IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT CHENNAI
DATED THE 12TH JULY, 2005
PRESENT: HON'BLE MR. JUSTICE K. GNANAPRAKASAM
CHAIRPERSON
RA 17 of 2005
(OA 162/2000, DRT, Ernakulam)
BETWEEN
The Federal Bank Limited
Puthiyara Branch
Rep. by its Senior Manager
Puthiyara
Kozhikode District (Kerala)
PIN: 673 004
..Appellant
AND
- Sri. Sathya Prakash
“Kavitha”,
Koyilandy P.O.
Kozhikode District (Kerala)
PIN: 673 307
- V.K. Gopalan
S/o V.K. Onakkan
House No.1/3827-A, Bilathikulam
Temple Road
Kozhikode 673 006 (Kerala)
..Respondents
Appearance
For Appellant Bank: Ms. Kochurani, Law Officer
: O R D E R :
1. The Appellant Bank filed the Original Application No. 162/2000 for recovery of a sum of Rs.13,13,254.30p under the Cash Credit Account together with interest @ 19.89% p.a. with quarterly rests from the defendants jointly and severally and by sale of ‘A’ to ‘D’ schedule properties
The 1st defendant was the principal borrower and the 2nd defendant was the guarantor.
Though the 2nd defendant denied the execution of the guarantee agreement in Exh.A11, the Tribunal came to the conclusion that the 2nd defendant did execute the guarantee agreement Exh.A11 and rejected the contentions otherwise as contended by the 2nddefendant.
But, however, on the question that the 2nd defendant did not execute the guarantee agreement simultaneously when the 1st defendant borrowed the amount and therefore the guarantee agreement (Exh.A11) is not supported by consideration and thereby came to the conclusion that the 2nd defendant, the guarantor is not liable, and dismissed the OA as against the 2nd defendant. Aggrieved by the same, the bank has preferred this appeal.
2. Heard the Authorised Officer of the appellant bank. The 1st respondent was set exparte on 29.4.2005 and the 2nd respondent is absent throughout. The 2ndrespondent was not represented on 25.5.2005, 17.6.2005 and 5.7.2005, and today also he is not represented. The 2nd respondent is called absent and set exparte.
3. The 1st respondent had the benefit of loan on 27.2.1999, to which the 2nd respondent executed the deed of guarantee on 13.8.1999. Though the 2nd defendant had taken several pleas before the DRT, all his contentions were negatived and the DRT upheld that the 2nd defendant did execute the guarantee letter on 13.8.1999. But, however, the DRT held that the 2nd defendant did not execute the guarantee letter Exh.A11 simultaneously or contemporaneously on the date when the 1st defendant namely K. Sathya Prakash, the principal debtor, had the benefit of loan under Exh. A16 on 27.2.1999.
4. Now, the point which arises for consideration of this Tribunal is, whether the deed of guarantee executed by the 2nd defendant subsequent to the date of loan, is a valid guarantee and supported by consideration.
5. The DRT is of the view that the execution of the guarantee agreement Exh.A11 was not contemporaneous to the loan transaction, under which the 1stdefendant had the loan amount and therefore, Exh.A11 is not supported by consideration and hence not enforceable. The DRT also relied upon the decision rendered by the High Court of Kerala in Bank of Credit & C. International Vs. Abdul Rahiman - 1998 (1) KLT 292, wherein, it was observed,
“The consideration for the surety’s promise has not to come from the principal debtor, but from the creditor. It need not directly benefit the surety although it may do so and it may consist wholly of some advantage given to or conferred on the principal debtor by the creditor at the surety’s request. The consideration may take the form of forbearance by the creditor, at the surety’s request, to sue the principal debtor or of the actual suspension or pending legal proceedings against him. The mere fact of forbearance is not, however, of itself a consideration for a person’s becoming a surety for the payment of a debt. There must be either an undertaking to forbear, or an actual forbearance at the surety’s express or implied request. An agreement to forbear for a reasonable time will provide sufficient consideration to support a surety’s promise.
Guarantee is, in the nature of a collateral engagement to answer for the debt, default or miscarriage of another as distinguished from an original and direct engagement for the parties’ own act.
For the validity of a contract of guarantee it is adequate consideration if anything is done or any promise made for the benefit of the principal debtor.
The creditor must have done something for the benefit of the principal debtor to sustain the validity of a contract of guarantee.
Anything done or any promise made for the benefit of the principal debtor must be contemporaneous to the surety’s contract of guarantee in order to constitute consideration therefor. A contract of guarantee executed afterwards without any consideration is void. The word ‘done’ in S.127 is not indicative of the inference that past benefit to the principal debtor can be good consideration.”
The decision relied upon by the appellant bank rendered by the High Court of Andhra Pradesh in Y. Venkatachalapathy Reddy Vs. Bank of India & Anr. - (2003) 113 Company Cases 368 (A.P.), was also referred to by the DRT, but it had preferred the view taken by the Kerala High Court in Bank of Credit & C. International Vs. Abdul Rahiman, and came to the conclusion that the guarantee agreement Exh.A11 is not supported by consideration and therefore dismissed the OA as against the 2nd defendant. Now, the question would be, whether the decision by the DRT by preferring the view taken by the Kerala High Court in Bank of Credit & C. International Vs. Abdul Rahiman, than the decision rendered by the Andhra Pradesh High Court in Y. Venkatachalapathy Reddy Vs. Bank of India & Anr, is proper.
6. The Authorised Officer representing the appellant bank has submitted that though the 2nd defendant did not execute a guarantee letter on one and the same day when the 1st defendant had executed the necessary documents relating to the loan transaction and had the benefit of loan, nevertheless, the execution of the guarantee agreement by the 2nd defendant is sufficient act, which was done by him and it is sufficient promise made by him for the benefit of the principal debtor and it is a sufficient consideration to the surety for giving guarantee as postulated in Section 127 of the Contract Act, 1872, which reads as under:-
“Consideration for guarantee.-Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.”
The ingredients of this Section was also brought to the notice of the DRT, but it was not at all considered by the DRT. In fact, the scope and the applicability of this Section has been widely considered by the Andhra Pradesh High Court in the case of Y. Venkatachalapathy Reddy Vs. Bank of India & Anr. It is also evident from the above said judgement that there were divergence of opinion whether the surety bond executed subsequent to the loan transaction i.e. the surety relates to past consideration is a valid one or not.
7. Let us see what is the definition of “consideration” as defined under Section 2(d) of the Indian Contract Act, which states,
“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”
From this, it is evident that if at the instance of the promisor, if promisee does anything or abstains from doing something, that is sufficient consideration for the promise. In our case, at the instance of the 1st defendant, who is the principal borrower, the 2nd defendant had executed the guarantee agreement Exh.A11 and even if it is a subsequent act, I am of the opinion, that by such execution of the guarantee agreement, the 2nd defendant had the consideration for the contract. When that is established and accepted, there would not be any difficulty in fixing the liability to the 2nd defendant, who is the guarantor.
8. The next question would be, whether Exh.A11 the guarantee agreement would be hit by illustration (c) to Section 127 of the Contract Act. It would be useful to refer Section 126 of the Contract Act, which defines the contract of guarantee, surety, principal debtor and creditor.
Section 126 of the Contract Act reads:-
“A ‘contract of guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the ‘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 the ‘creditor’. A guarantee may be either oral or written.”
Section 127 of the Contract Act reads:-
“Consideration for guarantee.- Anything done, or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for giving the guarantee.”
Illustration (c) to Section 127 reads:-
“A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.”
On a plain reading of Section 127 of the Contract Act, it would not give room to any doubt, that if the guarantee agreement executed is for the benefit of the principal debtor, then it may be sufficient consideration to the surety. The Section does not say nor even it could be inferred that the said act/promise must be contemporaneous.
As such, the agreement of guarantee in respect of a past transaction is a sufficient consideration to the surety for giving the guarantee. But, however, illustration (c) to Section 127 of the Contract Act states that if the consideration was passed earlier and the surety agrees to pay the amount in default of the principal debtor without passing consideration contemporaneously, the agreement is void. In this connection, the Andhra Pradesh High Court was able to lay its hands to the decision rendered by a Division Bench of Karnataka High Court in Jayakunvar Manilal Shah Vs. Syndicate Bank - (1992) 1Bank CLR 485,wherein the Karnataka High Court relied upon the earlier judgement of the Privy Council in Kali Charan Vs. Abdul Rahman, AIR 1918 PC 226, wherein it was held that, “the execution of the surety bond subsequent to the principal agreement, if it is in compliance with the terms of the principal agreement, that itself is a sufficient consideration for the surety.” Based upon that view, the Karnataka High Court, in the case of Jayakunvar Manilal Shah’s case, held that,“Surety bonds were executed though on a date subsequent to the principal agreement was executed, but the surety bonds were executed in pursuance of one of the terms of the agreement and that itself was a sufficient consideration.” The Andhra Pradesh High Court also referred to the decision of the Division Bench of Bombay High Court (Goa Bench) in Union of India Vs. Avinash P. Bhonsle – (1991) 2 Bank CLR 578; (1993) 76 Company Cases 326, wherein it was held, “if the language of the text of section 127 of the Act is clear and unambiguous, the sweep of the text cannot be curtailed by using illustration (c) to section 127 of the Act to impose a limitation on the expression “anything done or any promise made for the benefit of the principal debtor” that it should be done at the time of giving the guarantee and that the language is wide enough to include anything that was done or a promise made before giving the guarantee and would not restrict the application of the Section if the consideration to the principal borrower is not passed contemporaneously.” The Andhra Pradesh High Court preferred the said view and held that though the guarantee agreement was executed subsequent to the borrowing, the same is valid and binding upon the guarantor. This view was taken by the Division Bench of the Andhra Pradesh High Court, after taking into consideration, the decision rendered by several other High Courts and I am in complete agreement with the said view, as no other contrary view is possible. As such, any guarantee agreement not executed contemporaneously to the principal agreement, if it is for the benefit of the principal debtor, that may be sufficient consideration to the surety.
9. In our case, the second defendant denied the very execution of the guarantee agreement Exh. A11 and the same was rejected by the DRT and it had held that the execution and validity of Exh.A11 cannot be questioned. But, however, the DRT has committed an error in holding that as it was executed subsequent to the loan transaction and Exh.A11 was not contemporaneous to Exh.A16 and hence it is not valid, is liable to be set aside and accordingly it is set aside.
10. When the language of a Section is clear and unambiguous, it is not open to interpret it in any other manner, as it has been done by the DRT.
11. In the result, the order of the DRT, Ernakulam dated 3.9.2004 dismissing the claim of the appellant bank against the 2nd defendant alone is set aside. In other respects, the Order passed by the DRT will hold good.
(Dictated to PA in Open Court today the 12th July, 2005 & transcript signed by me)
Index: Yes / No
Sd/-
[JUSTICE K. GNANAPRAKASAM]
CHAIRPERSON
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