Guarantors challenged their liability for a company’s borrowing on grounds of diversion of funds and variation of sanction terms. The Court rejected discharge of the guarantees, upheld continuing mortgage liability and contractual interest, and dismissed the writ petition, affirming the DRAT order.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 25TH DAY OF FEBRUARY, 2020
PRESENT
THE HON’BLE MR. JUSTICE ARAVIND KUMAR
AND
THE HON’BLE MR. JUSTICE E.S.INDIRESH
WRIT PETITION No.20318 OF 2018 (GM-DRT)
BETWEEN:
... PETITIONERS
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(BY SRI. UDAY HOLLA, SENIOR ADVOCATE FOR SRI. R. ASHOK KUMAR, ADVOCATES)
AND:
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... RESPONDENTS
(BY SRI.DHYAN CHINNAPPA SR.COUNSEL FOR SRI.VIGNESH SHETTY, ADV. FOR R1; SMT.REVATHY ADINATH NARDE, ADV.FOR R2; SRI.C.G.GOPALASWAMY, ADV. FOR R3-R5; SRI.CHANDRAKANTH PATIL K.,ADV.FOR R6 & R7; R8 TO R10 SERVED.)
THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA, PRAYING TO
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QUASH THE IMPUGNED ORDER PASSED BY THE DEBTS RECOVRY APPELLATE TRIBUNAL, CHENNAI IN R.A.NO.162/2017 DATED 14.3.2018 IN T.A.NO.109/2017 VIDE ANNEXURE – G AND ETC.,
THIS PETITION COMING ON FOR ORDERS THIS DAY, ARAVIND KUMAR J., MADE THE FOLLOWING:
O R D E R
The first respondent herein being the assignee of the
debt from the assignor, i.e. Bank of India, filed an application under Section 19 of Debt Recovery Tribunal Act in OA No.242 of 2006 for issuance of recovery certificate against defendants 1 to 10 therein for recovery of a sum of Rs.3,84,19,563.10, and against defendants No.1 to 7 for recovery of Rs.99,81,120.29 with interest and costs. Said application was filed by Bank of India and on account of assignment of debt, first respondent herein, by filing an application, got itself substituted in place of the said Bank and continued with the proceedings. Petitioners herein, who were defendants 8 to 10 in the application in OA No.242 of 2006 filed statement of objections denying entire averments made in the application including denial of personal guarantee executed by them and also execution of mortgage deed. It was also contended that Bank had deviated from the terms and conditions of sanction
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letter dated 16th June, 2003 by releasing a sum of Rs.89,53,191/to the first defendant for purchasing components from four shell companies by acting upon letter dated 17th October, 2003 of the second defendant which is in violation of the terms of sanction, due to which guarantee executed by them had stood extinguished under Section 133 to 135 of the Indian Contract Act, 1872. On account of applicant-Bank seeking for sale made by defendants 8 to 10 in favour of defendants 11 and 12 as void and not binding due to subsisting mortgage, same was denied by them contending inter alia that on account of legal necessity for discharge of income-tax liability and there being no prohibition to them from executing the sale deed same had been sold. It was further contended that Bank had failed to enforce its rights to sell the available hypothecated goods to realize its dues and due to Bank’s negligence, and inaction, guarantee given by the defendants stood extinguished under Section 139 of the Contract Act and there was no cause of action for bank to file the application for recovery against the writ petitioners. To substantiate claim made in OA 642 of 2006, authorised signatory of the first respondent-secured creditor was
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examined as AW1 and several loan documents were got marked. First petitioner herein got himself examined as DW1. After considering the pleadings and evidence available on record, by order dated 31st July, 2017 Debt Recovery Tribunal allowed OA 642 of 2006 in part and directed defendants 1 to 7 to jointly and severally pay the entire amount together with current and future interests, cost, etc. The claim against defendant 8 to 12 was dismissed without costs. The prayer for sale of schedule ‘A’ and schedule ‘B’ immovable properties as described in OA 642 of 2006 also came to be rejected. The grounds assigned by the Tribunal to arrive at the said conclusion was that guarantees executed by the petitioners was for fulfilling the obligation of the export order of M/s. Thuraya and the Bank had failed in its commitment and had deviated from the sanction dated 16th June, 2003 in collusion with the borrower by acting upon the letter dated 17th October, 2003 issued by second defendant by releasing a sum of Rs.89,53,191/- out of the subject loan for settling its dues with one M/s. Cipla and/or purchasing the components from four companies. Hence, it was held that there was breach of contract by the Bank and on account of the terms of sanction
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having been varied by the Bank itself, the guarantee given by the defendants stood extinguished under Section 133 to 135 of Contract Act. Tribunal also held that AW1-the witness examined on behalf of the secured creditor, was unable to answer with regard to four debit entries in the statement of account which proved the contention of defendants 8 to 10, or on the other hand secured creditor had failed to establish that there was no deviation in the terms of contract. In short, Tribunal held, applicant-Bank in collusion with the borrower by acting upon the letter dated 17th October, 2003 given by the second defendant had released the amounts to four (4) shell companies to the detrimental interest of defendants/guarantors by deviating the original terms of sanction and as such, there was no liability on the guarantors to indemnify the claim of the borrowers.
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proof of burden lies on the party who alleges the fact of collusion and petitioners viz. defendants 8 to 10 had failed to establish this initial burden; also on the ground that respondent No.8 was active Director of the principal borrower Company from 30th June, 1999 to 19th February, 2000 and was also the Company Secretary and being in-charge of the financial affairs of the borrower company from 29th September, 2004. It was also further held the alleged diversion of funds, even if any, was not checked by the Company Secretary, rather was helping the second defendant and as such, the guarantors would also be liable to repay the debts due to secured creditor and they cannot take shelter under Section 132 to 135 of the Indian Contract Act. In this background, appeal came to be allowed. Hence, this writ petition.
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authority being the last finding authority, were to upset the finding of original authority, necessarily it has to assign reasons failing which said order of the appellate authority will have to be set aside. On facts he would contend that personal guarantees executed by the petitioners is for the purposes of securing loans specified under the said agreements and secured creditor ought to have ensured that conditions imposed under the sanction of credit facilities extended to the borrowers are strictly adhered to, inasmuch as, variations or directions of said conditions would automatically absolve the guarantor of discharging the guarantee agreement. He would submit that DRT on appreciation of entire evidence available has arrived at a conclusion that bank–secured creditor in utter violation of the conditions imposed under the sanctioned letter had diverted the funds to four (4) shell companies and thereby under Sections 133 and 135 of the Contract Act, liability of guarantors automatically had stood absolved. He would also contend that primary security as indicated under the bond under the hypothecation deed and credits received by the debtor having not been enforced by secured creditors and it is
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also violation of the conditions which would automatically absolve the guarantors of their liability as secured creditor had not taken steps to enforce primary security and liability cannot be fastened on the guarantors. He would contend that DRAT having not gone into reasons assigned by the DRT to absolve the guarantor of their liability or reasons having been assigned as to why it was not satisfied with said finding, could not have set aside the findings so recorded by the DRT. He would also contend that one of the guarantors Sri. Gnananand having not executed personal guarantee, which was a condition precedent for enforcing the guarantee agreement against the petitioners had resulted in all the guarantors being absolved of their guarantee, inasmuch as, execution of personal guarantee by Sri. Gnananand was an essential term of the sanction vide Clause No.19 and as such DRAT committed a serious error in not appreciating these facts, which had received the attention of DRT. By relying upon following judgments he prays for allowing the petition and prays for setting aside the order of DRAT by restoring the order of DRT.
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from contending there has been variation in the terms set out in the sanction letter and as such guarantors ought to be absolved of their liability. He would submit that DRT ought to have considered the fact that applicant, who alleges diversion of funds, burden ought to have been discharged by such applicant and there could not have been any reverse burden cast on the secured creditor and as such appellate tribunal has rightly ignored the said finding recorded by the tribunal and there is no error committed by the appellate tribunal. He would also submit that defendant No.8 undisputedly was the Company Secretary at the relevant point of time when the diversion of funds took place and he having personal knowledge of this fact, has not produced any material to establish such diversion and as such contention raised by petitioners’ counsel in this regard need not be entertained. He would also contend that diversion even if any, ought to have been established by the petitioners that it was within the knowledge of bank i.e., secured creditor and on mere stray sentences in the objection statement/application or stray admission in evidence could not have swayed in the mind of DRT to accept said plea. He would further contend that even
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accepting for a moment that all the contentions raised by the petitioners/applicants are to be accepted and they are to be discharged of their personal guarantee, it would not ipso-facto discharge their liability under the mortgage agreement executed by them and personal guarantee even if wiped out, the amount borrowed by the second defendant which is secured by way of collateral security i.e. mortgage, which would still be enforceable by the secured creditor and this core issue has been considered by the appellate tribunal though ignored by the Debt Recovery Tribunal and as such he prays for dismissal of the writ petition. In support of his submission he has relied upon the following judgments:
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supervisory jurisdiction under Article 227 of the Constitution of India. The disputed question of facts which have been delved upon in detail by the DRT and reversed by DRAT which is the last fact finding authority, cannot be gone into as an appellate court, since this Court would be exercising the limited supervisory jurisdiction. This view gets support from authoritative pronouncement of the Hon’ble Apex Court in the matter of KHIMJI VIDHU v. PREMIERE HIGH SCHOOL reported in AIR 2000 SC 3495 wherein it has been held by the Hon’ble Apex Court as under:
“ …Both the trial Court as well as the first appellate court, on the basis of the material on the record, came to the conclusion that the respondent had used the spaces and passages, which had not been let out to them, in a manner other than for use of ingress and egress and had committed breach of the terms of the tenancy of vital nature. Both the courts detailed the manner in which the tenant had put to use the spaces and passages. These findings of fact could not have been interfered by the High Court in exercise of its jurisdiction under Article 226 and 227 of the Constitution. Jurisdiction under Articles 227 of the Constitution must be sparingly exercised and may be exercised to correct errors of jurisdiction and the like but not to upset pure findings of fact, which falls in the domain of an appellate Court only. …”
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amount had been allowed to be diverted by the borrower and as such, they sought to take umbrage under Section 133 to 135 of the Indian Contract Act. As observed hereinabove, the Tribunal accepted said plea, on the premise that though a denial has been made by defendants 8 to 10, an evasive answer had been given by the witness AW1 who had been examined on behalf of secured creditor. In fact, defendants 8 to 10 had not produced or tendered any proof of such amount having not been deviated. It is this finding of the Tribunal, which was found to be erroneous by the Appellate Tribunal. It is no doubt true that an elaborate discussion by the appellate Tribunal is found from the impugned order. However, that itself would not suffice to set aside the order of the Appellate Tribunal. From a holistic reading of the impugned judgment it would clearly indicate that Appellate Tribunal has applied its mind to examine as to whether the personal guarantee submitted by defendants 8 to 10 is to be held as having been discharged on account of there being any deviation or diversion of the loan borrowed and as such, the personal guarantees given by the petitioners are not required to be enforced against them? In the process of examining said
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issue, Appellate Tribunal found that very contract of guarantee agreement enabled the secured creditor to such acts as provided thereunder. For the purposes of immediate reference a clause so pressed into service is extracted hereunder:
“…And we and each of expressly agree that you shall have full discretionary power without any further consent from us and without in any way affecting our liability, under this guarantee, to renew any advance, and to hold over, renew or give up in whole or in part and from time to time, any bills, notes, mortgages, charges, principal either alone or jointly with any other person or persons or from any other person or persons or bearing the name of the principal, you shall be at liberty without in any way affecting our liability under this guarantee and we hereby give our consent to you to vary any contract or any term or terms of any contract entered into with or to release or discharge or to do any act or omission the legal consequence of which is to discharge or to grant time or any other indulgence or not to use, either the principal or any person or persons. And further that this guarantee shall be a continuing security to you, and shall not be determined except at the expiration of one calendar months;… ”
defendants 8 to 10 in the said agreement reads:
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“ We respectfully waive in your favour all or any of our rights against you or the Principal so far as may be necessary to give effect to any of the Provisions of this guarantee. And we and each of us agree that we shall not be entitled to claim the benefit of any legal consequences of any variation o any contract entered into by the Principal with you the liability I respect of which is guaranteed by us aforesaid. ”
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Company, but was also in-charge of its financial affairs. In other words, the DRAT is fully justified and correct in arriving at a conclusion that collusion was more between defendants 8 to 10 and the principal borrower, and not between the secured creditor and the principal borrower. In such circumstances, the question of invoking Section 133 to 135 of the Indian Contract Act or petitioners attempting to take umbrage under the said provisions to stave off their liability to indemnify would be not justified. Hence, we are of the considered view that DRAT has rightly arrived at a conclusion that defendants 8 to 10 cannot be discharged of their guarantee.
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proof of such allegation being placed by the party so alleging. As rightly held by the Tribunal vide paragraph 7, that as a thumb rule the burden of proof lies on the party who alleges the fact, cannot go unnoticed. Hence, the burden on the petitioners to have established that such diversion of funds had taken place on account of collusion between the borrower and the secured creditor or in other words the secured creditor had knowledge of such diversion of fund and yet had not taken any reasonable steps to prevent it. Until and unless there is cogent and positive evidence available on record to arrive at a conclusion that such collusion was there between the secured creditor and the principal borrower or the secured creditor had knowledge of diversion of funds and it had consciously allowed the terms of the sanction letter being violated by the principal borrower, then guarantor would have been justified to take shelter under Section 133 to 135 of the Indian Contract Act to stave off their liability and not otherwise. As such, judgment relied upon by the learned advocates to buttress their respective arguments would not be of any assistance in the facts obtained in the present case. Hence, we have not delved upon those judgments.
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stand extinguished or discharged by taking umbrage under Section 133 to 135 of the Indian Contract Act.
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passed by DRT absolving petitioners of their guarantee is erroneous and it has been rightly set aside by the Appellate Tribunal which would not call for interference.
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export backing credit and guarantees issued (Foreign), is an argument which is required to be considered for the purpose of outright rejection inasmuch as the two guarantees which have been executed by defendants 8 to 10 as per Annexures A5, A6 and A7, is for a sum of Rs.4.00 crore and for Rs.1,04,00,000/- respectively, whereunder, it is agreed upon by the said defendants to pay interest at the rate of 9.50% per annum up to 180 days, 12.50% per annum about 181 up to 270 days; and 15.50% after 270 days. Thus, claim for interest by the secured creditor is as per the contract or in other words the contractual interest as agreed upon has been sought to be enforced by the secured creditor and though Tribunal absolved defendants 8 to 10 from their guarantee, the application for recovery had been allowed in part and the liability had been fastened only on defendants 1 to 7 which was with interest as claimed in the original application. It has been specifically ordered by the Tribunal that defendants 1 to 7, should jointly and severally, shall pay the entire TA amount together with current and future interest, cost, etc. as sought for by the appellant in the TA. What has been sought for in the TA by the secured creditor which is at Annexure-R12
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would clearly disclose that interest at the rate of 14.50% and 15.50% per annum for these two credit facilities extended to
the principal borrower and on account of Appellate Tribunal having held that petitioners viz. defendants 8 to 10 would also be liable to indemnify the claim or their guarantee is coextensive with that of the principal borrower, necessarily writ petitioners would also be liable to pay interest as claimed by the secured creditor in the original application. In fact Appellate Tribunal itself has made an observation that original application should have be allowed against all the respondents jointly and severally and as such, for reasons set out in the said impugned order vide paragraph 12, has allowed the appeal as prayed for. We do not find any other good ground to entertain this writ petition.
Hence, we proceed to pass the following:
O R D E R
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Debt Recovery Appellate Tribunal,
Chennai stands affirmed.
(iii) No order as to costs.
Sd/JUDGE
Sd/JUDGE
lnn
3 issues framed by the court
Were the guarantors discharged under Sections 133 to 135 despite contractual consent to variation and failure to establish collusive diversion of funds?
Would discharge of the personal guarantees also extinguish the mortgages securing the borrowing?
Were the guarantors liable for contractual interest claimed by the secured creditor?
Colour shows how this judgement treated each authority
STATE BANK OF SAURASHTRA vs. CHITRANJAN RANGNATH RAJA AND ANOTHERReferred¶51
(1980) 4 SCC 516 · Who else cites this
P. JANAKIRAM CHETTY vs. PUNJAB NATIONAL BANK LTD., NEW DELHI AND ANOTHERReferred¶53
1967 SCC ONLINE KAR 83: AIR 1968 MYS 56 · Who else cites this
KARNATAKA STATE FINANCIAL CORPORATION vs. JANAKAIAH NAIDU AND OTHERSReferred¶54
ILR 2007 KAR 200 · Who else cites this
STATE OF WEST BENGAL vs. ATUL KRISHNA SHAW AND ANOTHERReferred¶55
1991 SUPP (1) SCC 414 · Who else cites this
STATE BANK OF INDIA AND ANOTHER vs. EMMSONS INTERNATIONAL LIMITED AND ANOTHERReferred¶57
(2011) 12 SCC 174 · Who else cites this
ASSISTANT COMMISSIONER, COMMERCIAL TAX DEPARTMENT vs. SHUKLA AND BROTHERSReferred¶58
(2010) 4 SCC 785 · Who else cites this
MADHUKAR AND OTHERS vs. SANGRAM AND OTHERSReferred¶59
(2001) 4 SCC 756 · Who else cites this
SATOSH HAZARI vs. PURUSHOTTAM TIWARI (DECEASED) BY LRS.Referred¶60
(2001) 3 SCC 179 · Who else cites this
STATE BANK OF INDIA vs. INDEXPORT REGISTERED AND ORS.Referred¶66
Civil Appeal No.1888/1992
R. LILAVATI vs. BANK OF BARODAReferred¶67
LAWS (KAR) 1986 6 13
HOUSING DEVELOPMENT AND FINANCE CORPORATION vs. GAUTAM KUMAR NAG AND OTHERSReferred¶68
(2012) 5 SCC 604 · Who else cites this
INDUSTRIAL INVESTMENT BANK OF INDIA LIMITED vs. BISWANATH JHUNJHUNWALAReferred¶69
(2009) 9 SCC 478 · Who else cites this
SITA RAM GUPTA vs. PUNJAB NATIONAL BANK AND OTHERSReferred¶70
(2008) 5 SCC 711 · Who else cites this
RAM KISHUN AND OTHERS vs. STATE OF UTTAR PRADESH AND OTHERSReferred¶72
(2012) 11 SCC 511 · Who else cites this
CENTRAL BANK OF INDIA vs. C.L. VIMLA AND OTHERSReferred¶73
(2015) 7 SCC 337 · Who else cites this
B.JAYASHANKARAPPA AND ORS. Vs. D.S.GULWADIReferred¶75
RSA No.756/1984
SYNDICATE BANK vs. ESTATE OFFICER & MANAGER, APIIC LTD. AND OTHERSReferred¶76
(2007) 8 SCC 361 · Who else cites this
PUZHAKKAL KUTTAPPU vs. C. BHARGAVI AND OTHERSReferred¶77
(1977) 1 SCC 17 · Who else cites this
SRI. S.V. RAMASWAMY AND ANR. vs. THE STATE OF KARNATAKA BY VYALIKAVAL POLICE, BANGALORE AND ANOTHERReferred¶78
CRL.P.NO.5802/2009
KHIMJI VIDHU v. PREMIERE HIGH SCHOOLRelied on¶81
AIR 2000 SC 3495 · Who else cites this
2 provisions across 2 enactments
S.V.RAMASWAMY
USHA RAMASWAMY
R.K.ASSOCIATES
ASSET RECONSTRUCTION COMPANY (INDIA) LTD
M/S. U & I SYSTEM DESIGN LTD (IN LIQUIDATION)
G.R.ITIGI
ARAVIND KUMAR
E.S.INDIRESH
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
