2001(1) ALL MR 94
IN THE HIGH COURT OF JUDICATURE AT BOMBAY

A.P. SHAH AND VIJAY DAGA, JJ.

Shri. Vijay Singh Padode & Anr. Vs. Sicom Ltd.

Appeal No. 644 of 2000,Summons for Judgment No. 1012 of 1998,Summary Suit No. 2361 of 1998

8th September, 2000

Petitioner Counsel: Shri. VIVEK WALAWALKAR, M/s. UDWADIA, UDESHI & BERJIS
Respondent Counsel: Mrs. S. P. TRIVEDI, PRAKASH PUNJABI & CO.

(A) Sick Industrial Companies (Special Provisions) Act (1985), S.22 - Recovery suit filed against guarantor - Can not be proceeded with without consent or permission of the Board.

AIR 1998 Bom. 247 held no longer good law in view of JT 2000(8) 252. (Para 7)

(B) Sick Industrial Companies (Special Provisions) Act (1985), S.22 - Permission of BIFR for suit against Sick Company - Whether can be used for suit against guarantor - Yes. (Para 10)

Cases Cited:
Madalsa International Ltd. Vs. Central Bank of India, 1998(2) ALL MR 443=AIR 1998 Bom. 247 [Para 5]
M/s. Patheja Bros. Forgings & Stamping & anr. Vs. ICICI Ltd., 2000(4) ALL MR 243 (S.C.)=JT 2000(8) 252 [Para 7]


JUDGMENT

Vijay Daga, J.:- Admit. Respondents waive service. By consent, appeal is taken up for final hearing.

The two questions fall for our determination in this appeal from the order dated 6th April, 2000 passed by the learned Single Judge of this Court in Summons for Judgment No. 1012 of 1998, in Summary Suit No. 2361 of 1998. Firstly, whether section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, ("the said SICA Act") is applicable to the suit against the guarantor of a loan or advance that has been granted to the concerned industrial company. Secondly, whether the permission granted under section 22 of the said SICA Act by the Board of Industrial and Financial Reconstruction ("BIFR") by an order dated 29-3-2000 to proceed with the recovery suits filed against the Company can be made use by the creditor to proceed with the recovery suit filed against the guarantors of the company.

The sequence of events leading to the institution of the suit, by the respondents SICOM giving rise to this appeal may shortly be stated as follows :

2. At the request of one DSJ Communication Ltd. ("the company") the respondents (SICOM) vide its letter dated 21st December 1995 sanctioned a short term loan of Rs. 100.00 lacs to the Company. The company on 27-12-1995, executed in favour of the respondents a loan Agreement and a Demand Promissory Note to secure said sum of Rs. 100.00 lacs with interest thereon. The appellants executed guarantee agreement in favour of respondents guaranteeing repayment of the said sum of Rs. 100.00 lacs together with interest, costs, charges, expenses etc.

3. The Company failed to pay respondents dues. The respondents, therefore, by their demand notice dated 9th September 1997 and thereafter by their Advocate's notice dated 21st October 1997 called upon the Company and the guarantors i.e. appellants to pay the respondents dues towards the aforesaid loan. The company vide its letter dated 5th November 1997 addressed to the respondents advocate informed that the Company had voluntarily offered a property worth an equivalent amount of the respondent's dues to set off the above loan and that the Company would seek further necessary advice of the respondents Managing Director in the matter with the result no action for recovery was initiated against the principal borrower company.

4. The Respondents SICOM relying upon the terms of Deed of guarantee, which provided that the guarantors shall not be released or discharged of their liabilities even if respondents in exercise of their powers had chosen to grant time to the company, filed a suit, being Regular Civil Suit No. 2361 of 1998 against guarantors for recovery of its dues in the sum of Rs. 1,20,00,302/- advanced by the respondents to the company and guaranteed by the guarantors, the present appellants.

5. After the suit was filed, writ of summons was served on the guarantors (defendants in suit). They filed their appearance in time, Chamber Summons was taken out. The guarantors filed their reply. The respondents (plaintiffs) in the said suit prayed for decree against the guarantors. The guarantors relying upon section 22 of the SICA Act contended that the suit filed against guarantor, being a recovery suit, could not have been filed or proceeded with without the consent of the BIFR. The said contention was rejected by the learned Single Judge of this Court, by an order dated 6-4-2000, relying upon a judgment of the Division Bench in the case of Madalsa International Ltd. & Ors. Vs. Central Bank of India AIR 1998 Bom. 247 : [1998(2) ALL MR 443 ]. However, leave to defend was granted subject to deposit of Rs. 1,20,20,000/- and the suit was ordered to be transferred to the list of commercial causes subject to deposit being made.

6. Being aggrieved by the aforesaid order of the learned Single Judge of this Court, present appeal has been filed. It was pleaded that as per provision of section 22(1) of the SICA Act no suit for enforcement of any guarantee in respect of any loans or advances granted to a sick company can be filed or proceeded with during the pendency of the reference except with the consent of the Board.

7. The learned Counsel appearing for the appellants brought to our notice that the judgment of this Court in the case of Madalsa International Ltd. (Supra) is no longer a good law in view of the judgment of the Apex Court in the matter of M/s. Patheja Bros. Forgings & Stamping & Anr. Vs. ICICI Ltd. JT 2000(8) 252 : (2000(4) ALL MR 243 (S.C.)) and contended that the judgment of the learned Single Judge needs to be set aside as the very basis of the judgment no longer holds good. The Apex Court after taking survey of the SICA Act held that section 22 also covers the recovery suits filed against the guarantors as such suits cannot be filed or proceeded with against the guarantors without the consent of the Board. The observations of the Apex Court are reproduced hereinbelow.

11. "It remains to deal with the judgment of the Division Bench of the Bombay High Court in Madalsa International Limited. The Division Bench found no ground to so read Section 22 as to hold that a suit against the guarantor also stands suspended. It is said, "The guarantor could be absolute third parties or directors of an industrial Company. However, in both cases it would be the guarantors, whether third parties or directors, who would be affected personally and we see no reason to interpret the Section in such a manner that apart from the properties of the industrial company, the legislature intended to protect the personal interest of the guarantors as proceedings against guarantor and their personal property would not affect the revival of the industrial company in any manner whatsoever. In the circumstances, the words, "of any guarantee in respect of any loans, or advance granted to the industrial company" in the context will have to be read as the guarantee given by the industrial company itself and none else."

12. "We have analysed the relevant words in section 22 and found that they are clear and unambiguous and that they provide that no suit for the enforcement of a guarantee in respect of any loan or advance granted to the concerned industrial company will lie or can be proceeded with or without the consent of the Board or the Appellate Authority. When the words of a legislation are clear, the Court must give effect to them as they stand and cannot demur on the ground that the legislature must have intended otherwise."

Thus, in view of the above judgment of the Apex Court it would no longer be open to debate that the suit against the guarantor can be proceeded with even without the consent or permission of the Board.

8. The second issue, as a consequence of the above judgment of the Apex Court canvassed before us by the learned Counsel for the appellant is that suit against guarantors cannot be filed or proceeded with unless there is permission of the Board in that behalf. The learned Counsel appearing for the respondents while replying the above submissions, brought to our notice the order of the Board dated 29-3-2000 and contended that they are armed with permission of the Board to proceed with the recovery suit already filed. The order of the Board dated 29-3-2000 is on record. It reads as under :

"The recovery suits already filed against the company could be continued but no fresh suit should be filed or decree, if any, obtained executed without prior approval of BIFR."

The learned Counsel for the appellant in rejoinder contended that the aforesaid direction can only operate in respect of recovery suit filed against the company. It cannot be pressed into service to file or proceed with the recovery suit filed against the guarantor. He, therefore, went on to contend that unless specific permission is obtained from the BIFR to proceed with the suit filed against the guarantors, the same can not be proceeded with.

9. In the light of the aforesaid rival contentions the following point arises for our consideration :-

Whether the permission to proceed with the recovery suit against the company can be made use of to proceed with the recovery suit filed against the guarantors ?

10. Before proceeding to consider the above issue, it would be profitable to review the relevant provisions of law in this regard. Section 126 of the Indian Contract Act defines "contract of guarantee". It states :

"A contract of guarantee" is a contract to perform the promise to discharge the liability of a third person in case of his defaults. The person who gives a guarantee is called "surety"; the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called "creditor". A guarantee may be either oral or written."

Thus the Contract Act defines 'guarantor' principal debtor, 'surety' and 'creditor'. Contract of guarantee requires concurrence of three persons the principal debtor, the surety, and the creditor and the surety undertaking an obligation at the request express or implied of the principal debtor. The obligation of the surety depends substantially on the principal debtor's default. In the present case, appellant furnished guarantee in favour of the respondents, SICOM and guaranteed repayment of the debt due by the company. Section 128 of the Indian Contract Act provides that the liability of the surety is coextensive with that of the principal debtor unless it is otherwise provided by the contract. It is therefore, necessary to consider whether in the terms of the guarantee there is anything which shows that the liability of the surety is not coextensive with that of principal borrower. Certain relevant clauses of the guarantee amongst others are reproduced hereinbelow :-

" 6. The guarantors hereby agree and declare that their liability under these presents, shall be irrevocable, joint and several with the liability of the company for repayment of the said loan together with interest, costs, charges and expenses.

8. The Guarantors hereby agree that in order to give effect to the guarantee herein contained, SICOM shall be entitled to act as if the guarantors were and are the principal debtors to SICOM for all payments and covenants guaranteed by them as aforesaid to SICOM and that it will not be necessary for SICOM to sue the company before suing the guarantors or any of them for the amount due under the said security documents.

9. The Guarantee contained herein shall be enforceable against the Guarantors notwithstanding that no action of any kind has been taken by SICOM against the Company and an intimation in writing sent to the Company and/or the Guarantors by SICOM that a default or breach has occurred, shall be treated as final and conclusive proof as to the facts stated therein.

15. The Guarantors further declare that this guarantee shall not in any manner be affected by reason of any laches on the part of SICOM to recover the amount due from the Company.

16. The Guarantors further declare that as between SICOM and the Guarantors, the Guarantors will be treated as principal debtors jointly with the company and accordingly the Guarantors shall not be entitled to and the Guarantors hereby waive all the rights conferred on the Guarantors by sections 133, 134, 135, 139 and 141 of the Indian Contract Act."

By Clause 6, it is specifically stipulated that the liability of the guarantors shall be irrevocable, joint and several with that of the company for repayment for the said loan together with interest, costs, charges and expenses; whereas Clauses 8 and 16 records that the guarantors have agreed that in order to give effect to the guarantee, SICOM shall be entitled to treat the guarantors as if they were and are the principal debtors to SICOM for all payments guaranteed by them and it shall not be necessary for SICOM to sue the company before suing the guarantors or any of them for the amount due under the security documents. The guarantee has been made enforceable against the guarantors notwithstanding no action has been taken by SICOM against the company. It is thus clear from the terms of the guarantee that SICOM has option either to file a suit for recovery against the company joining the guarantors as co-defendants or the guarantors can also be treated as principal debtors jointly with the company. The permission granted by the Board as extracted in para 8 supra can very well be used to proceed with such suits. The SICOM can also file a suit only against the guarantors treating them as principal debtors, without joining the company as a party to the suit. The guarantors in that event, shall be treated to have stepped in the shoes of the Company. Even if the matter is viewed from this angle, the above referred permission granted by the BIFR to proceed with the recovery suits filed against the company can very well be made use of to proceed with the suit filed against the guarantors. Any other view would mean that recovery suit can be proceeded against sick company but not against the guarantors. The guarantors do not stand on higher pedestal than the company. The contention canvassed on behalf of the appellants if accepted, shall in our opinion, lead to absurdity which must be avoided in any event.

In the backdrop of the above discussions, we hold that the permission granted by the Board to continue with the recovery suit already filed against the Company would also serve as a permission to proceed with the recovery suit already filed against the guarantors. Thus, in the instant case, suit filed against the guarantors by SICOM can be proceeded with in accordance with law.

In view of the aforesaid findings, we have no option but to dismiss the appeal and confirm operative part of the order passed by the learned Single Judge of this Court though for the reasons other than the reasons recorded by him.

In the result, the appeal is dismissed. No order as to costs.

Appeal dismissed.