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Tamil Nadu Mercantile Bank Ltd. v. Raj Kumar Gupta .
Factual and Procedural Background
This appeal challenges the order dated 23rd September 2005 passed by D.R.T-I, Chennai, in Original Application No. 648 of 1999. The Original Application was filed by the appellant bank for recovery of amounts owed by defendant No. 1, a partnership firm, whose partners are defendant Nos. 2 to 5. Defendant Nos. 4 to 6 stood as guarantors and executed personal guarantees and equitable mortgages in favor of the appellant bank. The Tribunal decreed the recovery but limited defendant No. 6's liability to the value of his share in the mortgaged property, holding that he was not personally liable beyond that. This limitation of liability is the subject of the present appeal.
Legal Issues Presented
- Whether defendant No. 6, who is not a partner of the firm, can be held personally liable for the entire amount due to the appellant bank under the guarantee?
- Whether the induction of new partners into the defendant No. 1 firm affects or discharges the guarantee given by defendant No. 6?
- Whether the guarantee executed by defendant No. 6 is a continuing guarantee and its effect on his liability?
Arguments of the Parties
Appellant's Arguments
- The guarantee executed by defendant No. 6 is a personal, joint, and several continuing guarantee securing the loan availed by defendant No. 1 firm.
- The guarantee liability is co-extensive with that of the principal debtor and continues unless revoked as per law.
- The induction of new partners into the firm did not affect the guarantee as the appellant bank was not informed nor consented to any change.
- Defendant No. 6's liability should not be limited to the value of his share in the mortgaged property but extend to personal liability for the loan amount.
Defendant No. 6's Arguments
- His liability is restricted to the value of his share in the mortgaged property as he is not a partner of the firm.
- The reconstitution of the defendant No. 1 firm by induction of new partners changed the contract of guarantee, discharging him from liability.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Section 128 of the Indian Contract Act, 1872 | Liability of surety is co-extensive with that of the principal debtor unless otherwise provided. | The court applied this principle to hold that defendant No. 6's guarantee liability extends jointly and severally with the principal debtor. |
| Section 130 of the Indian Contract Act, 1872 | A continuing guarantee may be revoked by the surety as to future transactions by giving notice to the creditor. | The court noted that no revocation notice was given by defendant No. 6, so the continuing guarantee remains in force. |
Court's Reasoning and Analysis
The court analyzed the guarantee deed executed by defendant No. 6 and found it to be a joint, several, and continuing guarantee securing the loan facility granted to defendant No. 1 firm. The court emphasized that under Section 128 of the Indian Contract Act, the surety's liability is co-extensive with that of the principal debtor. The guarantee was continuing in nature and could only be revoked by notice under Section 130, which was not done by defendant No. 6.
The court rejected defendant No. 6's contention that the induction of new partners altered or discharged the guarantee, noting that the appellant bank was not informed nor gave consent to any change in the contract. The original contract, therefore, remained intact, and the guarantee liability continued.
The Tribunal's earlier finding limiting defendant No. 6's liability to the value of his mortgaged property was found to be erroneous. The court held that since no revocation or discharge occurred, defendant No. 6 is jointly and severally liable for the entire loan amount along with other defendants.
Holding and Implications
Appeal allowed.
The court set aside the Tribunal's finding limiting defendant No. 6's liability and held that he is personally liable jointly and severally for the loan amount under the continuing guarantee. The direct effect is that defendant No. 6 must satisfy the full debt owed to the appellant bank, not merely the value of his share in the mortgaged property. No broader precedent beyond the facts of this case was established.
K. Gnanaprakasam, Chairperson:— This regular appeal has been filed as against the order dated 23rd September, 2005 passed in Original Application No. 648 of 1999 by D.R.T-I, Chennai.
2. The Original Application filed by the appellant for the recovery of the amounts was decreed as prayed for. But, however, it was held that, the responsibility of the defendant No. 6, being a guarantor, was only to the extent of the value of the portion/share of the schedule mortgage property in his possession, and he is not personally liable, and the said finding is under challenge in this appeal.
I have heard the learned Advocate for the appellant and the respondent.
3. The defendant No. 1-company is a partnership firm represented by its partners defendant Nos. 2 to 5 and they have availed certain loan facilities from the appellant Bank, for which defendant Nos. 4 to 6 stood as guarantors and they have executed personal guarantee in favour of the applicant Bank, and they have also executed mortgage extension letter by creating a valid equitable mortgage in favour of the appellant Bank in respect of the properties set out in the schedule to the Original Application. Based upon the relevant documents, Original Application was filed.
4. The defendant No. 6 resisted the claim by contending that the defendant No. 1-firm was reconstituted on 25th September, 1998 and there was a change in the contract of guarantee, by which the defendant Nos. 7 and 8 also became the partners of the defendant No. 1-company, and in view of the change in the constitution of the defendant No. 1-company, he was not liable; But, however, he had stated that if at all he is liable, his liability is restricted only to his share in the item No. I of the property set out in the schedule to the Original Application.
5. The Tribunal, after taking into consideration all of the aspects of the case,. came to the conclusion that the guarantee executed by the defendant No. 6 was a personal and individual guarantee for securing the loan availed by the defendant No. 1.-firm and he also agreed that his liability is joint and several. The guarantee executed by the defendant No. 6 is also a continuing guarantee, and therefore, even if there is any variation in the loan amount due or loan limits increased or decreased or to make any other arrangement with defendant No. 1-firm, that will not discharge the defendant No. 6 in any manner affecting his loan liability under the guarantee. But, however, the Tribunal held that the defendant No. 6, being not a partner of the defendant No. 1-firm, there could be no personal decree, against him, except the value of the property/security mortgaged by him, as he was one of the joint owners of the schedule mentioned mortgaged property, and the said finding alone is questioned in this appeal.
6. The point that arises for the consideration of this Tribunal is whether the defendant No. 6, who is not a partner of the firm, can be made personally liable to the amount due to the appellant Bank.
7. The deed of guarantee executed by the defendant No. 6 along with defendant Nos. 4 and 5 is not in dispute and the said guarantee reads that, “In consideration of your opening (or continuing) an account with or issuing of Bank guarantee to Salem Steel Industries….hereby jointly and severally agree to pay (emphasis supplied) and satisfy to your two days after demand upto the amount, hereinafter mentioned all moneys and liabilities already advanced, paid or incurred on such account/Bank guarantee or which you may at any time advance, pay or incur to or for the use, or accommodation of or on the credit of the customer…together with all interest, discount commission and other Banking charges, etc……..”. The guarantee deed further reads that, “This guarantee shall be a continuing guarantee and in full force until three calendar months after each of us shall have given or sent to you notice in writing of our intention to discontinue and determine the same….” As such, it is made out that the guarantee executed by the defendant No. 6 was not only joint and several and it was also a continuing guarantee. The continuing guarantee is a guarantee which extends to a series of transactions. The liability of the surety, as set forth in Section 128 of the Indian Contract Act, 1872, is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. But, however,. the said continuing guarantee could be revoked as provided under Section 130 of the Contract Act, which states, “A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.” As such, it cannot be said that the continuing guarantee would be alive forever and it has got its own limitation i.e it can be revoked as provided under Section 130 of the Contract Act. In fact, in the guarantee deed itself, it is stated that, “This guarantee shall be a continuing guarantee and it will be in full force until three calendar months after each of us shall have given or sent a notice in writing of our intention to discontinue and determine the same……..” When there is nothing on record to show that the defendant No. 6 has revoked the continuing guarantee, it can easily be concluded that the guarantee is a continuing guarantee, and it continues till the debt is discharged.
8. The defendant No. 6 further contended that two new partners were inducted into the defendant No. 1 firm, and therefore, there was a change in the contract of guarantee and hence, he is not liable. It is true that new partners were inducted into the defendant No. 1-company, but it was not informed to the appellant Bank. Even otherwise, the appellant has not given any consent for the variance of the contract and the original contract remains intact, In fact, even the induction of the new partners were not informed to the appellant, Bank, and as a matter of fact, the new partners were made as parties only after filing of the Original Application. That shows that the induction of the new partners were not brought to the notice of the appellant. Even otherwise, as long as the original contract was not varied, the liability of the surety continues. In fact, the defendant No. 6 has not chosen to revoke his guarantee and, as such, his contention that just because two new partners were inducted into the defendant No. 1 partnership firm, his liability would come to an end, cannot at all be accepted.
9. In fact, the Tribunal came to the conclusion that, the defendant No. 6's guarantee shall be continuing one and it would be in full force. But, having held so, it had committed an error in holding that, the defendant No. 6, not being a partner of the defendant No. 1 firm, there can be no personal decree against him, except the value of the property mortgaged by him, and the said finding is liable to be set aside, and accordingly it is set aside. It is needless to point out that the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract, and the continuing guarantee is one, which would be in force unless it is revoked by the surety, or it would come to an end on the death of the surety, or the guarantor would be discharged if there is any variance made in the contract without the surety's consent. None of these things have taken place in our case, and therefore, the defendant No. 6 is also jointly and severally liable along with other, defendants.
10. In the result, Appeal R.A No. 3 of 2006 is allowed. No costs.
Appeal allowed.
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