Appeal No.348 of 2003,Summons for Judgment No.466 of 2000,Summary Suit No.2805 of 1999

11th June, 2003

Petitioner Counsel: Mr. JANAK DWARKADAS,Ms. A. KALYANRAMANI,GAGRAT and Co.
Respondent Counsel: Mr. SHEKHAR NAPHADE,PRAKASH PUNJABI

Cases Cited:
State of Maharashtra Vs. M/s. National Construction Company, Bombay, AIR 1996 SC 2367 [Para 3]
Hindustan Construction Co. Ltd. Vs. State of Bihar, AIR 1996 SC 3710 [Para 3]
Union of India Vs. Pearl Hosiery Mills, AIR 1981 Punjab 281 [Para 4]
Central Bank Vs. Ali Mohd, 1993 Mah.L.J. 1092 [Para 4]
K. P. Chitguppi & Co. Vs. Vinayak Kashinath Khadilkar, ILR (Vol XLV)157 [Para 4]
Hodges Vs. Delhi and London Bank Ltd., 199-27 Ind-App 168 [Para 6]
Citibank N. A. Vs. Juggilal Kamlapat Jute Mills Co. Ltd., AIR 1982 Delhi 487 [Para 7]
T. Raju Setty Vs. Bank of Baroda, AIR 1992 Karnataka 108 [Para 7]
A. R. Krishnaswamy Iyer Vs. Travencore National Bank Ltd., AIR 1940 Madras 437 [Para 7]
Central Bank of India Vs. M/s. Multi Block Private Ltd., AIR 1997 Bom. 109 [Para 7]

JUDGMENT

A. P. SHAH, J. :- This Appeal is preferred against the judgment and decree dated 4-12-2002 passed by Deshmukh J in Summons for Judgment No.466 of 2000 in Summary Suit No.2805 of 1999.

2. The Appellant is Defendant and Respondent is Plaintiff-SICOM. Respondent had entered into an Agreement dated 10-1-1995 with Lloyd Finance Ltd., hereinafter referred to as the "company". Under that contract an amount of Rs.10 Crores was advanced as a loan to the Company. It was repayable in two installments of Rs.5 Crores each commencing at the end of two years from the date of distribution of the said loan. The loan was disbursed on 10-1-1995. Accordingly, the said loan was repayable in two equal installments of Rs.5 crores each, on 5-1-1997 and 5-1-1998. The company paid first installment i.e. Rs.5 crores on the due date. However, the company committed default in payment of second installment. One of the terms of the agreement between the Respondent and the company was that the Appellant gives an irrevocable and personal guarantee to the Respondent guaranteeing repayment of the said loan. The guarantee agreement was accordingly executed between the Appellant and the Respondent on 10-1-1995. The company as a security has pledged its shares with the Respondent. According to the Respondent, as default has been committed by the company, the amount has become recoverable as per the agreement and hence the summary suit has been filed by the Respondent against the Appellant. In reply to the Summons for Judgment taken out by the Respondent, the Appellant has inter alia contended (i) that the suit is bad for non-joinder of the necessary party i.e. the company; (ii) that since the Respondent has not instituted any suit against the company, present suit cannot be maintained by the Respondents; (iii) that Respondent has not enforced its security and has also not called for additional security to which it was entitled under agreement between the Respondent and the company, present suit is therefore not maintainable; (iv) that the loan is secured by pledging shares, therefore, the present summary suit is not maintainable; and (v) that charging of additional interest is charging penal interest and, therefore, the summary suit is not maintainable. The learned single Judge has held that various defences raised by the Appellant have no substance and have been raised to avoid the liability to pay huge amounts which are due to a public sector undertaking by the Appellant. Consequently the learned single Judge has decreed the suit in terms of prayer clauses (a) and (e) of the suit.

3. Mr. Dwarkadas, learned counsel appearing for the Appellant has not seriously pressed the first defence that the suit is bad for non-joinder of necessary party i.e. the company. It is obvious that the Respondent gets an independent cause of action in view of the contract of guarantee against the Appellant, and therefore, the company is not necessary party. This is the settled legal position in view of the decisions of the Supreme Court in State of Maharashtra and anr. Vs. M/s. National Construction Company, Bombay and anr., AIR 1996 SC 2367 and Hindustan Construction Co. Ltd. Vs. State of Bihar and anr., AIR 1996 SC 3710, where the Supreme Court has in terms held that the contract of guarantee is a contract independent of the underlying contract and so far as the rights between the creditor and the guarantor are concerned, they are governed by the contract of guarantee and the Plaintiff gets an independent cause of action against the guarantor.

4. Mr. Dwarkadas submitted that clauses in the contract of guarantee, which permitted institution of a suit against the Appellant without instituting the suit against the company are contrary to the provisions of sections 135 of 137 of the Contract Act. Mr. Dwarkadas further submitted that by virtue of Clause 2(o) of the contract of guarantee shares of the company were pledged with the Respondent and it was provided that value of such shares shall be subject to review every quarter and the company shall make good any devaluation in security as a result of fall in market value of the said shares. The submission of Mr. Dwarkadas is that the Respondent did not take any steps to value the shares quarterly, as a result the value of the shares has come down and, therefore, to that extent the Appellant is discharged of the liability. The submission is that the Respondent would be entitled to the security if he pays him and he will be entitled to enforce that security against the company and the Respondent by not taking timely steps in preserving that security and to that extent the Appellant is discharged. The learned counsel further submitted that under the contract between the company and the Respondent, the Respondent was entitled to call for additional security. However, no steps have been taken by the Respondent in that behalf and, therefore, the Appellant is discharged of its liability to that extent in view of provisions of sections 140 and 141 of the Contract Act. The learned counsel urged that the provisions of sections 133,135,140 and 141 of the Contract Act are not subject to the contract to the contrary between the parties to the contract. The provisions contained in the said sections are in unqualified terms. He placed reliance on the decision of the Punjab High Court in Union of India Vs. Pearl Hosiery Mills, AIR 1981 Punjab 281. In any event the learned counsel urged that the statutory right of surety under the provisions of the Contract Act could not be affected by consent given in advance to variance in the terms of the contract. He placed reliance on the decision of Wahane, J in Central Bank Vs. Ali Mohd., 1993 Mah. L.J. 1092 where the learned Judge held that surety's consent to variance must be at the time of act and the consent has to be simultaneously with novation. Mr. Dwarkadas also placed reliance on the decision of the division bench of this Court in K. R. Chitguppi & Co. Vs. Vinayak Kashinath Khadilkar, ILR (Vol XLV) 157.

5. Before adverting to the submission of the learned counsel for the Appellant, it would be useful to refer to the relevant clauses of contract between the parties. Clauses 5,8,9 and 14 of the contract are material and are reproduced herein below:

"5. (Sic) Irrevocable and shall be enforceable against the Guarantor notwithstanding that the securities or any of them specified under the said security document shall at the time when the proceedings are taken against the guarantor hereunder be outstanding or unrealized.

8. The Guarantor hereby agrees that in order to give effect to the Guarantee herein contained SICOM shall be entitled to act as if the guarantor was and is the principal debtor to SICOM for all payments and covenants guaranteed by them as aforesaid to SICOM and that will not be necessary for SICOM to sue the company before suing the Guarantor for the amount due under the said security document.

9. The Guarantee herein contained shall be enforceable against the Guarantor 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 Guarantor by SICOM that a default or breach has occurred shall be treated as final and conclusive proof as to the facts stated therein.

14. The guarantor further declares that this guarantee shall not in any event be affected by reason of SICOM obtaining any other/further securities from the company nor would it be affected by reason of SICOM failing to recover and/or realize any of the securities".

6. A perusal of the clauses 8 and 9 shows that the suit could be instituted against the Appellant treating him as principal debtor and it is not necessary for the Respondent to sue the principle debtor before instituting the suit against the guarantor and the guarantee given by the Appellant is enforceable against him notwithstanding the fact that no action has been taken by the Respondent against the company. In so far as the submission of discharge of surety under sections 140 and 141 is concerned, by clauses 5 and 14 the Appellant has waived his right under the above referred provisions of the Contract Act and it is not open for the Appellant to rely upon these provisions, even assuming that the Respondent has failed to call for proper additional security and as also failed to preserve the securities. The submission of Mr. Dwarkadas that these sections are not subject to the contract to the contrary to the contract between the parties, is without any merit. The contract itself created rights and liabilities between the parties. The parties have got right to contract out of the rights and liabilities mentioned in the Contract Act and that is envisaged by section 128 of the contract. It is true that we do not find the words "notwithstanding anything contained in" the contract to the contrary etc in sections 133 to 140 but therefore it does not follow that the parties cannot contract out of the rights and liabilities laid down under section 141 of the Contract Act. The issue is concluded by the decision of Privy Council in Hodges Vs. Delhi and London Bank Ltd., (199-27 Ind-App 168) where it has been held that rights conferred on the surety under the Contract Act could be waived by specific agreement in a deed of guarantee. In that case the Appellants therein in becoming sureties to the Respondent covenanted that though as respect the principal debtor they should be considered as sureties only, yet as regards the Bank they should "be considered as principal debtors", so as not to be exonerated from liability by any dealing between the Bank and principal debtor which would otherwise have that effect. It was held that the Appellant became liable as principal debtor to the Bank immediately on default of principal debtor and were not discharged by reason of time having been given to him.

7. In the case of Citibank N. A. Vs. Juggilal Kamlapat Jute Mills Co. Ltd., AIR 1982 Delhi 487 differing from the view expressed in Pearl Hosiery Mills case it has been held that it was not necessary for the Legislature to provide words "in the absence of any contract" in section 133 or section 135 or section 141, because section themselves speak of consent of the surety regarding variance in the terms of the contract between the principal debtor and the creditor, composition with the principal debtor etc. It has been further held that in the absence of words "without the surety's consent" the words "in the absence of any contract to the contrary" would have been surplus. Therefore following the decision of the Privy Council in Hodges Vs. Delhi and London Bank Ltd. it has been held that the rights conferred on the surety under sections 133,135 or 141 of the Act could be waived by specific agreement in a deed of guarantee and as a matter of fact such an agreement would amount to consent within the meaning of the aforesaid sections of the Act. This decision has been followed in T. Raju Setty Vs. Bank of Baroda, AIR 1992 Karnataka 108 and similar is the view taken by the Madras High Court in A. R. Krishnaswamy Iyer Vs. Travencore National Bank Ltd., AIR 1940 Madras 437. A learned single Judge of this court (Rane, J.) has categorically held in Central Bank of India Vs. M/s. Multi Block Private Ltd., AIR 1997 Bom. 109 that clauses in the guarantee bond waiving the rights under Chapter VIII of the Contract Act and other clauses for securing loan advanced cannot be said to be violative of the public policy or tainted with immorality. On the other hand the public policy should be that one should not allow to defeat the debt of the creditor.

8. In view of the decision of the Privy Council in Hodges Vs. Delhi and London Bank Ltd. it is not possible to accept the view expressed by the learned Judges of the Punjab High Court in Pearl Hosiery Mills case. In any event that was a case in which without consent of the surety variations were made in the terms of the original contract. Therefore in view of section 133 of the Act is was held that the surety stood discharged. Therefore it was not a case in which the point in question was considered. The decision by Wahane, J. in the case of Central Bank Vs. Ali Mohd. that the surety's consent to variation has to be simultaneously with novation does not lay down the correct law. With respect to the learned Judge the view expressed by him runs counter to the decision of the Privy Council in Hodges Vs. Delhi and London Bank Ltd. Reliance placed by Mr. Dwarkadas on the division bench decision in K. R. Chituppi company's case is totally misconceived. In fact that judgment supports the case of the Respondent than the Appellant. This is clear from the following observations :

"...I do not say that a surety can never anticipate the nature of a future variation and give his consent in anticipation of such variation. But it seems to me that in the present case there is neither a general nor a specific consent to the variation in the terms of the sub-agency. I am therefore of opinion that the lower appellate court was right in holding that in virtue of the provisions of section 133 the defendant no.2 was absolved from liability".

(emphasis supplied)

9. In so far as the present case is concerned, it is clear from the terms of the contract between the parties that the Appellant had clearly waived benefits that were available to him under the above referred provisions of the contract and, therefore it is not permissible for the Appellant to contend that the surety stood discharged in view of the alleged failure of the Respondent to take timely steps to preserve the security or to call for the additional security.

10. The next defence raised on behalf of the Appellant is that because of the security given by the company the present suit is not maintainable as a summary suit. This submission is not well founded. It is clear from clauses in the contract of guarantee that once default is committed by the principal debtor, suit could be instituted against the guarantor treating him to be a principal debtor. Therefore in terms of the agreement this suit has been filed treating the Appellant as the principal debtor and thus the suit cannot be said to be suit on guarantee for the purpose of sub-rule (2) of rule 1 of Order 37 of the C.P.C. The present suit is entirely based on the written contract between the parties, and therefore, the suit is maintainable as a summary suit under the provisions of Order 37 of the C.P.C.

11. Last defence raised on behalf of the Appellant that charging of additional interest amounts to charging of penal interest is required to be stated only to be rejected. Under clause 6 of the agreement interest is to be charged at the rate of 17.5% per annum. In case of default, from the date of default additional interest at the rate of 2.5% on the total amount of default was chargeable during the period of default. Clause 5 of the agreement provides that in case of default additional interest becomes payable and the additional interest charged at the rate of 2.5% p.a. on the total amount in default during the period of such default. It is therefore not possible to accept the contention that the Respondent was charging penal interest.

We therefore dismiss the appeal and confirm the decree passed by the trial court with costs.

On the request of the learned counsel appearing for the Appellant; this order is stayed for 8 weeks.

Appeal dismissed.