Allowed

Uco Bank v. Smt. Rama Rajendra Tantiya and Ors.

DRAT11 Nov 2024REGULAR APPEAL/271/2005

Case brief

AI extract

What is this about?

The Tribunal allowed the bank's appeal, holding that the guarantor could not unilaterally revoke his continuing guarantee without acceptance by the creditor or full payment of dues. Consequently, the debt remained enforceable, and the earlier dismissal of the recovery application based on limitation was set aside.

What did the court decide?

The impugned judgment dismissing the Original Application was set aside. The Original Application was allowed directing respondents to pay the debt with interest and costs.

Uco Bank versus Smt. Rama Rajendra Tantiya and Ors. — Contract and Commercial Disputes | DRAT (2024)

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BEFORE THE DEBTS RECOVERY APPELLATE TRIBUNAL, AT: MUMBAI Present: Mr Justice Ashok Menon, Chairperson

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Appeal No. 271/2005

Between

UCO Bank

V/s.

Smt. Rana Rajendra Tantiya & Ors. …Respondent/s Mr. Nainesh Amin, Advocate for Appellant.

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Mr Akshay Pawar, i/b M/s Mahimatma & Co., Advocate for Respondents Nos. 1 to 3.

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-: Order dated: 11/11/2024:-

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This is an appeal filed by the UCO Bank under Sec. 20 of the Recovery of Debts Due to Bank & Financial Institution Act, 1993 (“RDDB & FI Act”, for short) challenging the judgment and order dated 29.03.2005 dismissing Original Application (O.A.) No. 2526 of 1999 on the files of the Debts Recovery Tribunal-I, Mumbai (D.R.T.) as against the legal heirs of the deceased defendant No. 3 vide Judgment and order dated 29.03.2005.

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Defendant No.3 in the O.A. had died on 20.07.1979, and respondents Nos. 1 to 3 herein (original defendants Nos. 3a to 3c) were brought on record as his legal representatives. Deceased defendant No. 3 was one of the directors of respondent No.4 (original defendant No.1), a company named Shree Sitaram Mills Limited, the principal borrower, and had

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stood as guarantor to the debt. Apart from him, respondents Nos. 5 & 6 (defendant Nos. 2 & 4) also had executed guarantees. Respondent No. 7 (defendant No.5) is a bank allegedly having an interest in the securities. Respondents Nos. 4 to 7 are only proforma parties against whom the appellant is not seeking any relief.

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The facts based on the pleadings in the O.A., and as may be required for disposal of this appeal can be encapsulated thus:

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The principal borrower company had availed several credit facilities from the appellant bank executing security documents and guarantee deeds with the deceased third defendant and respondents Nos. 1 & 6 as guarantors. They defaulted in repayment, and the appellant bank filed a Civil Suit No.3961 of 1988 before the High Court of Bombay for recovering ₹11,70,38,726.69. The suit was transferred to the D.R.T. and refiled as O.A. Since the third defendant died, his legal representatives were impleaded as additional defendants 3a to 3c. None of the defendants in the O.A. except the legal representatives of deceased defendant No. 3 had appeared to contest the claim. The D.R.T. had already allowed the O.A. against defendants Nos. 1, 2 & 4 on 10.06.2004 and a Recovery Certificate was also issued against those defendants.

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Respondents Nos. 1 to 3 contested the O.A., and filed a written statement at Ext. 21 contending that the deceased third defendant had executed the Deed of Guarantee to secure the debt of the company in his capacity as its director. Subsequently, he resigned from the Board of Directors of the company and had vide letter dated 19.01.1978 intimated the bank, about the cancellation of his guarantee to the company. The guarantee was executed in the year 1976 and was never renewed till the suit was filed in 1988. The said guarantee had therefore come to an end by efflux of time also. The guarantee was executed since the mortgage was created by the company. It was also contended that the third defendant was discharged from the guarantee and therefore no claim against him survived.

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The Ld. Presiding Officer in the impugned judgment observed that the deceased third defendant was discharged from his liability as a guarantor given the letter addressed to the bank on 19.01.1978. It was observed that the bank has agreed to release the personal guarantee of the third defendant subject to providing a substitute guarantor. The letter dated 19.01.1978 specified that the guarantee would be withdrawn by the third defendant on expiry of three months from the date of notice. Hence, the DRT held that once the guarantee

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was cancelled, the bank could have recovered only the amount outstanding within three months from the date of notice, i.e. before 19.04.1978. The suit for recovery ought to have been filed within three years from 19.04.1978, the date on which the amount became due and payable. But the suit before the High Court was filed only on 22.12.1988 and hence it is barred by limitation. Ultimately, the O.A., as against the legal representatives of the third defendant was dismissed. The appellant is aggrieved and hence, in appeal.

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The cardinal question that arises for determination in this appeal is whether the third defendant stood discharged from his liability as a guarantor based on the letter sent by him. The Ld. Counsel for the appellant Mr Nainesh Amin submits that the guarantee executed by the deceased was a continuing guarantee and that there is no dispute about this fact. The third defendant was admittedly a director of the company and had stood as a personal guarantor for the loan. He resigned from the directorship on 19.01.1978 and thereafter issued a letter to the bank. The Ld. Counsel for the appellant Mr Amin points out the letter of guarantee which provides for withdrawal from the guarantee within three months is subject to the payment of the entire amount within that period of three months from the date of the letter. Admittedly, the third defendant has not

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paid the amount. The relevant portion of the guarantee reads thus:

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“My/our liability under these presents shall remain in full force until three calendar months and I/we shall have given or sent to you notice in writing of my/our intention to discontinue and determine these presents and shall have paid to you all moneys up to the limit of my/our liability due at the expiration of such notice and in that event of my/all or any of us dying or being under any legal disability the liability of the survivors or survivor of us and of the estate(s) and executors, administrators or legal representatives of the deceased guarantor shall continue the expiration of three calendar months notice in writing given to you by each survivors or survivor and the executors, administrators or legal representatives or such deceased guarantor to determine this presents and you shall be at liberty on receipt of such notice at any time within the said period of three calendar months to open a fresh account or accounts for the customers and to appropriate thereto all payments subsequently made to you by such customers and not expressly appropriated by such customers to the old account without in any way affecting my/our liability under these presents of the extent aforesaid”

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A reading of the aforesaid portion of the guarantee letter would indicate that the guarantor wanting to discontinue the guarantee has not only to inform the bank by giving three months' notice, he also has to pay the amount by the end of the three months. Admittedly, the amount was not paid within three months. Hence, the Ld. Counsel Mr Amin submits that the third defendant is not exonerated from his liability as a guarantor.

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The DRT has agreed that the deceased third defendant is not absolved of his liability on issuing a notice expressing his intention to withdraw from the guarantee. But once a notice of three months is issued expressing the intent to withdraw from the liability as a guarantor, the amount outstanding by

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the end of that three months becomes due and payable to the bank and therefore, the bank ought to have claimed that amount within three years from the date on which it had become due. The suit was not filed within three years from the date when the amount became due and payable and therefore, it is barred by limitation.

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The legal two points which would arise for consideration in the appeal are whether the guarantee would stand discharged by the end of three months from the date of issuance of the notice, and secondly, whether the limitation for claiming the amount would start running from the end of those three months to file a suit to claim the amount due.

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There is no dispute that it is a continuing guarantee. No such guarantee can be terminated unilaterally. The guarantee letter indeed provides for issuance of a notice giving three months to withdraw from the guarantee but such withdrawal from the guarantee is conditional to payment being made by the guarantor. Admittedly, the payment was not made and therefore, the withdrawal must fail.

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The bank had sent a reply to the letter dated 19.01.1978 of the guarantor on 02.02.1978 wherein they expressed their surprise about the withdrawal of the third defendant from the guarantee. It was pointed out that though the third defendant

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has resigned from the directorship of the company with effect from 24.12.1976, the request to relieve him from the guarantee was made only after a spell over two years. It is also pointed out that the third defendant had given a personal guarantee and not only in his capacity as the director of the company. It is also reminded that he would continue to be bound by the terms of the guarantee. This letter would indicate that the bank had not accepted the discharge of the third defendant from his liability as a guarantor. On 22.02.1978, the bank sent another letter to the company requesting for arranging from the third defendant an irrecoverable undertaking for the continuance of his guarantee for all advances made to the company in the past and/or that may be made to the company in future. The option is also given to the company to introduce some other guarantor of the status and means of the third respondent who may be prepared to give his guarantee covering past debt of the company to enable withdrawal of the third defendant’s guarantee. This letter would further indicate that the guarantee provided by the third defendant was never discharged.

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The Ld. Counsel appearing for the respondent submits that the guarantee was withdrawn giving three months' notice and, therefore, such withdrawal would come into effect from 19.04.1978. The Ld. Counsel for the respondent submits that

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in the reply given by the bank, it had accepted the course to substitute the guarantee provided by the third defendant, and therefore, his guarantee came to an end.

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It is also argued that the guarantor could unilaterally withdraw from the guarantee on giving three months' notice as provided in the letter of guarantee. There is nothing stated in the letter of guarantee regarding acceptance of that withdrawal by the bank. The letter of guarantee also does not provide for a condition to substitute the guarantor as a condition precedent for such withdrawal. Hence, the finding that the cause of action for the filing of the suit arises within three years from 19.04.1978 as held by the DRT is perfectly justifiable, submitted by the Ld. Counsel for the respondent. The Ld. Counsel also points out that after the resignation of the third defendant, other guarantee deeds were executed by the surviving guarantors which would further indicate that the third defendant was discharged from his liability.

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The most important point for determination in this appeal is regarding the effect of a continuing guarantee. The Ld. Presiding Officer has observed that the agreement for the guarantee provided for a withdrawal by the guarantor by giving three months’ notice. The relevant portion of the guarantee agreement which is extracted above does not give a unilateral

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right to the guarantor to withdraw from the guarantee particularly when it is a continuing guarantee which would continue till the entire debt is cleared by the borrower. The bank had made its intention clear by sending a letter to both the guarantor as well as the borrower company indicating its disinclination to accept the withdrawal of the guarantee. The company was directed to substitute a guarantor of the same position as the third defendant in case he wanted to be discharged. Admittedly, no such substitution was made by the company or the third defendant. Hence, it could not be said that the third defendant was discharged from his liability as a guarantor. The Hon’ble Supreme Court had in Sita Ram Gupta vs. Punjab National Bank & Ors. (2008) 5 SCC 711 , considered the effect of a continuing guarantee held that it was not open for the guarantor to revoke the guarantee as he had agreed to treat the guarantee as a continuing one and was bound by the terms and conditions of the said guarantee. In the instant case, the bank has declined his withdrawal from the guarantee by sending a reply. Section 130 of the Contract Act will not protect the guarantor under such circumstances. The Ld. Presiding Officer has not correctly applied the ratio of the decision of the Hon’ble Bombay High Court in Bank of India vs. Aiyars Advertising and Marketing Pvt. Ltd. & Ors. 1993 SCC

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OnLine Bom. 412 , wherein it was observed that a letter sent by the guarantor to relieve himself from the guarantee is not a termination of the guarantee unless it is accepted by the creditor.

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Even if the withdrawal from the guarantee is to be accepted, it is on condition to pay the entire dues within three months. Admittedly, the third defendant did not pay the dues. The Tribunal below concluded that on non-payment of the dues within three months from the date of the letter of withdrawal, the cause of action for the bank arises and that the bank would get only three years from the end of three months to claim the amount. In the instant case, the suit before the High Court was not filed within three years and therefore, it was barred by limitation holds the Ld. Presiding Officer. The claim of the bank is not a simple claim of money. It is a mortgage debt which would attract Article 62 of the Limitation Act and would give 12 years to the bank to claim the amount. The suit before the High Court was filed within 12 years and was, therefore, not barred by limitation. The impugned judgment is, therefore, not sustainable and requires to be quashed.

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In the result, the appeal is allowed and the impugned judgment and order dismissing the O.A. No. 2526 of 1999 dated

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29.03.2005 against the legal representatives of the deceased third defendant is set aside. The O.A. is allowed and the legal representatives of the third defendant who are the defendants Nos. 3(a) to 3(c) are jointly and severally directed to pay a sum of Rs.11,70,38,727.69 together with interest at the rate of 16.5% per annum with quarterly rests with effect from the filing of the suit till realisation and costs in the proceedings, from out the asset inherited by them from the deceased third defendant. A recovery certificate shall be issued accordingly.

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Sd/Chairperson

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mks-01

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Uco Bank v. Smt. Rama Rajendra Tantiya and Ors.

Case brief

What is this about?

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Uco Bank v. Smt. Rama Rajendra Tantiya and Ors.

Case brief

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