This order appeals challenging the recovery of a loan where directors resigned after guaranteeing the loan. The Tribunal held that resignation without bank consent does not discharge liability, and the renewal was not a novation, dismissing the appeals.
Appeals RA 151/2017 and RA 152/2017 are dismissed with costs of the first respondent bank.
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IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT CHENNAI
Dated the 10th day of January, 2025
PRESENT: HON’BLE MR. JUSTICE G. CHANDRASEKHARAN
CHAIRPERSON
RA 151/2017 & RA 152/2017
(arising out of OA 237/2015 (Old OA No.183/2010) on the file of DRT-II, Chennai)
I. RA 151/2017
Between
B. S. Raj Narain B-5, Jains Swarnakamal No.69, NSK Salai, Saligramam, Chennai 600 093.
…..Appellant
And
1. Axis Bank Limited Credit Management Centre, 1st Floor, Karukuttu Nilayam, No.192, Anna Salai, Chennai 600 002.
2. Brand Portrait Consulting Pvt. Ltd. Rep. by its Director, Venu Gopal Nair, 11/2, Sundararajan Street, Abhiramapuram, Chennai 600 018.
3. Mr. Venugopal Nair,
4. Mr. Subash Rambhav Bhokre Director, Brand Portrait Consulting Pvt. Ltd. No.6, Sneham, No.3, Park Road, Anna Nagar, Chennai 600 040.
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5. Ms. C. AroTaffline,
…..Respondents
(R2 to R5 are given up as no relief is claimed against them)
II. RA 152/2017
Between
Ms. C. AroTaffline, G-4, Oyster Operra, Gangai Street, Kalaskhetra Colony, Besant Nagar, Chennai 600 090.
..Appellant
And
1. Axis Bank Limited Credit Management Centre, 1st Floor, Karukuttu Nilayam, No.192, Anna Salai, Chennai 600 002.
2. Brand Portrait Consulting Pvt. Ltd. Rep. by its Director, Venu Gopal Nair, 11/2, Sundararajan Street, Abhiramapuram, Chennai 600 018.
3. Mr. Venugopal Nair, Director, Brand Portrait Consulting Pvt. Ltd. A-11, The Nest, Radha Nagar, Cenotaph Road, Teynampet, Chennai 600 090.
4. Mr. Subash Rambhav Bhokre Director, Brand Portrait Consulting Pvt. Ltd. No.6, Sneham, No.3, Park Road, Anna Nagar, Chennai 600 040.
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5. B. S. Raj Narain B-5, Jains Swarnakamal No.69, NSK Salai, Saligramam, Chennai 600 040.
….Respondents
(R2 to R5 are given up as no relief is claimed against them)
Counsel for appellant : M/s BFS Legal Counsel for first respondent bank : M/s M.R. Uma Vijayan & Co.
COMMON ORDER
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dated 25.7.2007. This amount was not paid, therefore, the applicant bank (R1 bank herein) issued legal notice dated 12.04.2010 to the defendants to pay the entire dues. When there is no response from defendants, OA was filed for recovery of above said amount.
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contract. The rate of interest was enhanced from 13.5% - 15% to 14.25% - 15.75%. Thus, through this new agreement, the appellants are exonerated from paying the loan on the principle of novation.
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permission from the first respondent bank. The email sent to the bank is only an intimation and no permission was sought from the first respondent bank before resignation. Therefore, unilaterally resigning the position of Director in the second respondent company by the appellants will not exonerate them from repaying the loan liability to the bank in their capacity as Directors and as guarantors to the loan in their personal capacity.
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respondent bank for resigning from the post of Director. It is further submitted that conditions incorporated in the guarantee deed are against public policy. In support of his submissions, Ld. Counsel relied on the following judgments.
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when the appellants are Directors of the 2nd respondent company. There is a Covenant ‘h’, in the aforesaid sanction letter which states that “The firm/concern/company should not make any drastic changes in its management set up without the bank’s permission’. This Covenant makes it clear that if there is any drastic change in the management set up of the 2nd respondent company, bank’s permission should be obtained. Admittedly, in the case before hand, the appellants have not obtained bank’s permission before their resignation from the position of Director from the 2nd respondent company. E-mail sent by the appellants on 22.02.2008 is just an information intimating about their resignation.
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condition shall, upon demand, forthwith pay to the Bank all the amounts payable by the Borrower under the Loan Agreement. The Guarantor shall pay interest at the rate of 13.5 % per annum ((applicable rate of interest to the advances made) on the amounts so demanded from them in the event of any delay in their making the payment to the Bank in terms of the notice of demand issued in this behalf by the Bank.
5. The Guarantor shall also indemnify and keep the Bank indemnified against all losses, damages, costs, claims and expenses whatsoever which the Bank may suffer, pay or incur by reason of or in connection with any such default on the part of the Borrower including legal proceedings taken against the Borrower and/or the Guarantor for recovery of the monies referred to in Clause 2 above.
6. The Guarantor hereby agree that without the concurrence of the Guarantor, the Borrower and the Bank shall be at liberty to vary, alter or modify the terms and conditions of the Loan Agreement and of the security documents executed by the Borrower in favour of the Bank and in particular to defer, postpone or revise the repayment of the Credit facility and/or payment of interest and other monies payable by the Borrower to the Bank on the such terms and conditions as may be considered necessary by the Bank including any increase in the rate of interest. The Bank shall also be at liberty to absolutely dispense with or release all or any of the security / securities furnished or required to be furnished by the Borrower to the Bank to secure the said Credit facility. The Guarantor agree that the liability under this Guarantee shall in no manner be affected by any such variations, alterations, modifications, waiver, dispensation with or release of security, and that no consent of the Guarantor is required for giving effect to any such variation, alteration, modification, waiver, dispensation with, or release of security.
10. The Guarantor hereby agree and declare that the Borrower will be free to avail of further loan or other facilities from the Bank or any other financial institution or Bank in addition to the Credit facility and or to secure the same during the subsistence of this Guarantee and in that event the Guarantee herein contained will not be affected or vitiated in any manner whatsoever but will remain in full force and effect and binding on the Guarantor.
11. The rights of the Bank against the Guarantor shall remain in full force and effect notwithstanding any arrangement which may be reached between the Bank and the other or others from liability and notwithstanding that any time hereafter the other Guarantor may cease for any reason whatsoever to be liable to the Bank, the Bank shall be at liberty to require the performance
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by the Guarantor of their obligations hereunder to the same extent in all respects as if the Guarantor had at all times been solely liable to perform the said obligations.
12. To give effect to this Guarantee, the Bank may act as though the Guarantor were the principal Borrower to the Bank.
16. This Guarantee shall not be wholly or partially satisfied, or exhausted by any payments made to or settled with the Bank by the Borrower and shall be valid and binding on the Guarantor and operative until repayment in full of all monies due to the Bank under the Loan Agreement and the Bank issues a certificate in this regard.
19. This Guarantee shall be a continuing one and shall remain in full force and effect till such time the Borrower repays in full the said Credit facility together with all interest, premium on prepayment or on redemption, costs, expenses and other monies that may from time to time become due and payable and remain unpaid to the Bank under the Loan Agreement.
20. The liability of the Guarantor hereunder shall be to the extent of Rs. 25,00,000/- plus all interest, premium on prepayment or on redemption, costs, expenses and other monies payable by the Borrower to the Bank under the Loan Agreement or any other letter or deed. Should there be any excess drawings of the said Credit facility by the Borrower over and above the initial limit sanctioned to the Borrower, for any reason whatsoever, the Guarantor shall be liable for the entire amount outstanding and the Guarantor expressly waive notice of such excess drawal”.
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confirmation, till the borrower repays in full the Credit facility, together with interest.
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earlier debts or the debtors and substitution by new debts or the debtors. It is open to the parties to the earlier debt to either enter into new contract of debt or to substitute the debtors by new set of debtors. In the present case, the original loan contract comes to an end when the Petitioner No.1 and Respondent No.4 walked out of the Respondent No.3 company by resigning as its Directors with the consent of the Respondent No.1 Bank. A new set of Directors walked in who had not only re-casted the debt with the express consent of Bank but Respondent No. 1 also enhanced the limits on their asking. They also executed a new set of documents i.e. promissory note, the loan agreement and their personal guarantee bonds and the collateral security by mortgage of the property by Respondent No. 7. The substitution of a new contract is the core of novation and once a subsequent contract has been executed between the parties, net effect is that the earlier obligations stand discharged and it is the new contract that will define the relationship of the parties and it is a new cause of action which arises on execution of the new contract between the parties. The intention of the parties is very clear from the chain of events as mentioned hereinabove .”
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postulated in Section 130 of the Contract Act. Nothing is immortal in this world. All creations are subjected to decay and destruction guarantee is also liable to revocation. As such, continuing guarantee does not mean that it is perpetual and would continue till one's life time or as long as the sun and moon exist. It is, therefore, clear that the continuing guarantee is not a perpetual one and the same is subject to revocation by the surety and the limitation is that would enure only in respect of future transactions and such revocation by a notice to the creditor.
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14. In this case the provision of Sec. 62 of the would be applicable as there was substitution of the new contract between the parties and it would be unjust to hold the appellant liable because he was not the party to the new contract and he had also informed the bank about his retirement. It is obvious that because the appellant has retired or severed his connection with the company the appellant was not called upon to give fresh guarantee when the rehabilitation package was entered into between the parties and in place of four, five guarantees were taken and other collateral securities were accepted
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bank and the guarantor and when the guarantor was not a signatory to the substituted guarantee, then, the guarantor was held not liable.
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confirms the order of Ld. Presiding Officer passed in OA 237/2015 on 7.10.2015 and consequently these appeals are dismissed with the costs of first respondent bank.
[Dictated to Stenographer (SN), transcribed by him, corrected, signed and pronounced by me in open court, this 10th January, 2025)
Sd/-
(JUSTICE G. CHANDRASEKHARAN) CHAIRPERSON
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3 issues framed by the court
Whether resignation of directors from the borrowing company without bank permission discharges their personal guarantee liability under Section 133 of the Indian Contract Act.
Whether the renewal of the loan facility with minor modification constitutes a novation that extinguishes the original guarantee.
Whether variance in interest rates discharges the guarantors under Section 133 of the Indian Contract Act.
Colour shows how this judgement treated each authority
Union Bank of India Vs. Rajan Malhotra and othersDistinguished¶109
Union Bank of India Vs. Rajan Malhotra and others reported in 2019 SCC Online 11177; AIR 2020 (NOC) 533 175: (2019);265 DLT 277(DB); (2019) 178 DRJ 424
Punjab National Bank Vs/ Debts Recover Appellate TribunalDistinguished¶109
Punjab National Bank Vs/ Debts Recover Appellate Tribunal reported in MANU/PH/0455/2008
Kailash Chandra Gaur Vs. Central Bank of India & OthersDistinguished¶109
Kailash Chandra Gaur Vs. Central Bank of India & Others reported in MANU/DC/0034/2005
V. Nanadkumar Vs. Central Bank of IndiaDistinguished¶109
V. Nanadkumar Vs. Central Bank of India reported in MANU/DC/0022/2005
Pratap Rama Rane Vs. Canara Bank and othersDistinguished¶109
Pratap Rama Rane Vs. Canara Bank and others reported in MANU/DM/0012/2007
3 provisions across 2 enactments
B. S. Raj Narain
C. AroTaffline
Axis Bank Limited
G. CHANDRASEKHARAN
As recorded by the court registry
14 orders share this CNR
Judgements on the same questions, provisions and authorities, from every court
