despite a direction of the Civil Court, said bonds were not returned by Bank and in the meanwhile the said bonds had elapsed and Mr. Panday sustained loss of interest. Subsequently, the O.A. No. 772/1996 was filed before the DRT by the bank which was contested by Mr. Pandey on the ground that he had not executed any document as on 22nd July, 1995 (wrongly written as 22nd August, 1995) as he was in Mumbai from 17th July, 1995 to 12th August, 1995 and the Bank had obtained his signatures on blank papers which were later on forged and fabricated. 11. The DRT vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Petitioner No.1 and Respondent No.4 had not signed the so-called guarantees after their resignation; their names, addresses and even identities have not been mentioned on the so-called deeds of guarantee dated 22nd July, 1995; the law laid down by various courts in this regard has been ignored by DRAT; the act of Respondent No. 1 by entering into subsequent contract with Respondent No. 3 Company through a new Board of Directors amounted to novation of the earlier contract. The learned DRAT has misconstrued the established principle of law that no debt barred by time can be recovered; the earlier guarantees cannot continue if new set of documents, including guarantees were executed by the new directors/guarantor. No acknowledgment of guarantee or confirmation of loan liability was signed by the Petitioner No.1 and Respondent No.4 after they had resigned from the company, so the case against the erstwhile Directors is barred by limitation. The DRAT failed to consider that the present case is covered under Article 55 of the Limitation Act; the observations of the DRAT that the point of limitation and the suit being barred by time was not taken in the written statement is wrong as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofiles of D2 and D3. Aw-2/4 is the letter written by D-7 agreeing to mortgage his immovable property towards the collateral security for the credit facilities enjoyed by the company. As per AW-2/8 D4 communicated the bank that she was withdrawing from the personal guarantee. D5 and D6 also informed the bank that they had resigned from the Directorship of the company. They would say thereafter new contract was entered into by the new Directors D2 and D3 and enhancement of credit facilities to which they are not personally liable. The Bank was aware of the fact that new Directors came in place of D4 and D5. The bank immediately had entertained the new Directors and fresh proposals came from new Directors, there was sanctioning and disbursement of credit facilities without D4 to D6 as parties. AW-2/10 is Demand Promissory note dated 27.07.1995 executed by D3 and AW2/11 is its covering letter. AW-2/12 and AW-2/13 are fresh contracts with D2 and D3. AW-2/14 is another promissory note by D3 and AW-2/15 is its covering letter. AW-2/19 to AW-2/23 are the documents related to the mortgage created by D7. The sale deed AW-2/24 was deposited with the bank creating equitable mortgage. It shows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off the debt and get discharged. The other option was allow the principal debtor to arrange his own new sureties and continue the arrangement with the new parties. The bank opted the second one, the new set of sureties was accepted, a property was brought in as collateral security by way of creating equitable mortgage by D7. When the bank opted for the second option the bank can never say that the liability of the earlier sureties continued. Suppose a case where the mortgage created subsequently was found to be fake and the bank could not realise any amount from the mortgage property. The entire liability shifts on to the guarantors. At the time when the guarantee deed was executed the limit was certain and the obligation was made known to the sureties. But after D2 and D3 came to the picture there has been a subsequent enhancement to the credit facilities and it was only D2 and D3 who were executing the documents. Thus, the contracting parties changed, the amount was enhanced periodically, the constitution and composition of the principal borrower changed with the knowledge of the bank. How can the defendants 3, 4 and 5 be responsible for the subsequent credit facilities enjoyed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he personal guarantee of Mrs. Neeru Malhotra W/o Shri, Rajan Malhotra will be got released from the bank; that the bonds and personal guarantees of the existing Directors and Mrs. Neeru Malhotra will be waved after the deposit of Rs. 2,15,000/- with the bank. Clause 3 says D5 and D6 had to pay a sum of Rs. 2,15,000/- to the companies Account within month June, 1995. It is not known whether D5 and D6 complied this part. Anyhow as the liability of the sureties stand discharged by the conduct of the bank and the Principal borrower the bank has no authority for retention of the India Development bonds. The bank is directed to return the bonds to D6. The bank has a case that the immovable property of D4 and D5 was mortgaged. No documents have been produced except an affidavit to prove the mortgage. By filing an affidavit that the title holder will mortgage the property when the title document is received no mortgage can be created and there is no valid mortgage at all. D4 and D6 have no liability towards the bank on account the deeds of guarantee/pledge made by them." 18. The DRT was cautious of the fact that it was the Bank which had produced on record copy of resolution dated 24th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs to be a correct stand and these personal guarantee bonds were filled later on without even mentioning the names of the persons or addresses of the persons who had allegedly executed the said personal guarantees. Another factor which has to be kept in mind is that Mr. Pandey had submitted a letter dated 20th June, 1995 to the bank requesting for release of Indian Development Bonds given by him as collateral security, the said letter is reproduced herein: "Dated 20.6.95 To The Senior Manager Union Bank of India Overseas Branch, New Delhl-1 SUB. Release of India Development Bond as Collateral security. Dear Sir, We have submitted property papers worth Rs. 40 LACS as collateral Security for all our future credit from Bank as per decision of Directors. Hence now we request for release of old security of I.D. Bond as soon as possible. Thanking and Regards, Sd/- in English (Ram Raghubir Pandey) 234, JAGRITI ENCLAVE Delhi-92 Received - Sd/- (Bank Manager) 23.6.95" 21. The said letter was received by the bank on 23rd June, 1995. Respondent No. 4 here had even withdrawn his collateral security vide this letter, so he has no occasion to go back to the bank and exec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, or to rescind or alter it, the original contract need not be performed. Illustrations (a) A owes money to B under a contract. It is agreed between A, B and C, that B shall thenceforth accept C as his debtor instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted. (b) A owes B 10,000 rupees. A enters into an arrangement with B, and gives B a mortgage of his (A's) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old. (c) A owes B 1,000 rupees under a contract. B owes C 1,000 rupees. B orders A to credit C with 1,000 rupees in his books, but C does not assent to the arrangements, B still owes C 1,000 rupees and no new contract has been entered into." 25. In the present case there is no denial of the fact that initially the loan was taken by the Respondent No. 3 Company on the basis of the documents executed by the Petitioners and Respondent No. 4. As the Petitioner No.1 and Respondent No.4 are concerned, they were also Directors; Petitioner No.2 is wife of Petitioner No.1 and she stood surety; the collateral security was of the India Development Bonds pledged by the Responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or to substitute the debtors by new set of debtors. In the present case, the original loan contract comes to an end when the Petitioner No.1 and Respondent No.4 walked out of the Respondent No.3 company by resigning as its Directors with the consent of the Respondent No.1 Bank. A new set of Directors walked in who had not only re-casted the debt with the express consent of Bank but Respondent No. 1 also enhanced the limits on their asking. They also executed a new set of documents i.e. promissory note, the loan agreement and their personal guarantee bonds and the collateral security by mortgage of the property by Respondent No. 7. The substitution of a new contract is the core of novation and once a subsequent contract has been executed between the parties, net effect is that the earlier obligations stand discharged and it is the new contract that will define the relationship of the parties and it is a new cause of action which arises on execution of the new contract between the parties. The intention of the parties is very clear from the chain of events as mentioned hereinabove. 28. Moreover, there is material of change in the amount being financed by the Respondent No.1 on exe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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