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1997 Supreme(Bom) 29
Bombay High Court
M.S.RANE
Central Bank of India - Appellant
Versus
Multi Block Private Ltd. - Respondent
Decided On : 01/16/1997
N.A. Shah with S.R. Kothari i/by Mulla and Mulla, for Plaintiffs; S.C. Dharmadhikari with T.N. Tripathi i/by S. Ashwinkumar and A.P. Gupte, for Defendants.
A guarantee bond executed by a director of a company is valid and enforceable, even if it contains terms that are considered to be unconscionable or oppressive, provided that the director was not compelled or forced to sign the guarantee bond, and the consideration for the guarantee bond is not unlawful and the object is not unlawful.
Headnote:
GUARANTEE - VALIDITY - PUBLIC POLICY - SECTION 23 OF THE INDIAN CONTRACT ACT - APPLICABILITY - GUARANTEE BOND EXECUTED BY DIRECTORS OF A COMPANY - WHETHER OPPOSED TO PUBLIC POLICY - WHETHER UNLAWFUL AND UNENFORCEABLE.
Fact of the Case:
The plaintiffs, a bank, filed two suits against the defendants, who were the directors of a company, to recover amounts due under guarantee bonds executed by them. The defendants challenged the validity of the guarantee bonds, contending that they were unconscionable, oppressive, and opposed to public policy, and therefore, unlawful and unenforceable.
Finding of the Court:
The court held that the guarantee bonds were valid and enforceable. It found that the defendants had not adduced any evidence to show that they were compelled or forced to sign the guarantee bonds. The court also held that the terms of the guarantee bonds were not unconscionable or oppressive, and that they were not opposed to public policy. The court further held that Section 23 of the Indian Contract Act, which deals with unlawful consideration or object, was not applicable to the case, as the consideration for the guarantee bonds was the advancement of the loan to the company, and the object was to secure the debt of the creditor.
Issues: 1. Whether the guarantee bonds were unconscionable, oppressive, and opposed to public policy. 2. Whether the guarantee bonds were unlawful and unenforceable. 3. Whether Section 23 of the Indian Contract Act was applicable to the case.
Ratio Decidendi: 1. The court held that the guarantee bonds were not unconscionable or oppressive, as the defendants had not adduced any evidence to show that they were compelled or forced to sign the guarantee bonds. 2. The court held that the guarantee bonds were not unlawful or unenforceable, as the consideration for the guarantee bonds was the advancement of the loan to the company, and the object was to secure the debt of the creditor. 3. The court held that Section 23 of the Indian Contract Act was not applicable to the case, as the consideration for the guarantee bonds was not unlawful, and the object was not unlawful.
Final Decision: The court decreed the suits in favor of the plaintiffs and rejected the defendants' application for a stay of the operation of the decree.
2. It may be stated at this stage itself that the issue was also raised in both the suits by and on behalf of the contesting defendants about the maintainability of the suits for want of leave under Order 2, Rule 2 of the Code of Civil Procedure. This was done since the plaintiffs had earlier filed a suit being Suit No. 324 of 1977 in this Court in which also the first defendant, who is also the first defendant in these two suits as the principal borrower and some of the defendants are also common defendants in the said earlier suit. However, by judgment and order dated 10th December, 1996 passed by my Brother Judge Vaidya- natha, the said issue has been resolved with the finding that the leave under Order 2, Rule 2 of the Civil Procedure Code was not necessary for institution of both these suits herein. Therefore, that aspect need no longer detain us.
3. It will be useful to recapitulate the factual aspects in each of the case.
Suit No. 975 of 1978:-
4. The claim herein is for a sum of Rs. 1,21,245/- with interest at the rate of 15.5%. There is also a prayer for the disposal of the security assets, namely, hypothecated goods.
5. It is the case of the plaintiffs that the claim in the suit relates to a Term Loan facility granted to the first defendant. The defendants 2 to 9 were at the relevant time the Directors of the first defendant and they had executed the guarantee bond for a sum of Rs. 4,25,000/-, for the advancement of the loan facility to the first defendant. It may be stated that in the suit herein as also in another two suits, namely, Suit No. 976 of 1978 and Suit No. 324 of 1977 the guarantee bond is common. According to the plaintiffs, the defendant No. 2 onwards executed the guarantee bond for securing the loan advanced to the first defendant.
6. In the plaint, the plaintiffs have given the particulars of the claim stating that at the foot of their account, the amount claimed in their suit was outstanding against the first defendant in respect of the said Term Loan facility. At the outset, it may be stated that as far as merits of the claim is concerned, there is no challenge by and on behalf of the defendants. Further more, as stated earlier, the decree has already been passed against the first defendant - the principal borrower and this is also one more relevant factor which would not admit any dispute about the amount as claimed in the suit herein.
7. The plaintiffs have stated that they served demand notices upon the principal borrower as also the guarantors, the defendants herein in calling upon them to pay the amount outstanding in respect of the Term Loan facility to which there was no response and hence the suit. It will thus be noticed that defendants 2 to 9 are sought to be indicated as the Guarantors.
Suit No. 976 of 1978 :-
8. In this suit the claim is for a sum of Rs. 57,707.61. The same relates to a Short Term loan facility granted to the first defendant
