Federal Bank Ltd Vs Sathhyaprakash and V K Gopalan

IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT CHENNAI

DATED THE 12^TH 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

1. Sri. Sathya Prakash

“Kavitha”,

Koyilandy P.O.

Kozhikode District (Kerala)

PIN: 673 307

2. 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 1^st defendant was the principal borrower and the 2^nd defendant was the guarantor.

 Though the 2^nd defendant denied the execution of the guarantee agreement in Exh.A11, the Tribunal came to the conclusion that the 2^nd defendant did execute the guarantee agreement Exh.A11 and rejected the contentions otherwise as contended by the 2^nddefendant.

 But, however, on the question that the 2^nd defendant did not execute the guarantee agreement simultaneously when the 1^st defendant borrowed the amount and therefore the guarantee agreement (Exh.A11) is not supported by consideration and thereby came to the conclusion that the 2^nd defendant, the guarantor is not liable, and dismissed the OA as against the 2^nd defendant. Aggrieved by the same, the bank has preferred this appeal.

2.         Heard the Authorised Officer of the appellant bank. The 1^st respondent was set exparte on 29.4.2005 and the 2^nd respondent is absent throughout. The 2^ndrespondent was not represented on 25.5.2005, 17.6.2005 and 5.7.2005, and today also he is not represented. The 2^nd respondent is called absent and set exparte.

3.         The 1^st respondent had the benefit of loan on 27.2.1999, to which the                      2^nd respondent executed the deed of guarantee on 13.8.1999. Though the 2^nd defendant had taken several pleas before the DRT, all his contentions were negatived and the DRT upheld that the 2^nd defendant did execute the guarantee letter on 13.8.1999. But, however, the DRT held that the 2^nd defendant did not execute the guarantee letter Exh.A11 simultaneously or contemporaneously on the date when the 1^st 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 2^nd 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 1^stdefendant 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 2^nd 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 2^nd defendant did not execute a guarantee letter on one and the same day when the      1^st 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     2^nd 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 1^st defendant, who is the principal borrower, the 2^nd 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 2^nd 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 2^nd 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 2^nd 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 12^th July, 2005 & transcript signed by me)

Index: Yes / No

Sd/-

[JUSTICE K. GNANAPRAKASAM]

CHAIRPERSON

Kotti Finance Ltd Vs Indian Bank

IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT CHENNAI

DATED THE 21^ST OCTOBER, 2008

PRESENT:  HON’BLE MR. JUSTICE T.V. MASILAMANI

CHAIRPERSON

RA(SARFAESI)-113/2008

(SA-178/2007 – DRT-III, Chennai)

BETWEEN –

M/s. Kotti Finance Ltd.,

No.180-181, Gandhi Road,

Kanchipuram Town,

Rep. by its Director,

Mr.S. Kamakotti

….  Appellant

AND

Indian Bank,

Circle Office,

No.510-511, Gandhi Road,

Kanchipuram,

Rep. by its Authorised Officer

….  Respondent

Counsel for Appellant – M/s. Prakash Goklaney, Rishi S. Ahuja & Harshad P. Goklaney

Counsel for Respondent Bank – M/s. Aiyar & Dolia

O R D E R

1.         The Appellant/Third party has filed this Appeal challenging the impugned Order passed by the DRT-III, Chennai, in SA-178/2007 on 10.1.2008.

2.         The facts leading to the filing of this Appeal may be set out briefly as under :-

            The Respondent Bank sanctioned the loan facilities by way of Overdraft and OCC limit to M/s. Lakshmi Vilas Silks Ltd. against collateral security of movable properties for which equitable mortgage of land and building bearing Door Nos.186C (New No.181) and 186B (New No.180) situated at Gandhi Road, Kanchipuram, was also created in favour of the Bank by the borrower.  The Directors of the principal borrowers stood as guarantors for the due repayment of the loan.  Since the account was out of order, the Bank invoked the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter called as SARFAESI Act) and issued the demand notice dated 26.12.2002, under Section-13(2) in the said Act and also took physical possession of the 1^st and 2^nd floors of the building and symbolic possession of the ground floor on 7.1.2005.  Since the borrowers have not repaid any amount, the secured property was sold by the Bank on 16.10.2006, and the same was also confirmed in favour of the highest bidder on 17.10.2006.  The Bank issued notice to the borrowers to hand over physical possession, but the Appellant, who is third party filed the said SA contending that the Appellant institution is a tenant of the ground floor in the said mortgaged property.  The Respondent Bank filed a detailed Counter Affidavit.  After hearing both sides and upon perusal of the material records, Ld. PO dismissed the Application filed by the Appellant.  Hence the Appeal.

3.         Heard Mr. Prakash Goklaney, Ld. Counsel appearing for the Appellant and Mr. Subramaniam, Ld. Counsel appearing for the Respondent Bank.

4.         Ld. Counsel for the Appellant has putforth the following contentions :- 

The Appellant is a Public Limited Company inducted into possession of the ground floor in the mortgaged property from the year 1995 under a lease deed dated 9.1.1991, and has been in occupation of the same, carrying on business including that of provision of safe deposit lockers to its customers.  The Respondent Bank is now attempting to evict the Appellant in the guise of evicting the debtor and such an action on the part of the Respondent Bank is illegal as also an abuse of process of law.  The DRT failed to note that the law of evidence is not provided in so far as the proceedings before the DRT is concerned.  The Appellant is a tenant entitled to the protection under the Tamil Nadu Buildings (Lease and Rent Control) Act, and there need not be a lease deed for the purpose of invoking the provisions under the said Act.  Similarly the DRT erred in stating that the lease was not in accordance with Section-65A of the Transfer of Property Act, which is not applicable to cases covered by the Rent Control Act.  Similarly the finding rendered by the DRT that the action on the part of the Appellant was barred by limitation has no legal basis for the reason that only when the Respondent Bank threatened to break open and take physical possession, the Appellant was constrained to institute the said proceedings. Even otherwise, the delay if any, could have been condoned by the DRT as there was sufficient cause for such delay.

5.         In the above circumstances, the points for consideration are as follows :-

1)      Whether the Appellant being a third party to the transaction is entitled to claim tenancy rights over the ground floor of the mortgaged property ?

2)      Whether the impugned Order passed by the DRT has to be set aside as prayed for ?

The Points :

6.         It is common ground that the Respondent Bank had taken measures under Sections-13(2) & 13(4) of the SARFAESI Act, against the principal borrower M/s. Lakshmi Vilas Silks Ltd., and the Directors of the Company, who stood as guarantors for the due repayment of the loan amount and in the process the secured property was taken possession.  Similarly it is not in dispute that the ground floor of the secured property was taken by way of symbolic possession by the Bank and in this context the Appellant has putforth the claim in the said Application in SA-178/2007 before the DRT that they are in possession of the ground floor as a tenant under the principal borrower.  In this respect, it is relevant to note that some of the Directors of the principal borrower Company are the Directors of the Appellant institution also.

7.         In the above circumstances, it has become necessary to consider whether the Appellant has proved satisfactorily that the institution is a statutory tenant of the 1^st floor of the mortgaged premises?  The Appellant has placed strong reliance on the unregistered document so as to claim the status of a statutory tenant.  In this connection, Ld. Counsel for the Respondent Bank has cited the decision, Duraisamy Naidu & Ors. Vs. Ramakrishnan & Ors.- [(2007) 1 MLJ 424], wherein the principle of law is laid down that where the lease deed is executed for a period of more than one year, it has to be mandatorily registered as per Section-17(1)(d) of the Indian Registration Act, and that such an unregistered document would be inadmissible in evidence.  Hence it goes without saying that the unregistered document relied on by the Appellant cannot be pressed into service for any purpose and therefore, this Tribunal holds that the finding rendered by Ld. PO on this aspect of the matter has to be confirmed.

8.         Though the Appellant has produced Income-tax returns of the Appellant Company with reference to financial years 1997, 1998 and 1998-1999 to show that even prior to the loan transaction between the Respondent Bank and the borrower Company, the Appellant was inducted into possession of the premises as a tenant, this Tribunal is inclined to accept the contentions of the Respondent’s Counsel that the said documents are self-serving in nature and that therefore, no reliance can be placed upon them so as to jeopardise the valuable rights of the Bank. In this context, Ld. Counsel for the Respondent Bank has cited the decision M/s. Sree Lakshmi Products Vs. State Bank of India [2007 (2) CTC 193], laying down the proposition of law that if a claim is made on the basis of an unregistered document so as to affect the rights of the secured creditor, such claimant is not a protected tenant and that the continuance of possession of such a claimant is contrary to the provision of Section-65A of the Transfer of Property Act.  Hence the Ld. Counsel for the Respondent has argued rightly in my opinion that the Appellant has no right to continue in possession of any portion of the secured property. 

9.         On the other hand, Ld. Counsel for the Appellant has placed strong reliance upon the decision Hutchison Essar South Ltd. Vs. Union Bank of India & Anr. [AIR 2008 Karnataka 14] in support of his contention that non-registration of lease agreement is not fatal and that irregularities in inducting the Appellant into possession of the premises make the occupier trespasser of the same.  However, since the said decision was rendered by the Ld. Single Judge of the High Court of Karnataka at Bangalore, inasmuch as the ratio laid down by the First Bench of the Madras High Court referred supra is binding on this Tribunal, I am unable to endorse the view projected by the Ld. Counsel for the Appellant on the basis of the said decision and it follows that the principle of law enunciated therein cannot be made applicable to the facts of the present case.

10.       Further as has been rightly pointed out by the Ld. Counsel for the Respondent Bank, the conduct of the Appellant would also assume importance while disposing of this Appeal.  The Appellant filed a Civil Suit in the Munsif Court at Kanchipuram in OS No.494/2006 and obtained interim injunction in IA-1240/2006 and after contest by the Respondent Bank, the injunction Order was vacated on merits.  Similarly, the said Order became final as the same was not challenged by the Appellant in any other forum.  Further the Directors of the Appellant Company, some of whom are Directors in the borrower Company did not disclose any such tenancy agreement between the borrower Company and the Appellant Company at the time of entering into the loan transaction with the Respondent Bank and therefore, this Tribunal is of the considered view that if really the Appellant Company was inducted into possession of the ground floor as a tenant even prior to the loan transaction, in the course of normal conduct, the Directors of the borrower Company, who are also Directors of the Appellant Company should have revealed such tenancy agreement to the Bank.  But on the other hand, in this case, the borrower Company did not come forward to putforth any contention to support the plea of tenancy projected by the Appellant Company and it follows necessarily that such conduct on the part of the Directors of both the Companies would go a long way to show that the plea of tenancy set up by the Appellant Company is purely an after thought. 

11.       Further, in support of the plea of taking possession of the secured property, the Respondent Bank filed the Memo in this Appeal along with Panchanama recorded on 15.6.2008, 11.6.2008 and 17.1.2005, which reveal that a portion of the ground floor wherein safety lockers are embedded to earth, had alone been taken possession by the Bank symbolically and the remaining portion of the ground floor as well as the other two floors of the secured building had been physically handed over to the Bank as per the Panchanama produced in this Tribunal.  In any view of the matter, both on facts and in law, the Appellant miserably failed to establish its claim of tenancy over the second floor of the secured property.  Considering the above facts and circumstances in the light of the principles of law enunciated in the said decisions referred supra, this Tribunal is of the considered opinion that there is no illegality or irregularity pointed out in the impugned Order so as to interfere with the same and it is therefore confirmed.

12.       For the aforesaid reasons, the Appeal is dismissed with cost of Rs.5000/- and consequently the impugned Order passed by the DRT-III, Chennai, in SA-178/2007 dated 10.1.2008, is confirmed.  The cost of Rs.5000/- is ordered to be paid to The Spastics Society of Tamil Nadu, Taramani Road, Chennai-600 113. Cost Memo is directed to be filed within two weeks.

(Dictated to PS, transcript corrected and order pronounced & signed by me in open court today 21.10.08)

[ JUSTICE T.V. MASILAMANI ]

CHAIRPERSON