CENTRAL BANK OF INDIA Vs. VIRUDHUNAGAR STEEL ROLLING MILLS LTD&ORS

Supreme Court of India (Division Bench (DB)- Two Judge)

Appeal (Civil), 3654 of 2006, Judgment Date: Dec 29, 2015

                                                                  REPORTABLE



                        IN THE SUPREME COURT OF INDIA

                         CIVILAPPELLATE JURISDICTION

                           CIVIL APPEAL No. 3654 OF 2006




CENTRAL BANK OF INDIA                                         .….. APPELLANT

                                      Vs.

VIRUDHUNAGAR STEEL ROLLING MILLS
LTD. & ORS.                                                 .….. RESPONDENTS



                               J U D G M E N T



VIKRAMAJIT SEN, J.


1     This Appeal assails the concurrent findings  of  the  Trial  Court  as
well as the High Court absolving  the  Respondents,  other  than  Respondent
No.1 which is the company which received various credit facilities from  the
Appellant Bank, of a total  amount  of  [pic]12  lacs  against  security  of
moveable as well as  raw  materials.   These  facilities  were  subsequently
secured in favour of the Appellant Bank by means of continuing guarantee  by
the Directors of the Respondent Company, who are  Respondent  Nos.  2  to  4
herein, in terms of Promissory  Notes,  Letters  of  Guarantee,  Letters  of
Hypothecation and Letters of Continuity all dated 30.8.1974.   On  30.6.1977
and again on 31.12.1977, by means of separate letters  from  the  Respondent
Company to the Appellant Bank, the  entire  balance  due,  stood  confirmed.
Eventually,  the  Appellant  filed  a  suit  on  2.5.1980  for  recovery  of
[pic]3,94,805.42 with future interest at the rate of 14 per cent per  annum.
 In the interregnum another  creditor  of  the  Respondent  Company,  namely
Respondent No. 5, had already initiated recovery proceedings  in  the  Court
in the course of which the properties of   Respondent  Company  came  to  be
auctioned and were purchased by Respondent No. 6 on 26.10.1979.
2     As many as ten issues were framed by the Trial Court which went on  to
decree the suit against the Respondent Company, but dismissed it as  against
Respondent Nos. 2 to 4.  The conclusions of the Trial Court so far  as  they
are germane to decision in this Appeal were that  the  liabilities  incurred
by the Respondent Company prior to the execution of the personal  guarantees
by Defendant Nos. 2 to 4 were not recoverable from the latter.    The  Trial
Court placed reliance on two judgments of  the  Madras  High  Court,  namely
J.J. Harigopal Agarwal v. State Bank of India AIR 1976 MAD  211  and  D.  K.
Mohammed Ehiya Sahib  v.  R.M.P.V. Valliappa Chettiar AIR 1976 MAD 536.   In
the latter case it was held that if there is any variation in  the  original
contract the legal consequence would be that the surety stood absolved.
3     The impugned Judgment notes that the main submission on behalf of  the
Appellant Bank was  that  all  the  documents  executed  by  the  Respondent
Company,  including  those  dated  30.8.1974  and  the  acknowledgement   of
liability dated 30.6.1977  and  31.12.1977  had  to  be  taken  together  in
fastening the liability of the Directors  of  the  Company  with  regard  to
their personal guarantees.  It also noted that  in  none  of  the  documents
relied  upon  by  the  Respondent  Company  had  Respondent  Nos.  2  to   4
acknowledged or undertaken their personal liability and/or  stood  guarantee
for repayment of any specific and liquidated  amounts  already  advanced  by
the Appellant Bank to the Respondent Company prior to 30.8.1974.   The  High
Court also returned the  finding  that  there  was  no  cogent  evidence  to
establish that the claims  raised  in  the  suit  pertained  to  advance  or
credits made subsequent to 30.8.1974, the date on which  Respondent  Nos.  2
to 4 had executed the documents relied upon by the Appellant Bank.
4     The learned Counsel  appearing  for  the  Appellant  Bank  had  raised
arguments, firstly to the question of limitation, secondly to the  discharge
of surety by variance and thirdly on priority claims in respect of  Rollers.
 Since the question which engaged the attention of the  High  Court  in  the
impugned Judgment revolved around the fastening  of  the  liability  on  the
Respondent Nos.2 to 4 in respect of transactions prior to the  date  of  the
execution of  those   documents,  i.e.  30.8.1974,  we  shall  restrict  our
attention only to this point.  It will be a relevant  reiteration  that  the
entire claim of the Appellant Bank had been decreed against  the  Respondent
Company.
5     So far as the factual matrix is concerned, the Respondent Company  was
a constituent of the Appellant Bank for a considerably long period  and  had
availed of various facilities including cash credit, etc.    It  is  not  in
dispute that of the limit of [pic]12 lacs sanctioned by the  Appellant  Bank
in favour of the Respondent  Company,  the  balance  on  the  close  of  the
business on 29.8.1974 was [pic]7,68,853.39, and the  latter  stood  indebted
to the former for the aforesaid sum.   Learned  counsel  for  the  Appellant
Bank had sought to rely on Montosh  Kumar  Chatterjee  v.  Central  Calcutta
Bank Ltd. (1952-53) 57 CWN 852, the ratio of which  appears  to  be  that  a
creditor is not bound to volunteer to a surety information as to  the  state
of the principal debtor’s account;  and  that  a  creditor  is  entitled  to
appropriate payments received subsequent to the  execution  of  a  guarantee
bond, even so far as  a  pre-existing  debt  of  which  the  surety  had  no
knowledge; that there  can  be  no  presumption  that  the  surety  will  be
efficacious for prior as well as current and future debts.  We note that  in
the case in hand, the Letter of Guarantee signed on 30.8.1974 by  Respondent
Nos. 2  to  4  makes  no  mention  of  any  old  transactions,  although  it
specifically records that the liability  of  the  guarantors  cannot  exceed
[pic]12 lacs.   The Letters of Guarantee  could  easily  have  recorded  the
liabilities outstanding against the Respondent Company on 30.8.1974 with  an
affirmation from Respondent Nos. 2 to 4 that they  were  guaranteeing  these
outstandings.    Woefully  for  the  Appellant  Bank,  there  is   no   such
acknowledgment or assumption of liability  in  the  subject  Guarantee.  The
High Court has pithily noted the  statement  of  P.W.1,  Accountant  of  the
Appellant Bank, who has deposed to the effect that  the  Deed  of  Guarantee
made no mention of any prior transactions.  It appears to  us  that  if  any
doubts  in  this  regard  still  persisted,  they  stood  dispelled  by  the
testimony of D.W.1,  who  has  stated  in  his  cross-examination  that  the
Appellant Bank obtained the Guarantee Deed  on  the  understanding  that  it
would be effective and relevant only with  regard  to  debts  subsequent  to
30.8.1974.   This  very  witness  had  also  clarified  that  the  Guarantee
arrangements made no mention whatsoever that they were effective in  respect
of prior debts.
6     The decision in Sita Ram Gupta v. Punjab National Bank  (2008)  5  SCC
711 is of no advantage to the Appellant Bank.  That  decision  concerns  the
possibility of a guarantor  revoking  his  continuing  guarantee,  with  the
objective of escaping his liability.    This  is  not  the  case  before  us
inasmuch as the defence of Respondent Nos. 2 to 4 is that  they  had  agreed
to stand surety only for transactions after 30.8.1974.   Our  attention  was
also drawn to B. G. Vasantha v. Corporation Bank, Mangalore  (2005)  10  SCC
215 as also M.S. Anirudhan v. Thomco’s Bank Ltd. AIR 1963 SC 746  but  these
decisions do not call for a detailed analysis.  It  is  the  Appellant  Bank
which drafted the Guarantee Deed, and in case of doubt, the  document  would
be read against it.  This is the contra proferentem  rule,  which  is  of  a
vintage which brooks no contradiction.
7      In  view  of  the  foregoing  discussion,  there  appears  to  be  no
controversy as to the fact that the Guarantee Deeds executed  by  Respondent
Nos.  2  to  4  on  30.8.1974  rendered  them  personally  liable  for   any
transactions or advances made  by  the  Appellant  Bank  to  the  Respondent
Company after 30.8.1974.   There is also no controversy whatsoever that  the
Bank  account  lay  dormant  after  this  date,  all  dealings  having  been
transacted much prior thereto.   Such being the position, it is not open  to
the Appellant Bank to pursue Respondent Nos. 2 to 4 for  recovery  of  debts
incurred by the Respondent Company in favour of the Appellant Bank.  We  may
clarify that our decision is founded on the evidence that has been  recorded
in this suit.  We should not be misunderstood to have held that a  guarantor
can, in no  circumstances  be  fastened  with  liabilities  which  had  been
incurred in the past which the guarantor assumed liability for.
8      We  accordingly  dismiss  the  Appeal  by  affirming  the  concurrent
findings arrived at by both the Courts below.  There  shall  however  be  no
order as to costs.


                                                                …………………………J
                                                           [VIKRAMAJIT SEN]



                                                                …………………………J
                                                        [SHIVA KIRTI SINGH]
New Delhi;
December 29, 2015.