IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT CHENNAI
DATED THE 29TH SEPTEMBER, 2005
PRESENT: HON’BLE MR. JUSTICE K. GNANAPRAKASAM
CHAIRPERSON
RA-27/2002
(OA-313/1997: DRT-I, Chennai)
BETWEEN:
Indian Bank, a Nationalised Bank
and a Body Corporate constituted
under the Banking Companies
(Acquisiton and Transfer of Undertakings)
Act V of 1970 carrying on the business of
Banking and having its Head Office at
No.31, Rajaji Salai, Chennai – 600 001
And having Branches spread all over India
and one its Branches at ARMB-II, Chennai, and
rep. by its Assistant General Manager Mr. P.S. Vilvanathan.
… Appellant
AND
1. Mrs. Humera Mumtaz,
Proprietrix,
M/s. Transnational Tanners,
W/o. Javid Rahman,
No.896, 72nd Street,
11 Sector, K.K. Nagar West,
Chennai-600 078.
2. Mr. Javid Rehman,
S/o. Mr. S.M.F. Rehman,
No.896, 72nd Street,
11 Sector, K.K. Nagar West,
Chennai-600 078.
3. Mr. K. Subramanian,
S/o. Mr. K. Kalimuthu,
Paingal Post, Peravoornai Taluk,
Tanjore District-614 642.
4. Mr. K. Panneerselvam,
S/o. K. Kalimuthu,
No.16, II Main Road,
New Colony, Chromepet,
Chennai-600 044.
… Respondents
Counsel for Appellant: Mr. J.B. Dolia & Mr. M.S. Shanmugasundaram
Counsel for Respondents 3 & 4: Mr. R. Subramanian
: O R D E R :
The Applicant Bank in OA is the Appellant. Aggrieved by the Order dated 28.12.2001, passed by the DRT-I, Chennai, the Indian Bank has preferred this Appeal.
Brief facts which are necessary to dispose of this Appeal are as follows.
1. The Appellant Bank sanctioned Credit facilities to the 1st defendant such as Packing Credit, and Foreign Bills Purchase/Foreign Bills Negotiated. That in order to secure due repayment of those facilities, the 1st defendant had executed Demand Promissory Note, Agreements of hypothecation of moveable plants and machinery. Defendants 2 to 4 executed Agreements of Guarantee and they have also created an equitable mortgage by deposit of title deeds of their properties in favour of the Appellant Bank. The 2nd defendant is the husband of the Proprietrix of the 1st defendant. As the defendants have not repaid the amount, the Appellant Bank filed OA for the recovery of a sum of Rs.3,66,78,382/- together with interest @ 21.75% p.a. with quarterly rests.
2. As the Appeal has been filed as against the discharge of defendants 3 & 4 alone, facts leading to the case of defendants 1 & 2 are not given below. The defendants 3 & 4 filed a separate Reply Statement, stating that the OA filed against them is not maintainable and it is barred by time. It is their further case that they are not liable for the loans granted to Mrs. Humera Mumtaz, and their signatures were obtained in blank papers and subsequently filled up and fabricated by the Bank. They have not executed any revival letters extending the period of limitation. The Bank also failed to recover the amounts from the defendants 1 & 2. Hence, prayed for the dismissal of the OA.
3. The DRT after considering the facts of the case passed Order/decree on 28.12.2001, holding that the 1st defendant alone was liable to pay the said amount. Subsequently, the Order was modified by its Order dated 14.3.2002, whereunder the defendants 1 & 2 were made liable. However, the Order was further modified by Order dated 7.6.2002, whereunder also the liability was fastened only against the defendants 1 & 2 for various reliefs. The defendants 3 & 4 were discharged. As against the same, the Bank has preferred this Appeal.
Heard the Learned Advocate for the Appellant and the Respondents 3 & 4.
Points for consideration are :-
1) Whether Clause-9 in the Agreement of Guarantee that the amount confirmed by the borrower or any acknowledgement of liability by the borrower would renew the liability of the guarantors also.
2) Whether the claim against Defendants 3 & 4 is barred by time.
Points No.1 & 2:
4. The Ld. Advocate for the Appellant would contend that in respect of the loan sanctioned in favour of the 1st defendant, the defendants 2 to 4 have executed Agreements of Guarantee. The defendants 2 to 4 have also created an equitable mortgage by deposit of title deeds of their properties.
The defendants 1 & 2 have acknowledged their liabilities in respect of Packing Credit, Foreign Bills purchased/negotiated/ADOVEXBIR and Temporary Overdraft facility by their confirmation letters dated 30.6.1994.
That in the Agreement of Guarantee executed by 3rd and 4th defendant, they have consented to the Bank for making any variance as the Bank think fit in terms of the contract with the borrower including enlarging or varying the credit limits.
Under Clause-9 of the Agreement, they have further agreed that, “The Guarantors also agree that any balance or debts confirmed by the Borrower, or his authorised agent or any acknowledgement of liability concerning the same made and signed by the Borrower or his authorised agents shall be binding on the Guarantors in the same manner as if the Borrower or his authorised agent was their authorized agent to make such acknowledgement of liability or confirming the balances and the said acknowledgement and confirmation shall be binding on them, as if made by themselves.
They further agree that every such acknowledgement by the borrower or his authorised agent would renew their liability as Guarantors and the Guarantors would be liable for the payment of acknowledged debts in the same way as for the debts hereby guaranteed.”
Based upon this Clause, the Appellant argues, even though the guarantors have neither acknowledged the debt nor given Confirmation letter within time i.e. in the year 1994, as the defendants 1 & 2 did on 30.6.1994, they are liable as the principal borrowers have acknowledged the debt in time, that is sufficient to clamp the liability on the guarantors also.
The Appellant lays its claim under Clause-13 of the Agreement of Guarantee also which reads, “The Guarantee hereby given shall be a continuing security and shall not be determined unless 3 calendar months’ written notice is given by the Guarantors and in the event of the Guarantor’s death or their coming under a disability, the liability of the Guarantors estate shall continue unless three calendar months’ notice of their instructions to determine the guarantee in writing is given to the Bank by the legal representatives of the guarantors.”
It is the case of the Appellant that the guarantee given by defendants 3 & 4 is not only a continuing guarantee which would extend to a series of transactions but the liability of the surety is co-extensive with that of the principal borrower unless it is otherwise provided by the contract as stated in Section-128 of the Indian Contract Act, 1872.
The continuing guarantee given by the defendants 3 & 4, could be revoked by them at any time but it would only enure in respect of the future transactions.
But in the instant case, the defendants 3 & 4 have not revoked the guarantee nor they have given any notice to the creditor.
That in the absence of the same, the liability of the guarantors, continues till the debt is live.
5. In the case of such a continuing guarantee, it is the contention of the Appellant that so long as the account is a live account in the sense that it is not settled, and there is no refusal on the part of the guarantor to carry out the obligation, the limitation would only run from the date of breach under Article 115 of the Schedule to the Limitation Act, 1908.
In the present case, the guarantors have not revoked or broken the guarantee and as such, so long as the account remained a live account, and there was no refusal on the part of the guarantors to carry out their obligation, the period of limitation did not commence to run and hence the guarantors are liable.
6. On the contrary, the Ld. Advocate for the respondents would contend that though the defendants 3 & 4 have executed the Agreement of Guarantee in 1991, they have not acknowledged the debts thereafter, as it was done by the borrowers (defendants 1 & 2) in the year 1994.
Guarantee was given on 16.9.1991, on 27.11.1991 and on 28.11.1991, but whereas the OA was filed in the year 1997, nearly after six years and the defendants 3 & 4, have not acknowledged the debts as done by the defendants 1 & 2 and, therefore, the claim against them is barred by time.
Clause-5 of the Agreement of Guarantee states, “The Guarantors hereby consent to the Bank renewing from time to time the said Packing Credit & FBN order limits of Rs.180.00 lakhs allowed to the Borrower, obtaining fresh documents from him closing the existing accounts, opening new accounts, or transferring the same or part thereof to any branch of the Bank. Notwithstanding this, the Guarantors agree and declare that they shall remain liable to the Bank for any indebtedness of the Borrower under the renewed limit and the terms and conditions of the deed shall apply and govern their liability under the renewed limit.”
This Clause stipulates that in the event of renewing the loan, to the borrower, the Bank has to obtain fresh documents from the guarantor and the same was not done in this case. Further, though there is a clause “Notwithstanding” in the Agreement, it runs contrary to the earlier Clause and, therefore, that cannot be taken into account.
A plain reading of this Clause indicates that the guarantee given by these defendants 3 & 4, should also be renewed from time to time as they did in the case of the principal borrowers.
It is submitted that no reason has been given by the Appellant for not having obtained the renewal from the guarantors when especially it had obtained such a renewal from the borrowers.
7. Now the question is whether the renewal of debt by the borrowers would renew the liability of the guarantors.
The execution of the Agreement of Guarantee by defendants 3 & 4, and the Additional guarantee by K. Subramanian were held to be proved.
The Appellant relies upon Clause-9 of the Agreement of Guarantee which states, “Every such acknowledgement by the borrower or his authorised agent would renew their liability as Guarantors and the Guarantors would be liable for the payment of acknowledged debts in the same way as for the debts hereby guaranteed.”
It is on record that the borrowings was renewed by the borrowers i.e. defendants 1 & 2 only, to which defendants 3 & 4 were not parties. Though the Appellant had chosen to obtain renewal from the borrowers, no reason was given by the Bank for not having obtained renewal from the guarantors. No doubt, Clause-9 in the Agreement states that the acknowledgement made by the borrower would renew the liability of the guarantors also.
This Clause is created by the Bank and incorporated in the Agreement. This Clause was introduced only to meet their administrative convenience, which cannot be a law. Such a Clause in the Agreement has no legal sanctity also. The Indian Contract Act, 1872, does not approve any such acknowledgement nor the Limitation Act, 1963, admits such a position. For each and every borrowing or debts or for renewal, there must be a valid admission or acknowledgement or confirmation.
Acknowledgement is dealt under Section-18 of the Limitation Act, which states, “Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, any acknowledgement of liability in respect of such property or rights has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liabililty, a fresh period of limitation shall be computed from the time when the acknowledgement was so signed.” The primary requisite for a valid acknowledgement of liability is that –
1) It must be in writing.
2) Signed by the party or by any person against whom a property or right is claimed.
3) Acknowledgement must be before the expiration of the period prescribed for a Suit or Application.
This alone would save the limitation and a fresh period of limitation shall be computed from the date of acknowledgement.
In the absence of the same, there cannot be a valid acknowledgement of liability. Keeping this view in mind, the Bank had obtained the letter of confirmation of the loan liability from the borrowers, but they have not chosen to do so with the guarantors.
Clause-5 in the very same Agreement also says “that the guarantor consented to renew from time to time”, but such a renewal was not obtained from the guarantors. Hence the renewal made by the borrower would not renew the liability of the guarantor.
8. We shall also examine the status and conduct of the parties at the time of borrowing. As the creditor is always in a dominating position, he would exploit the hapless position of a person seeking credit and would compel the persons seeking credit and the persons furnishing guarantee and indemnity to agree to its dictates and terms, which in the very nature of things will be unjust and unconscionable.
This kind of danger is intended to be prevented or eliminated by Section-23 of the Contract Act also, which reads, “The consideration or object of an agreement is lawful, unless – It is forbidden by law; or is of such nature that, if permitted it would defeat the provisions of any law or is fraudulent, or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy……. Every agreement of which the object or consideration is unlawful is void.”
It is well settled legal position that no debt could be recovered if it is barred by time. That in order to overcome the same, the Appellant Bank had chosen to obtain acknowledgement of liability from defendants 1 & 2.
But they have not chosen to do so from defendants 3 & 4. In the said circumstances, the argument of the Appellant that the acknowledgement of debt/liability obtained from the borrowers would renew the liability of the guarantors also, is incompatible.
The guarantors cannot be prevented from raising a plea that the debt or liability claimed against them is barred by time, as it is a well established law that there cannot be any estoppel against the statute.
Unless the Appellant shows that the surety had given up his/their right under the Act, it cannot be presumed that he has given up his right. If such things are allowed to take place, it amounts to denying the right to seek relief and, therefore, such a Clause was held to be un-enforceable. Section-23 of the Contract Act does not require that the contract should be tainted with illegality, but it is suffice if the terms which are so unfair and unreasonable and that shocked the conscience of the Court, it will be sufficient to attract Section-23.
9. Though the Clause-9 in the Agreement is not immoral, but it would, if permitted to be invoked, it would defeat the provisions of law i.e. the Law of Limitation, which prescribes certain periods for each and every transaction or claim.
The acknowledgement of borrower would renew the liability of the guarantor also, appears to be not only unreasonable but also unconscionable. The said Clause also clearly indicates a dominant position of the creditor. By this Clause, the creditor is trying to shield his future inability in advance.
The Clause is introduced knowing full well that the Bank may not be able to obtain acknowledgement of liability from the guarantor and in anticipation of the same, this Clause is introduced to take shelter and the same would amount to defeating the provisions of law. Such an act is impermissible under law.
10. It may be stated that by Clause-9, the guarantor had waived his right. Waiver is different from estoppel. For example, if a person is entitled to certain benefits under certain acts, say for instance, Tamil Nadu City Tenants Protection Act, he can waive his right of purchasing the vacant land, occupied by him which is required for his own use as contemplated under the Act, for monetary consideration or for any other reason.
But he cannot be estopped from claiming his right to purchase, even if the land lord had obtained an Agreement from the tenant that he would not claim the rights under the Tamil Nadu City Tenants Protection Act, as the same would amount not only to defeat the provisions of law but the same is also against Public policy and such an Agreement is illegal and void and there can be no estoppel against the statute.
That is the difference between waiver and estoppel. To circumvent the law of limitation, the Bank had introduced Clause-9 in the Agreement, which in my opinion is against the provisions of law and it would cause injury to the person concerned and, therefore, the same is against the principles enunciated in Section-23 of the Contract Act also.
11. Then we shall consider about the discharge of a surety, which is dealt with in Section-133 of the Contract Act, which states, “Any variance made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.”
This shows that even if there is any variance of a contract, surety’s consent is required, otherwise, the surety would stand discharged. When such is the position, Clause-9 of the Agreement of Guarantee that the acknowledgement made by the borrower would renew the liability of the guarantors, is outside the scope of the Limitation Act, 1963, as well as Indian Contract Act, 1872.
12. As far as the other contention raised by the Appellant that the Agreement of Guarantee executed by defendants 3 & 4 is a continuing guarantee and the same is also stated so in Clause-13 of the Agreement, and therefore the guarantors are liable, there is no dispute about the same.
This Clause in the Agreement has got the legal sanction under Section-129 of the Indian Contract Act, 1872, which states, “A guarantee which extends to a series of transaction, is called a continuing guarantee.”
But the Section does not say that the time barred debt would come under the purview of continuing guarantee. No doubt, there is nothing on record to show that the defendants 3 & 4 have revoked the guarantee.
But that does not mean the guarantors are liable to a time barred debt. Further contention of the Appellant that in the case of continuing guarantee, so long as the account is a live account i.e. the account is not settled and there is no refusal on the part of the guarantor to carry out the obligation, the period of limitation did not at all start to run and that is the view taken by the Supreme Court in the case of M/s. Margaret Lalita Samuel, Appellant Vs. Indo-Commercial Bank Ltd., Respondent (1979) 2 SCC 396, and the said proposition was also followed in the case of Union Bank of India, Ernakulam, Appellant Vs. T.J. Stephen & Others – AIR 1990 Kerala 180.
There is no quarrel over this proposition. But the case on hand, stands entirely on a different footing. Here the defendants 3 & 4 stood guarantee in the year 1991 and, thereafter, no acknowledgement of liability or confirmation of the loan liability was obtained, and therefore, the claim was not in time. But on the other hand, the claim against the defendants 3 & 4 is barred by time as it has been rightly held by the DRT.
13. Before parting with the case, I would like to observe that in many cases the borrowers after borrowing, hardly show any interest in repayment of the loans which can keep on accumulating, as a result of which it becomes difficult for Banks/Financial institutions to give fresh loans/financial assistance to deserving parties who are waiting at the door steps of the Bank/Financial institutions in queue, as the money is stuck up in the hands of erring borrowers. In certain cases, the borrowers change their address without even informing the Bank and at times their whereabouts are not known and Banks find it very difficult to make even a formal demand before instituting legal proceedings.
That in order to avoid any manner of contingency, the Banks get acknowledgement of liability and it may at times, it is stated by the borrowers, their signatures and the signatures of the guarantors are obtained in blank papers at the time of granting loan itself and filled up at a later stage.
This appears to be a common plea of the borrowers and guarantors in many of the Bank Suits/Applications.
Though the Banks obtain equitable mortgage, there is no scope for preliminary decree and final decree under the RDDB&FI Act, 1993, as it is available in the Civil Court.
That in order to avoid unnecessary controversy and criticism from the borrowers and guarantors that the signatures were obtained in blank papers and filled them up at a later point of time to save limitation, I feel that the Government of India can think of an amendment to the Limitation Act and prescribe the period of limitation as 12 years, instead of 3 years in respect of recovery of any manner of debt, whether secured or unsecured from the Bank and financial institutions, which would enable the Banks to give sufficient opportunity to the borrowers to make payments,
and if payments are not forthcoming, the Bank can file Suit within some reasonable time within the period of 12 years, which would put an end to the unnecessary criticism that the Suit is barred by time and the Banks made use of the signed blank papers to save limitation.
14. In the result, the Appeal is dismissed. No cost.
(Dictated to PS, transcript corrected, order pronounced & signed by me in open court today 29 .9.2005).
Sd/-
[ JUSTICE K. GNANAPRAKASAM ]
CHAIRPERSON
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