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Wednesday, April 29, 2015

Sec.128 of Indian Contract Act - Guarantee co existence with that of Principal unless specifically exempted in the letter of Guarantee - mother aged 85 years, having 1/6 share with limited rights to enjoy the property through will , stood as Guarantor for Mortgage loan executed by her sons for business purpose infavour of Bank - failed to pay debt - Bank filed a petition to DRT - DRT referred the case before Lok Adalat for settlement - joint memo filed but mother not signed - time given to deposit the settled amount towards one time settlement - but the sons principal debtors failed to pay the Lok Adalat awarded amount - while pending sale notices , she filed for setting aside the Lok Adalat Award as it is not binding on her - High court set aside the Award as she is not signed on the Joint Memo and thereby set aside sale etc. conducted pending enquiry - Apex court held that the guarantor cannot escape from her liability as a guarantor for the debt taken by the principal debtor. In the loan agreement, which is the contract before us,there is no clause which shows that the liability of the guarantor is not co-extensive with the principal debtor. Therefore Section 128 of the Indian Contract Act will apply here without any exception.- mere fact of ignorance of joint memo not beliveable as sons and mother are living together - 2015 S.C.MSKLAWREPORTS



The Respondent No.1  C.L.  Vimla
who is a  senior  citizen  aged  about  85  years,  is  the  guarantor. 
The
appellant Central Bank of India is the Bank to whom  the  property  involved
in the present case, was mortgaged.
The property  involved  in  the  present
case is a residential house which was  purchased  by  the  husband  of  C.L.
Vimla, namely, C.L.Narsimhaiah Shetty, under a sale deed  dated  10.06.1997.
She is in possession of the property along with other  family  members.  Her
husband, during his life time, executed a Will dated 31.05.1995  bequeathing
his undivided share in favor of his sons  equally  and  while  settling  the
property he granted life interest in favour of the  guarantor.  
However,  he
has not authorized her to sell or mortgage the property.  
The  property  was
mortgaged in favour of Central Bank of India  (hereinafter  referred  to  as
“the Bank”) for raising a loan of Rs.17,50,000/- for  family  business.

The Debt Recovery Tribunal referred  the  case
for settlement before Lok Adalat.
The High Court  Legal  Services  Committee
considered the reference and passed an award whereunder  the  borrower  have
agreed to pay Rs.33,50,000/- as final settlement of the claim of  the  Bank.

This settlement was not within the knowledge of the guarantor C.L. Vimla  as
she had not signed the joint memo. 
One of her sons  N.  Surya  Bhagavan  has signed it. Her advocate has also signed the  Joint  Memo. 

 It  was  only  on
5.4.2006 when she learnt that the property has been ordered to  be  sold  by
auction. She also  learnt  about  the  signing  of  Joint  Memo  by  N.Surya
Bhagavan and the Bank. 

The High Court of Karnataka, in the impugned judgment, has  dealt  with  the
issues individually. The Court had framed issues on the  inherent  power  of
the Lok Adalat, the action of the Debt Recovery Tribunal (DRT)  in  deciding
the interim applications filed by the guarantor and the  possession  by  the
auction purchaser and payment of solatium to the Central Bank of  India.  On
the issue of the inherent power of the Lok  Adalat,  the  High  Court  after
relying on a number of decisions held that as the guarantor was not a  party
to the Joint Memo, the decree would not be binding  on  her.  Regarding  the
validity of the sale, the High Court held that the sale was not done as  per
the mandate of the sale proclamation which said that  the  sale  was  to  be
conducted part by part  and  stopped  as  soon  as  the  decree  amount  was
realized. Thus, the High Court held that the auction was violative of  Order
21 Rule 64. It also rejected the plea for solatium of  20%  of  the  Central
Bank of India.

Apex court held that
the liability of the guarantor under Section  128  of  the  Indian
Contract  Act,  1872 The  legislature  has  succinctly  stated  that   the
liability of the guarantor  is  co-extensive  with  that  of  the  principal
debtor unless it is otherwise provided  by  the  contract.  This  Court  has
decided on this question, time and again, in line with  the  intent  of  the
legislature.
 In Ram Kishun  this Court has held that “in view of the provisions of Section  128
of the Contract Act, the liability of the guarantor/surety  is  co-extensive
with that of  the  debtor.”   The  only  exception  to  the  nature  of  the
liability of the guarantor is provided in the Section itself, which is  only
if it stated explicitly to be otherwise in the Contract.



In the case of Ram Kishun (supra), this Court has also  stated  that  it  is
the prerogative of the Creditor alone whether  he  would  move  against  the
principal debtor first or the surety,  to  realize  the  loan  amount.  This
Court observed:



“Therefore, the creditor has a right to obtain a decree against  the  surety
and the principal debtor. The surety has no right to restrain  execution  of
the decree against him until the creditor has exhausted his  remedy  against
the principal debtor  for  the  reason  that  it  is  the  business  of  the
surety/guarantor to see whether the principal debtor has paid  or  not.  The
surety does not have a right to dictate terms to the creditor as to  how  he
should make the recovery and  pursue  his  remedies  against  the  principal
debtor at his instance”.







Thus, we are of the view that in  the  present  case  the  guarantor  cannot
escape from her  liability  as  a  guarantor  for  the  debt  taken  by  the
principal debtor. In the loan agreement, which is the  contract  before  us,
there is no clause which shows that the liability of the  guarantor  is  not
co-extensive with the principal debtor. Therefore Section 128 of the  Indian
Contract Act will apply here without any exception.



After a thorough reading of the Form of  Guarantee  for  Advances  &  Credit
Generally, our attention has been drawn to Clause 2 where  Respondent  No.1,
C.L. Vimala and one of her sons  N.  Ramesh  Babu,  have  stated  under  the
relevant part of the clause as under:

“2)……in relation to the subject matter of this guarantee  or  any  judgement
or award obtained by you against the principal debtor shall  be  binding  on
us….”



This Court has held in United Bank of India  that the Clauses  in  the  letter
of guarantee are binding on the guarantors as follows:

“In view of the above, the question regarding  confirmation  of  the  decree
against the guarantors now needs to be settled. ……………… we see no reason  why
the guarantors should not be made liable under  the  letters  of  guarantee,
the terms whereof clearly stipulate that on the  failure  of  the  principal
debtor to abide by the contract, they will be liable to pay the  amount  due
from the principal debtor by the appellants. Clause  15  of  the  letter  of
guarantee, in terms states that any action settled  or  stated  between  the
bank and the principal debtor or admitted by the principal debtor  shall  be
accepted  by  the  guarantors  as  conclusive  evidence.  In  view  of  this
stipulation in the letter of guarantee, once  the  decree  on  admission  is
passed against the principal debtor, the guarantors would become  liable  to
satisfy the decree jointly and severally.”

Thus, we see no reason why the Joint Memo, which states  compromise  arrived
at between the Central Bank of India and the principal  debtors,  would  not
bind C.L. Vimla when under Clause (2) she has admitted that any judgment  or
award obtained by the Central Bank of India  against  the  principal  debtor
would bind the parties.



The mere fact of ignorance cannot be a valid ground.  The  respondent,  C.L.
Vimala and her son,  N.Surya  Bhagavan  who  signed  the  joint  memo,  were
residing in the same house. We see no reason why the  Respondent  would  not
know of the joint memo,  when  she  could  have  by  reasonable  means  made
herself aware of the proceedings.

Accordingly, we set aside the order passed by the High Court and  hold  that
since the auction purchaser  has  already  paid  the  full  amount  of  sale
consideration and is in possession of the  property  in  question  for  more
than about 8 years, for equity and good conscience,  we  do  not  intend  to
interfere with his possession and we, therefore, set aside the order  passed
by the High Court, and allow these appeals. - 2015 S.C. MSKLAWREPORTS

  

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