AI Insights
The case involves a dispute over the liability of guarantors under a series of guarantee agreements related to loans extended by Bank of India to a principal borrower, M/s. Thuraya. The guarantors, defendants 8 to 10, were initially absolved of their liability by the DRT on grounds that the bank had deviated from the terms of the loan sanction, which included the diversion of funds to shell companies. However, the DRAT reversed this decision, emphasizing that the guarantors failed to prove any collusion or negligence by the bank and that they had agreed to variations in the terms of the sanction. The High Court of Karnataka, in its supervisory jurisdiction under Article 227 of the Constitution, upheld the DRAT's decision, noting that the guarantors had not met the burden of proof required to establish their claims of deviation and collusion.
Appeal Details
Counselvise Citation
[2020] 140 COUNSELVISE.COM (IT) 821485 (HC-KARNATAKA)
Assessee PAN
Bench
Appeal Number
CRN Number
Appellant
Respondent
Appeal Type
Others
Pronouncement Date
25-02-2020
Assessment Year
misc
Judgement Text
" 1 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: 1. SRI.S.V.RAMASWAMY S/O LATE VIJERAGHAVAN, AGED 70 YEARS, R/O NO.358, HIG, 13TH CROSS, 5TH MAIN, RMV 2ND STAGE, DOLLAR COLONY, BENGALURU – 560 094. 2. MRS.USHA RAMASWAMY W/O S.V.RAMASWAMY, AGED 65 YEARS, R/O NO.358, HIG, 13TH CROSS, 5TH MAIN, RMV 2ND STAGE, DOLLAR COLONY, BENGALURU – 560 094. 3. R.K.ASSOCIATES REP BY ITS PARTNER S.V.RAMASWAMY, S/O LATE VIJERABHAVAN, AGED 70 YEARS, R/O NO.358, HIG, 13TH CROSS, 5TH MAIN, RMV 2ND STAGE, DOLLAR COLONY, BENGALURU – 560 094. ... PETITIONERS 2 (BY SRI. UDAY HOLLA, SENIOR ADVOCATE FOR SRI. R. ASHOK KUMAR, ADVOCATES) AND: 1. ASSET RECONSTRUCTION COMPANY (INDIA) LTD, REP. BY ITS AUTHORISED OFFICER, THE RUBY 10TH FLOOR, 29, SENAPATHI BAPAT MARG, DADAR (WEST), MUMBAI – 400 028. 2. M/S. U & I SYSTEM DESIGN LTD (IN LIQUIDATION), REP. BY OFFICIAL LIQUIDATOR, MINISTRY OF CORPORATE AFFAIRS, CORPORATE BHAVAN, 26-27, 12TH FLOOR, RAHEJA TOWERS, M.G.ROAD, BENGALURU - 560 001. 3. MR.G.R.ITIGI NO.774, 10TH “D” CROSS, 5TH MAIN, WEST OF CHORD ROAD, BENGALURU – 560 086. 4. SMT.SHUBHAPRADHA ITIGI W/O G.R.ITIGI, NO.774, 10TH “D” CROSS, 5TH MAIN, WEST OF CHORD ROAD, BENGALURU – 560 086. 5. SMT.SHOBA ITIGI M/O G.R.ITIGI, NO.774, 10TH “D” CROSS, 5TH MAIN, WEST OF CHORD ROAD, BENGALURU – 560 086. 3 6. MR.ABHAY KUMAR DESHMUKH F-3, B1, 60 MEERA MANSION, 17TH CROSS, MALLESWARAM, BENGALURU – 560 003. 7. SMT.SARITHA DESHMUKH W/O ABHAY KUMAR DESHMUKH, F-3, B1, 60 MEERA MANSION, 17TH CROSS, MALLESWARAM, BENGALURU – 560 003. 8. MR.D.S.R.MURTHY(DECEASED) REP. BY HIS LEGAL HEIR SMT.SHUBHAPRADHA ITIGI(RESPONDENT NO.4) NO.774, 10TH “D” CROSS,5TH MAIN, WEST OF CHORD ROAD, BENGALURU – 560 086. 9. SMT.P.DAKSHYINI DEVI W/O G.PARASURAMA REDDY, NO.2787, 14TH MAIN ROAD, ATTIGUPPE, RPC LAYOUT, VIJAYANAGAR II STAGE, BENGALURU – 560 040. 10. MR.VENKATESH S/O LATE CHOWDAIAH, SHYANMANGALA VILLAGE, BIDADI HOBLI, RAMNAGARAM TALUK, BENGALURU. ... 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 4 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 5 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 6 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 7 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. 2. Being aggrieved by the order of the Tribunal, secured creditor filed an appeal before Debt Recovery Appellate Tribunal (for short ‘DRAT’) in RA 162 of 2017 and by impugned order dated 14th March, 2018 (Annexure-G), DRAT allowed the appeal by setting aside the order of the Debt Recovery Tribunal by arriving at a conclusion that the 8 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. 3. Sri. Uday Holla, learned Senior Counsel appearing on behalf of petitioners has supported the order passed by DRT and would contend that DRAT while upsetting the finding of DRT has recorded a finding that order of the original authority is to be set aside, modified or varied without assigning any specific reason. He would further contend that appellate 9 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 10 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. (i) (1980) 4 SCC 516: STATE BANK OF SAURASHTRA vs. CHITRANJAN RANGNATH RAJA AND ANOTHER 11 (ii) 1967 SCC ONLINE KAR 83: AIR 1968 MYS 56: P. JANAKIRAM CHETTY vs. PUNJAB NATIONAL BANK LTD., NEW DELHI AND ANOTHER (iii) ILR 2007 KAR 200: KARNATAKA STATE FINANCIAL CORPORATION vs. JANAKAIAH NAIDU AND OTHERS (iv) 1991 SUPP (1) SCC 414: STATE OF WEST BENGAL vs. ATUL KRISHNA SHAW AND ANOTHER (v) (2019) 2 SCC 727: JAMILA BEGUM (DEAD) THROUGH LEGAL REPRESENTATIVES vs. SHAMI MOHD. (DEAD) THROUGH LEGAL REPRESENTATIVES AND ANOTHER (vi) (2011) 12 SCC 174: STATE BANK OF INDIA AND ANOTHER vs. EMMSONS INTERNATIONAL LIMITED AND ANOTHER (vii) (2010) 4 SCC 785: ASSISTANT COMMISSIONER, COMMERCIAL TAX DEPARTMENT vs. SHUKLA AND BROTHERS (viii) (2001) 4 SCC 756: MADHUKAR AND OTHERS vs. SANGRAM AND OTHERS (ix) (2001) 3 SCC 179: SATOSH HAZARI vs. PURUSHOTTAM TIWARI (DECEASED) BY LRS. 4. Per contra, Sri. Dhyan Chinnappa, learned Senior Counsel appearing on behalf of respondents would support the order of DRAT and contends that by referring to the clauses of the guarantee agreement whereunder guarantors had agreed for variation or modification of the terms of sanction letter and thereby the guarantors are acquicised 12 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 13 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: (i) Civil Appeal No.1888/1992: STATE BANK OF INDIA vs. INDEXPORT REGISTERED AND ORS. (ii) LAWS (KAR) 1986 6 13: R. LILAVATI vs. BANK OF BARODA (iii) (2012) 5 SCC 604: HOUSING DEVELOPMENT AND FINANCE CORPORATION vs. GAUTAM KUMAR NAG AND OTHERS (iv) (2009) 9 SCC 478: INDUSTRIAL INVESTMENT BANK OF INDIA LIMITED vs. BISWANATH JHUNJHUNWALA (v) (2008) 5 SCC 711: SITA RAM GUPTA vs. PUNJAB NATIONAL BANK AND OTHERS 14 (vi) (2012) 11 SCC 511: RAM KISHUN AND OTHERS vs. STATE OF UTTAR PRADESH AND OTHERS (vii) (2015) 7 SCC 337: CENTRAL BANK OF INDIA vs. C.L. VIMLA AND OTHERS (viii) MFA No.4140/2010: KARNATAKA STATE INDUSTRIAL INVESTMENT AND DEVELOPMENT CORPORATION LIMITED vs. SR. G.O.LOHIA AND OTHERS (ix) RSA No.756/1984: B.JAYASHANKARAPPA AND ORS. Vs. D.S.GULWADI (x) (2007) 8 SCC 361: SYNDICATE BANK vs. ESTATE OFFICER & MANAGER, APIIC LTD. AND OTHERS (xi) (1977) 1 SCC 17: PUZHAKKAL KUTTAPPU vs. C. BHARGAVI AND OTHERS (xii) CRL.P.NO.5802/2009: SRI. S.V. RAMASWAMY AND ANR. vs. THE STATE OF KARNATAKA BY VYALIKAVAL POLICE, BANGALORE AND ANOTHER 5. At the outset, before dwelling upon the rival contentions raised at the bar, it would be apt and appropriate to state that present petition, though it is styled as filed under Articles 226 and 227 of the Constitution of India, it has to be necessarily held as a petition filed under Article 227 of the Constitution of India inasmuch as the order of the Tribunals, i.e. DRT and DRAT, is under challenge and this Court while examining the correctness or otherwise of the said orders would be examining the same within the limited scope of 15 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. …” 16 6. Keeping the aforesaid authoritative principles laid down by the Hon’ble Apex Court in mind, when facts on hand are examined, it requires to be noticed, at the outset, that petitioners were defendants 8 to 10 in OA 242 of 2006 and they had appeared, filed their written statement and there was absolute and total denial of all the averments made in the application. In other words, the borrowing, the execution of guarantee agreement, suit documents and all other details as more specifically pleaded by the secured creditor in OA 242 of 2006 came to be denied. 7. As already observed hereinabove, the specific denial to stave off their liability, defendants 8 to 10 viz. writ petitioners herein, obviously by way of alternate plea had contended before Tribunal that even if the guarantee agreements pressed into service by the secured creditor is taken at its face value, it cannot be enforced against them on account of the terms and conditions stipulated under sanction letter issued to the borrower had ben violated on account of inaction of the secured creditor, viz. it was contended that the loan borrowed by the defendants 1 to 7, for which they had stood as guarantors, was for a specific purpose and said 17 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 18 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;…” 8. The further undertaking given by the petitioners i.e. defendants 8 to 10 in the said agreement reads: 19 “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.” 9. In this background if plea raised by defendants 1 to 8 is examined, it would clearly go to show that defendants 8 to 10 had stood as guarantors for the financial assistance availed by the first defendant and secured creditor had a right to modify the terms of sanction without any notice even to the guarantors also. As rightly observed by the DRAT, the eighth defendant was acting on behalf of the first defendant company in dual capacity, viz. as a Director from 30th June, 1999 to 19th February, 2000 and as a Company Secretary till 29th September, 2004. Even according to the writ petitioners, the alleged diversion of funds took place during the year 2003 based on the letter issued by the first defendant dated 17th October, 2003. Thus, the alleged diversion of funds was well within his knowledge as he was very much the Company Secretary, not only in-charge of the day-to-day affairs of the 20 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. 10. The appellate Tribunal, while examining the correctness and legality of an order as a First Appellate Authority, would definitely be required to give findings as to why the conclusion arrived at by the original authority is to be modified or set aside or varied if such an exercise is undertaken. In the instant case we find Tribunal had proceeded at tangent to arrive at a conclusion that diversion of funds to the tune of Rs.89,53,191/- was as a result of collusion between bank and the borrower which was without 21 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. 22 11. The DRT has proceeded to dismiss the application on the ground that the burden of proof lies on the Bank to discharge that the funds had not been diverted. As noted hereinabove, it is for the person to prove who alleges a fact. In other words, proof of burden is on such person who alleges and there cannot be any negative burden cast on the opposite party. In fact, AW1 in his cross-examination has denied that four payments which constituted a sum of Rs.89,53,191/- were made by the first defendant company to settle their loan with M/s. Cipla and the suggestion that money had gone on round tripping, has also been denied. Thus, burden of proving that four (4) payments were made to shell companies by the Bank in collusion with principal borrower even otherwise, the clause in the contract agreement enabled the secured creditor to vary the terms of contract as long as it is not detrimental to its own interest, and guarantors having given absolute right to the secured creditor to vary the conditions of contract, they cannot be heard to contend that that on account of such variations in the terms of sanction letter, their liability under the guarantee agreement would 23 stand extinguished or discharged by taking umbrage under Section 133 to 135 of the Indian Contract Act. 12. Yet another fact, which cannot go unnoticed, is that eighth defendant is none other than the Company Secretary who at the relevant point of time had all access and means to know the affairs of the company, inasmuch as, he being the Company Secretary was responsible to file the returns of the Company before the Registrar of Companies and as such cannot feign ignorance of the transactions that has taken place on behalf of the principal borrower, viz. company. In other words, this would prima facie establish that there could be collusion between the principal borrower and the guarantors. The writ petitioners, viz. defendants 8 to 10 having relied upon the communication dated 17th October, 2003 which emanated from the principal borrower to the secured creditor to prove their contention of diversion of funds, had failed to establish the same and as such DRT had committed a serious error in arriving at a conclusion that defendants 8 to 10 are not liable to answer the claim, though being guarantors, by drawing adverse inference. In that view of the matter, we are of the considered view that order 24 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. 13. It is also to be observed at this juncture that DRT in its enthusiasm of discharging defendants 8 to 10 of their liability as guarantors on the ground of there having been deviation in terms of the sanction letter and as such the guarantee agreement cannot be enforced, erred in not noting the fact that by way of collateral security to the loan amount borrowed by the principal borrower, the immovable property as indicated in the sanction letter had also been mortgaged. In other words, even if the guarantee agreement stood extinguished or guarantors stood discharged of their obligation, their liability to the collateral security was not absolved. In other words, their liability was co-extensive with that of the principal borrower and mortgage created by them continued and for these cumulative reasons DRAT has rightly interfered with the orders passed by the DRT. 14. Insofar as feeble argument relating to charging of the interest at the rate of 14.50% and 15.50% per annum on 25 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 26 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 co- extensive 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 (i) Writ petition is dismissed. (ii) Order Annexure-G dated 14th March, 2018 passed in RA 162 of 2017 by the 27 Debt Recovery Appellate Tribunal, Chennai stands affirmed. (iii) No order as to costs. Sd/- JUDGE Sd/- JUDGE lnn "
Other Referred Cases
STATE BANK OF SAURASHTRA vs. CHITRANJAN RANGNATH RAJA AND ANOTHER, P. JANAKIRAM CHETTY vs. PUNJAB NATIONAL BANK LTD., NEW DELHI AND ANOTHER, KARNATAKA STATE FINANCIAL CORPORATION vs. JANAKAIAH NAIDU AND OTHERS, STATE OF WEST BENGAL vs. ATUL KRISHNA SHAW AND ANOTHER, JAMILA BEGUM (DEAD) THROUGH LEGAL REPRESENTATIVES vs. SHAMI MOHD. (DEAD) THROUGH LEGAL REPRESENTATIVES AND ANOTHER, STATE BANK OF INDIA AND ANOTHER vs. EMMSONS INTERNATIONAL LIMITED AND ANOTHER, ASSISTANT COMMISSIONER, COMMERCIAL TAX DEPARTMENT vs. SHUKLA AND BROTHERS, MADHUKAR AND OTHERS vs. SANGRAM AND OTHERS, SATOSH HAZARI vs. PURUSHOTTAM TIWARI (DECEASED) BY LRS, KHIMJI VIDHU vs. PREMIERE HIGH SCHOOL, STATE BANK OF INDIA vs. INDEXPORT REGISTERED AND ORS, R. LILAVATI vs. BANK OF BARODA, HOUSING DEVELOPMENT AND FINANCE CORPORATION vs. GAUTAM KUMAR NAG AND OTHERS, INDUSTRIAL INVESTMENT BANK OF INDIA LIMITED vs. BISWANATH JHUNJHUNWALA, SITA RAM GUPTA vs. PUNJAB NATIONAL BANK AND OTHERS, RAM KISHUN AND OTHERS vs. STATE OF UTTAR PRADESH AND OTHERS, CENTRAL BANK OF INDIA vs. C.L. VIMLA AND OTHERS, KARNATAKA STATE INDUSTRIAL INVESTMENT AND DEVELOPMENT CORPORATION LIMITED vs. SR. G.O.LOHIA AND OTHERS, B.JAYASHANKARAPPA AND ORS. vs. D.S.GULWADI, SYNDICATE BANK vs. ESTATE OFFICER & MANAGER, APIIC LTD. AND OTHERS, PUZHAKKAL KUTTAPPU vs. C. BHARGAVI AND OTHERS, SRI. S.V. RAMASWAMY AND ANR. vs. THE STATE OF KARNATAKA BY VYALIKAVAL POLICE, BANGALORE AND ANOTHER
Laws Referred To
Indian Contract Act, 1872, Debt Recovery Tribunal Act
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