Guarantor appealed a recovery decree against directors who personally guaranteed a term loan to Karnataka State Financial Corporation. The High Court held the guarantee invocation notice fixed limitation, that the surety's liability is co-extensive and independently enforceable, and dismissed the appeal with costs.
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.
M.F.A.NO.4565/2012
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IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 27TH DAY OF JUNE, 2024
PRESENT
THE HON'BLE MRS. JUSTICE K.S. MUDAGAL
AND
THE HON'BLE MR. JUSTICE VIJAYKUMAR A. PATIL
MISCELLANEOUS FIRST APPEAL NO.4565/2012 (SFC)
BETWEEN:
S. SUBRAMANYAM AGED ABOUT 43 YEARS S/O S. SANTHANARAMAN PRESENTLY R/AT FLAT NO.708 BUHARIA CORNICE, AL REEM PLAZA SHAJA, DUBAI, UAE.
..APPELLANT
(BY SRI. M.R. NARAYAN, ADV.,)
AND:
1 . M/S. KARNATAKA STATE FINANCIAL CORPORATION HEAD OFFICE AT NO. 1/1 KSFC BHAVAN, THIMMAIAH ROAD NEAR CONTONMENT RAILWAY STATION BANGALORE-560002. REP. BY ITS DY. GENERAL MANAGER T. SHASHIKUMAR.
2 . M/S. SHIMOGA CASTINGS PVT. LTD., REPRESENTED BY ITS MANAGING DIRECTOR NO.279, HEBBAL INDUSTRIAL AREA HOOTAGALLI, MYSORE 571186 AND ALSO AT REGISTERED OFFICE NO.17/6 ALI ASKAR ROAD CROSS BANGALORE 560052.
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….RESPONDENTS
(BY SRI. GURURAJ JOSHI, ADV., FOR R1 SRI. NIKHILESH M. RAO, ADV., FOR 3 & R4 V/O DTD:04.11.2015 APPEAL STANDS DISMISSED AGAINST R2 & R5)
THIS MISCELLANEOUS FIST APPEAL IS FILED U/S 32(9) OF STATE FINANCIAL CORPORATION ACT, AGAINST THE ORDER DT.19.03.2012 PASSED IN MIS.PETITION NO.36/2010 ON THE FILE OF THE I ADDITIONAL DISTRICT JUDGE, MYSORE, ALLOWING THE PETITION FILED U/S 31(1)(aa) OF THE FINANCIAL CORPORATIONS ACT.
THIS APPEAL HAVING BEEN HEARD AND RESERVED, COMING ON FOR PRONOUNCEMENT THIS DAY, VIJAYKUMAR A. PATIL J., PRONOUNCED THE FOLLOWING:
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JUDGMENT
This appeal is filed by the guarantor under Section 32(9) of the State Financial Corporation Act, 1951 (hereinafter referred to as 'the SFC Act') assailing order dated 19.03.2012 passed in Misc.P.No.36/2010 on the file of I Addl. District Judge at Mysuru. By the said order, the petition filed by the respondent No.1 under Section 31(1)(aa) of the SFC Act was allowed directing the appellant and respondent Nos.3 to 5 to pay to respondent No.1 a sum of Rs.19,33,81,798/- with cost and compound interest at 22% p.a. from 10.03.2010 till the date of realisation.
follows:-
(i) Respondent No.2 filed an application before respondent No.1 - M/s. Karnataka State Financial Corporation (hereinafter referred to as 'the KSFC') for financial assistance by way of term loan of Rs.1,50,00,000/- to establish and run an industry at Plot No.279, Hebbal Industrial Area, Hootagalli, Mysuru. KSFC sanctioned the term loan of Rs.1,50,00,000/- on 10.01.1996. Respondent No.2 executed the mortgage deed mortgaging the land and building of the industrial plot and also executed the deed of hypothecation for the machineries and
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secured the loan. The appellant and respondent Nos.3 to 5 are the Directors of the respondent No.2 - Company and they have offered their personal guarantees / surety for repayment of the term loan of Rs.1,50,00,000/- secured from KSFC. The appellant and respondent Nos.3 to 5 executed the deeds of personal guarantees dated 26.02.1996, 05.03.1996, 14.02.1996 and 14.02.1996.
(ii) Respondent No.2 committed default in repayment of the loan amount to the KSFC. On such default, the KSFC decided to invoke the personal guarantees given by the appellant and respondent Nos.3 to 5 and accordingly issued notices to the appellant, respondent Nos.3 and 4 on 21.07.2007 and to respondent No.5 on 03.02.2010 calling upon them to pay the outstanding dues. As per the accounts maintained by the KSFC, a sum of Rs.19,33,81,798/- was due from respondent No.2 as on 10.03.2010. KSFC filed Misc.P.No.36/2010 application before the Trial Court under Section 31(1)(aa) of the SFC Act for recovery of Rs.19,33,81,798/- with interest and costs from the appellant and respondent Nos.3 to 5.
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objections before the Trial Court. Respondent Nos.2 and 5 remained exparte. The appellant admitted the sanction of loan by the KSFC in favour of the respondent No.2. He also admitted the execution of personal guarantee. However, he claimed that KSFC has issued notice for the purpose of saving the limitation. It was further contended that M/s.ENNEN Castings Pvt. Ltd. became sick and land, building and plant and machinery of the said Company were sold to Shivamogga Steels Pvt. Ltd. by KSFC vide sale deed dated 26.03.1992 for realisation of the amount due to it. It was contended that neither M/s.ENNEN Castings Pvt. Ltd. nor Shivamogga Steels Pvt. Ltd. were the owners of the land and the land was owned
by the KIADB which had not executed absolute sale deed, suppressing the same the KSFC executed the sale deed in favour of Shivamogga Steels Pvt. Ltd. only with an intention to assure the appellant that the land belonged to Shivamogga Steels Pvt. Ltd. is a valuable land and the same is taken as a mortgage which meets the loan amount. It is averred that KSFC induced the appellant to run the industry under the name and style of respondent No.2 and assuring that the appellant
and respondent Nos.3 to 5 can make use of the existing infrastructure of respondent No.2 - Company and they would
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give loan of Rs.1,50,00,000/- for the purpose of buying diesel generation sets and other plant equipments. It was also assured by KSFC that the entire loan amount would be secured by mortgage of land, building and plant and machinery owned by the respondent No.2 - Company and on such assurance the appellant executed the personal guarantee. However, KSFC has not taken the mortgage deed from the respondent No.2 and the alleged mortgage deed did not transfer any right to KSFC as no title to Shivamogga Steels Ltd. itself was transferred from the KSFC. It is further averred that the respondent No.2 suffered huge loss mainly on account of power cut and labour strike and the KSFC has not properly pictured the burden of licence fee agreed to be paid to the said Shivomagga Steels Ltd. Under such circumstances, the appellant requested KSFC to take over the unit and realise the assets of the unit for satisfaction of the liability. However, KSFC did not take any action. It is further averred that respondent No.2 was not running profitably and could not pay to its creditors. The creditors filed winding up petition before the High Court of Karnataka and winding up order was passed on 16.08.2001 and the Official Liquidator took over the possession of respondent No.2 - Company. Due to the lapse of the Official Liquidator, the plant and machinery were stolen and
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whatever remained has become scrap on account of nonoperation and non-maintenance. Such negligent acts of the KSFC caused tremendous loss and injury to the appellant and other guarantors. The officials of the KSFC colluded with the management of respondent No.2 leading to loss to the appellant. Hence he sought for dismissal of the petition.
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guarantee only in the cases of default of the principal borrower, invoking the guarantee without proceeding against the principal borrower is contrary to the settled principles of law. It is contended that the notice dated 21.07.2007 issued by the KSFC as per Ex.P11 is only with an intention to overcome the limitation as the actual cause of action arose to file an application in the year 2002 on principal borrower's default in payment of instalment. Hence, the application filed by the KSFC is barred by limitation. In support of his contention he relied on the judgment of the Hon'ble Supreme Court in the case of Syndicate Bank vs. Channaverrappa Bellary1 and submits that when the demand is made by the creditor on the guarantor under the guarantee which requires a demand as a condition precedent for liability of the guarantor, such a demand should be for payment of sum which is legally due and recoverable from the principal debtor and in the instant case, the debt is barred by law of limitation against the principal borrower. Hence, it is not a legally recoverable debt from the guarantor. It is further contended that the KSFC was negligent in timely selling the mortgaged assets and hypothecated machineries which has resulted into the theft of the same and
in effect, the machineries have become scrap and the appellant
1 AIR 2006 SC 1874
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requested the KSFC to take over the plant and machinery which is nothing but repudiation of contract and after repudiating the contract, the invocation of guarantee by the KSFC would not arise. It is also contended that the KSFC did not take any steps to foreclose the mortgage deed and not made any attempt to sell the plant and machinery in time and due to the lapse of KSFC, the loan amount could not be realised. The KSFC, to overcome their lapses have filed belated application before the Trial Court to invoke the guarantee and these aspects have not been properly considered by the Trial Court resulting in passing of the impugned order.
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the appellant to furnish the bank guarantee by giving incorrect impression that the entire loan amount would be recovered by selling the mortgaged land and building. However, neither the KSFC nor M/s.ENNEN Castings Pvt. Ltd. were the owners of the land and still the ownership of the land is with the KIADB. He seeks to allow the appeal by setting aside the impugned order.
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Ex.P3 clearly indicates that the KSFC is entitled to invoke the guarantees to realise their dues. It is further submitted that the KSFC can independently invoke the guarantee and realise its dues without even proceeding against the principal borrower. He places reliance on the judgment of the Division Bench of this Court in the case of Gulhati and another v.
Karnataka State Financial Corporation and others2 It is also submitted that the KSFC has issued number of notices to the principal borrower and the copies of notices are marked to the guarantor for information prior to invoking the guarantee. That issuance of such notice itself should not be termed as a invocation of guarantees and actual guarantees were invoked on 21.07.2007. Hence, the application is within the period of limitation. It is also submitted that the trial Court has considered the pleadings, evidence and the law laid down by the Courts and passed well reasoned order, which does not call for any interference in the appeal filed by the guarantor. He submits that the KSFC has filed objections to the application filed by the appellant for production of additional documents.
It is submitted that the additional documents produced along with an application are irrelevant to decide the appeal and the said application is filed on 24.11.2020, which is after 8 years of
2 ILR 2007 KAR 44
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filing of the appeal and no reasons are forthcoming for the delay. Hence, he seeks dismissal of the application as well as the appeal.
"Whether the impugned judgment and order of Trial Court in allowing the application filed by the respondent-KSFC under Section 31(1)(aa) of the SFC Act is sustainable in law?"
ANALYSIS
Reg. limitation:
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enforcement of liability of the principal borrower. In the instant case, the guarantee deeds were invoked by the respondent KSFC by issuing notice dated 21.07.2007 at Ex.P-11 and thereafter filed the petition under Section 31(1)(aa) of the SFC Act which is within a period of three years. Hence, the contention of the appellant that the debt is barred by time is liable to be rejected.
” 20. As regards the periods of limitation, though it is baldly stated in the counter that the petition is barred by limitation and the date of the first notice be taken as the starting point of limitation, there is no clear details given as to how such a contention would stand. It needs to be mentioned that under the first notice, the first respondent-Corporation had only recalled the entire loan payable by the principal borrower and at the same time, had alerted the guarantors to see that something is done to save the company. Under the first notice admittedly, the first respondent - Corporation did not invoke the liability of the surety under the guarantee bond . It is only in the second notice, the first respondent - Corporation invoked the liability of the surety and if the period of limitation is to be computed from the date of the second notice, the petition filed by the first respondent - Corporation under Section 31(1)(aa) for enforcing the liability of surety, it is well within time even if it is to be assumed that the residuary Article 137 is applicable to such petitions."
(emphasis supplied)
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might have issued notices to the principal borrower earlier to Ex.P-11 and copy of the same might have been marked to the guarantors. The marking of such copy to the guarantor cannot be termed as invoking the guarantee by the respondent KSFC. The appellants have not placed on record any of the notices earlier issued by the respondent KSFC invoking the guarantee. Hence, bald assertion that the limitation runs from the date of earlier notice or on the date of default of last instalment by the principal borrower as per the loan agreement merits no consideration and plea is contrary to the settled principles of law.
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surety has no bearing on the KSFC not exhausting its remedy against the principal borrower.
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guaranteed/indemnified the KSFC to make good the liability of the principal borrower.
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Re. Section 128 Contract Act:
"31. Special provisions for enforcement of claims by Financial Corporation .-
(1) Where an industrial concern, in breach of any agreement, makes any default in repayment of any loan or advance or any instalment thereof [or in meeting its obligations in relation to any guarantee given by the Corporation] or otherwise fails to comply with the terms of its agreement with the Financial Corporation or where the Financial Corporation requires an industrial concern to make immediate repayment of any loan or advance under section 30 and the industrial concern fails to make such repayment, [then, without prejudice to the provisions of section 29 of this Act and of section 69 of the Transfer of Property Act, 1882 (4 of 1882)] [ Inserted by Act 56 of 1956, Section 15 (w.e.f. 1-10-1956).], any officer of the Financial Corporation, generally or specially authorized by the Board in this behalf, may apply to the District Judge within the limits of whose jurisdiction the industrial concern carries on the whole or a substantial part of its business for one or more of the following reliefs, namely:-
(a) xxxx (aa) for enforcing the liability of any surety ;"
16. The aforesaid Section empowers the KSFC to
proceed for enforcement of liability of guarantor independently.
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The contention of the appellant that the creditor is required to proceed firstly against the principal borrower and thereafter they have to proceed against the guarantor. The said issue is no more res integra . The Division Bench of this Court in the case of Gulhati and another referred supra, in paragraph Nos.18, 18a, 18b has held as follows:
"18 . Further in the case of N. Narashimhaiah and Ors. v. KSFC and Ors. (Supra) the Division Bench of this Court speaking through Sri R.V. Raveendran J., (as he then was) has held as under:
C) It is not necessary for a creditor, before proceedings against the surety to demand payment from the principal-Debtor unless it is expressly stipulated for. The surety may be proceeded against without first proceeding against the Principal Debtor. (emphasis supplied)
18-A. What emanates from the above decision is that in terms of Section 128 of the Contract Act, the liability of the appellant - surety is coextensive with the liability of the principal debtor and hence it is not necessary for the 1st respondent - Corporation, before proceeding against the surety to demand payment from the principal borrower or sue the principal borrower. Nor it was incumbent upon the 1st respondent - Corporation to have impleaded the principal borrower as a party respondent to the present proceedings initiated against the appellant and the other respondents for enforcing the liability of the surety under Section 31(1 )(aa) of the Act. It is now well settled that the liability of the surety is coextensive with that of the principal borrower . The liability of the surety is immediate and the same is not deferred until the Corporation exhausts its remedies against the principal borrower. It is equally well settled that the guarantor alone could be sued without suing the principal borrower so long as the creditor
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satisfies the Court that the principal debtor or the principal borrower is in default. Section 128 of the Indian Contract Act provides that the liability of the sureties is coextensive with the liability of the principal-debtor unless it is otherwise provided by the contract. It is not necessary for a creditor, before proceeding against the surety to demand payment from the principal-debtor or sue the principaldebtor, unless it is expressly stipulated for. The surety may be proceeded against, without first proceeding against the principal debtor. The guarantor alone could be sued without suing the principal debtor so long as the creditor satisfies the Court that the principal debtor is in default. Therefore we find no force in the submission of the learned Counsel for the appellant that the principal borrower being not made party respondent to the proceedings, the same is fatal to the proceedings initiated under Section 31(1)(aa).
18-B. In view of above discussion, there could be no legal impediment on the part of the 1st respondent-Corporation to seek to enforce the liability of surety without making the principal borrower as party to the proceedings. Be it noted that the liability of surety of non-payment of loan, is co-extensive with the Principal borrower or Principal Debtor and that further even according to the clauses contained in the surety bond executed by the appellant by way of personal guarantee to the first respondent - Corporation towards the repayment of loan of the Principal borrower, the deed of guarantee is a continuing one. In the fact situation, the appellant cannot escape his liability to pay the dues. In other words, the first respondent - Corporation can certainly enforce the claim against surety under the deed of guarantee executed by the appellant ."
(emphasis supplied)
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Re. fraud and misrepresentation:
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Steels Pvt. Ltd., by the respondent KSFC and without disclosing the same, the appellant was compelled to stand as a surety to the loan obtained by respondent No.2 Shimoga Castings Pvt. Ltd. Ex.R2 sale deed dated 26.03.1992 indicates that the sale in favour of Shimoga Steels Pvt Ltd., by the KSFC "as is where is" condition. The appellant, being the Managing Director of respondent No.2 Company, highly qualified and knowing fully well has filed loan application before KSFC and availed the loan. Now he cannot be allowed to turn around and contend that the respondent KSFC had no absolute right to sell the property in favour of Shivamogga Steels Pvt. Ltd. The material available on record clearly indicates that the respondent KSFC has taken over the assets of M/s.ENNEN Castings Pvt. Ltd. and later sold in favour of Shimoga Steels Pvt. Ltd. The respondent KSFC never indicated nor assured that it has title to the land in question. The appellant knowing fully well has applied for loan as Managing Director of respondent No.2 Company and stood as guarantor to the said loan now he cannot be allowed to take stand contrary to the documentary evidence on record. The appellant's contention of inducement, misrepresentation, etc., are nothing but a attempt to escape from liability.
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Reg. repudiation:
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Reg. negligence:
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ordered to be wound-up by the Company Court. On that ground also, the contention of the appellant with regard to the negligence and lapses of respondent - KSFC fails.
Reg. IA No.1 under Order 41 Rule 27 of CPC:
CONCULSION
after appreciating the pleadings, oral & documentary evidence available on record. The impugned order is neither perverse nor contrary to the evidence on record calling for interference in the present appeal. There is no merit in the appeal and I.A. No.1/2020. Hence, the following:
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ORDER
Appeal and I.A. No.1/2020 are hereby dismissed with
costs.
Sd/JUDGE
Sd/-
JUDGE
RV/BSR
3 issues framed by the court
Whether the KSFC's claim against the guarantor was barred by limitation when the guarantee was invoked by notice dated 21.07.2007?
Whether KSFC could enforce the surety's liability under Section 31(1)(aa) without first proceeding against the principal borrower?
Whether alleged inducement, misrepresentation or negligence by KSFC exonerated the guarantor?
Colour shows how this judgement treated each authority
Syndicate Bank vs. Channaverrappa BellaryDistinguished¶12
AIR 2006 SC 1874 · Who else cites this
Gulhati and another v. Karnataka State Financial Corporation and othersFollowed¶10
ILR 2007 KAR 44 · Who else cites this
5 provisions across 3 enactments
S. Subramanyam
M/s. Karnataka State Financial Corporation
M/s. Shimoga Castings Pvt. Ltd.
Sri. Samir Surendra Gandhi
Sri. Rakesh Dilip Kumar Gandhi
Smt. Shanthi Prasad B
K.S. Mudagal
Vijaykumar A. Patil
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
