Mohan Shantanagoudar, J.:— This appeal is filed questioning the order dated January 16, 2007, passed by VI Additional City Civil Court in Misc. No. 435 of 1999 holding that the appellant is also liable to pay the sum as ordered, jointly or severally.
2. The records reveal that respondent No. 1 herein sanctioned a loan of Rs. 70 lakhs in favour of respondent No. 2 herein. The loan agreement dated March 6, 1996, was executed by respondent No. 2 and respondent No. 1. The third and fourth respondents herein executed surety agreement dated March 6, 1996, giving collateral security of Schedules I and II properties. The appellant executed a “letter of comfort” dated March 2, 1996, as per exhibit P14. Respondent No. 2 committed default and did not repay the amount as agreed. Hence, respondent No. 1 invoked surety agreement dated March 6, 1996, given by respondents Nos. 3 and 4 by issuing notice dated 16/9/1998. Respondents Nos. 3 and 4 did not pay the amount despite the notice. Thus, a petition came to be filed by respondent No. 1 herein under sections 31(1)(aa) and 32(1) of the State Financial Corporations Act, 1951 (“the SFC” Act), for a direction to respondents Nos. 3 and 4 to pay the amount of Rs. 1,03,90,000 and for sale of secured properties described in Schedules I and II of the petition. A direction is also Page: 294sought that the appellant along with respondents Nos. 3 and 4 herein shall pay the said amount with interest jointly and severally. After hearing, the impugned order is passed by the court below holding that respondent No. 2 company is due to pay a sum of Rs. 1,03,90,000 as on 30/6/1998. It is further held that the appellant and respondents Nos. 2 to 4 herein are jointly and severally liable to pay the said amount. Further, directions are also issued. Sri K.G Raghavan, the learned senior advocate appearing on behalf of the appellant submits that exhibit P14 the “letter of comfort” is wrongly interpreted and treated as “letter of guarantee” by the court below and the same has resulted in miscarriage of justice. He further submits that exhibit P14 nowhere mandates the appellant that he should repay the dues of respondent No. 2, in case, respondent No. 2 or the guarantors, i.e, respondents Nos. 3 and 4 fail to repay the loan amount to respondent No. 1. In other words, according to him, exhibit P14 is not a letter of guarantee, but, is a mere letter of comfort.
3. The said submissions are opposed by Sri D.S Joshi, learned counsel appearing on behalf of respondent No. 1. He contended that exhibit P14 though titled as “letter of comfort” is clearly a “letter of guarantee”, inasmuch as, the wordings used in the said document amply reveal that the appellant has undertaken to repay the loan of respondent No. 2, in case of non-payment of loan by respondent No. 2 or respondents Nos. 3 and 4 herein.
4. In order to decide this matter, the relevant document to be considered is exhibit P14 which read thus:
“We understand you have sanctioned a corporate loan of Rs. 75 lakhs (rupees seventy five lakhs only) vide your letter ACCTS/CL/7842/95-96, dated February 29, 1996, to M/s. Dominion Chemical Industries Ltd., Hosur Road, Bommanahalli, Bangalore-560068.
M/s. Dominion Chemical Industries Ltd., is one of our associate companies. We hereby confirm that it our normal practice to see that all our associates companies meet their financial and contractual obligations and this end we will undertake all reasonable steps to ensure that M/s. Dominion Chemical Industries Ltd., conducts its operations efficiently to meet its obligations in the usual course of business.
We are convinced that the company concerned has the capabilities to fully cater to its financial commitments.”
5. The aforementioned document makes it amply clear that the company which has obtained loan, i.e, respondent No. 2 is one of the associate companies of the appellant. The appellant has confirmed that it is its normal practice to see that their associate companies meet their financial and contractual obligations and that appellant will undertake all reasonable steps to ensure that M/s. Dominion Industries Ltd. (debtor company) conducts its operations efficiently to meet its obligations in the usual course of business. The said document further states that the appellant is convinced that the debtor company has the capabilities to fully cater to its financial commitments.
6. The said letter of comfort nowhere reveals that the appellant stood as guarantor for the loan disbursed by respondent No. 1 in favour of respondent No. 2. It merely states that the associate company (debtor company) will meet the financial and contractual obligations and that the appellant herein undertakes all reasonable steps to ensure that the debtor company conducts its operations efficiently to meet its obligations in the usual course of business. The comfort letter is more in the nature of recommendatory letter. If a person has not stood as guarantor or surety, he cannot be treated a guarantor or surety without there being a specific undertaking by him that he would discharge the liability of the third person, in case of his default. In this context, it is relevant to note the provisions of section 126 of the Indian Contract Act, 1872, which read thus:
“126. ‘Contract of guarantee’, ‘surety’, ‘principal debtor’ and ‘creditor’.—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.”
7. From the above, it is clear that the contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. If the entire document in question, i.e, exhibit P14 is read as a whole, the same nowhere reveals that the appellant has entered into a contract or an agreement with respondent No. 1 to discharge the liability of respondent No. 2 herein (principal debtor) in case of its default.
8. The apex court in the case of State of Maharashtra v. Dr. M.N Kaul reported in AIR 1967 SC 1634; [1968] 38 Comp Cas 1, while dealing with the aspect of the enforceability of the guarantee has observed thus (page 4 of 38 Comp Cas):
“The question is whether this guarantee is enforceable. That depends upon the terms under which the guarantor bound himself. Under the law he cannot be made liable for more than he has undertaken. It is often said that a surety is a favoured debtor, for in the expressive phrase of Lord Westbury L.C in Blest v. Brown, [1862] 4 De G.F and J. 367 at page 376:
‘you bind him to the letter of his engagement.
Beyond the proper interpretation of that engagement you have no hold upon him.’
These observations have been recalled in cases of guarantee and suretyship by the Judicial Committee and also this court. See for example Pratapsing Moholalbhai v. Keshavlal Harilal Setalvad, 62 I.A 23 at page 33; AIR 1935 PC 21 at page 24 and M.S Anirudhan v. Thomco'S Bank Ltd. ., [1963] 33 Comp Cas 185; [1963] (Supp) 1 SCR 63 at page 77; AIR 1963 SC 746 at page 752. To this there are some exceptions. In case of ambiguity when all other rules of construction fail the courts interpret the guarantee contra proferentem, that is, against the guarantor or use the recitals to control the meaning of the operative part where that is possible. But whatever the mode employed, the cardinal rule is that the guarantor must not be made liable beyond the terms of his engagement.”
(emphasis1 supplied)
9. From the above, it is clear that the question as to whether the deed in question is a deed of guarantee or not depends upon the terms under which the guarantor binds himself. Under law, he cannot be made liable for more than what he has undertaken. In our considered opinion, there is no ambiguity in exhibit P14. Under exhibit P14 the appellant has not undertaken that he would repay the loans of respondent No. 2, in case, if respondent No. 2 fails to discharge its liability. Therefore, the appellant cannot be made liable for more than what it has undertaken. It is not in dispute that respondent No. 1 herein has insisted on “letter of comfort” of appellant herein while disbursing the loan in favour of respondent No. 2 herein. Accordingly, the appellant herein being the holding company has given letter of comfort as suggested by the first respondent.
10. All through, respondent No. 1 as well as other parties including the appellant has understood the document exhibit P14 as a “letter of comfort”, plain and simple. In the cross-examination of PW1 witness for respondent No. 1), he has clearly admitted that the appellant has not undertaken under exhibit P14 that he would repay the amount in case Page: 297respondents Nos. 2 to 4 herein commit default in payment of the loan. In the light of clear admission of PW1 and having regard to the language employed in exhibit P14, it is clear that the appellant has not undertaken that it would repay the loan amount in case of default by respondents Nos. 2 and 4 herein.
11. In this context, we may usefully refer to the definition of “letter of comfort”, as found in P. Ramanatha Aiyar's Advanced Law Lexicon, which reads thus:
“Letter of comfort.—A document that indicates one party's intention to try to ensure that another party complies with the terms of a financial transaction without guaranteeing performance in the event of default.”
(emphasis1 supplied)
12. Form the material on record, it is clear that the letter of comfort merely indicates the appellant's assurance that respondent No. 2 would comply the terms of a financial transaction without guaranteeing performance in the event of default.
13. Since we find that the appellant has not bound himself for repaying the loans due to first respondent corporation in the event of default by respondents Nos. 2 and 4, the impugned order in so far as it relates to fixing liability on appellant is liable to set aside. Accordingly, the same is set aside. Rest of the order passed against respondents Nos. 2 to 4 continues to remain.
14. Appeal is allowed-in-part accordingly.