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High Court Of Delhi
CITIBANK - Appellant
Versus
JUGGILAL KAMLAOAT JUTE MILLS COMPANY LIMITED - Respondent
Suit 1290 of 1979
Decided On : 05/17/1982
The plaintiff-bank filed a suit against the defendant-jute mill for recovery of Rs. 77,10,733.67, being the loan amount advanced to the defendant's sister concern, J.K. Manufacturers Ltd. (Manufacturers Ltd.), along with interest and costs. The loan was sanctioned to Manufacturers Ltd. on the condition that the defendant-jute mill would be liable to pay the loan amount as a principal debtor. The defendant-jute mill executed a deed of guarantee in favor of the plaintiff-bank, guaranteeing the due payment and discharge of all the liabilities of Manufacturers Ltd. under the loan agreement. Manufacturers Ltd. defaulted in repayment of the loan, and the plaintiff-bank filed a suit against Manufacturers Ltd. in the Kanpur Court, obtaining a consent decree for Rs. 55,27,570.01 with interest at 12.5% per annum and costs. The plaintiff-bank then filed the present suit against the defendant-jute mill, claiming the outstanding loan amount, interest, and costs. The defendant-jute mill contested the suit, contending that it was only a surety and that its liability stood discharged due to the acts and omissions of the plaintiff-bank, including filing the suit against Manufacturers Ltd. without impleading the defendant-jute mill, obtaining a consent decree, and selling the mortgaged property of Manufacturers Ltd. without the defendant-jute mill's consent.
Fact of the Case:
The plaintiff-bank sanctioned a loan of Rs. 60 lacs to J.K. Manufacturers Ltd. (Manufacturers Ltd.) on the condition that the defendant-jute mill would be liable to pay the loan amount as a principal debtor. The defendant-jute mill executed a deed of guarantee in favor of the plaintiff-bank, guaranteeing the due payment and discharge of all the liabilities of Manufacturers Ltd. under the loan agreement. Manufacturers Ltd. defaulted in repayment of the loan, and the plaintiff-bank filed a suit against Manufacturers Ltd. in the Kanpur Court, obtaining a consent decree for Rs. 55,27,570.01 with interest at 12.5% per annum and costs. The plaintiff-bank then filed the present suit against the defendant-jute mill, claiming the outstanding loan amount, interest, and costs. The defendant-jute mill contested the suit, contending that it was only a surety and that its liability stood discharged due to the acts and omissions of the plaintiff-bank, including filing the suit against Manufacturers Ltd. without impleading the defendant-jute mill, obtaining a consent decree, and selling the mortgaged property of Manufacturers Ltd. without the defendant-jute mill's consent.
Finding of the Court:
The court held that the defendant-jute mill was liable to pay the loan amount as a principal debtor, as per the terms of the loan agreement and the deed of guarantee. The court further held that the defendant-jute mill's liability was not discharged due to the acts and omissions of the plaintiff-bank, as the plaintiff-bank had not lost or parted with the security it had against Manufacturers Ltd., and the defendant-jute mill had consented to the acts of the plaintiff-bank, including the filing of the suit against Manufacturers Ltd., obtaining the consent decree, and selling the mortgaged property of Manufacturers Ltd.
Issues: 1. Whether the defendant-jute mill was liable to pay the loan amount as a principal debtor or as a surety. 2. Whether the defendant-jute mill's liability stood discharged due to the acts and omissions of the plaintiff-bank.
Ratio Decidendi: 1. The court held that the defendant-jute mill was liable to pay the loan amount as a principal debtor, as per the terms of the loan agreement and the deed of guarantee. The court relied on the following principles: - A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. - The person who gives the guarantee is called the surety; the person in respect of whose default the guarantee is given is called the 'principal debtor'; and the person to whom the guarantee is given is called the 'creditor'. - A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not. - A surety is entitled to be indemnified and to recover from the principal debtor whatever sum he has originally paid under the guarantee, and to stand in place of the creditor. 2. The court held that the defendant-jute mill's liability was not discharged due to the acts and omissions of the plaintiff-bank, as the plaintiff-bank had not lost or parted with the security it had against Manufacturers Ltd., and the defendant-jute mill had consented to the acts of the plaintiff-bank, including the filing of the suit against Manufacturers Ltd., obtaining the consent decree, and selling the mortgaged property of Manufacturers Ltd. The court relied on the following principles: - A surety is discharged from his liability if the creditor loses or without the consent of the surety parts with such security. - A surety is entitled to the benefit of all the securities of the creditor, whether he is aware of their existence or not, even though they were given after the contract of suretyship, if the creditor who has had, or ought to have had, them in his full possession or power, loses them or permits them to get into the possession of the debtor, or does not make them effectual by giving proper notice, the surety to the extent of such security will be discharged.
Final Decision: The court passed a decree in favor of the plaintiff-bank for Rs. 60 lacs (Rupees sixty lacs) with proportionate costs and future interest at 12.5% per annum on Rs. 55 lacs (Rupees fifty-five lacs) from the date of the suit till realization against the defendant-jute mill.
( 1 ) IN this somewhat unusual suit, under Order 37 of the Code of Civil Procedure, 1908, the plaintiff, Citibank 1. A. , seeks a decree for Rs. 77,10,733. 67, against the defendant Juggilal Kamlapat Jute Mills Co. Ltd. (for short jute Mills ).
( 2 ) J. K. Manufacturers Ltd. (for short Manufacturers Ltd. ) has a cotton textile manufacturing unit in Kanpur. This company was incurring heavy losses. In order to render the said textile unit into an economic, profitable and efficient unit and for the purpose of modernising and/or equipping it with additional plant etc. , Manufacturers Ltd. agreed to grant to jute Mills licence to use the said textile unit on terms and conditions as contained in the licence deed dated Sept. 25, 1971 (Annexure 1 to the plaint ). The licence was granted initially for a period of five years commencing from Oct. 1, 1971 on payment of licence fee of Rs. 50,000. 00 per month or a sum equal to 50% of the net profits earned by Jute Mills in the textile unit in each year whichever was higher. A supplementary agreement was executed between manufacturers Ltd. and jute Mills on Oct. 3, 1973 making some modifications in the original agreement.
( 3 ) ON July 2, 1973, the plaintiff sanctioned a term loan facility of Rs. 60 lacs in favour of manufacturers Ltd. repayable by twelve six-monthly instalments of Rs. 5 lacs each. Besides the principal amount, the bank was also entitled to be paid interest at 3 per cent over the Reserve Bank of India rate subject to a minimum of 12. 5 per cent per annum. In the event of default in any payment of the principal or commitment fee/charge or of interest on the loan, the entire amount remaining due and unpaid on the date of the said default was to become due and payable to the plaintiff immediately. The term loan agreement was executed between the bank and manufacturers Ltd. , on Nov. 21, 1973. On Nov. 22, 1973 manufacturers Ltd. , also deposited the documents of title relating to their textile unit at kalpi Road, Kanpur, and thereby mortgaging to the plaintiff all the properties of the textile unit to secure repayment of the aforesaid loan of Rs. 60 lacs. On Nov. 21, 1973, the jute Mills executed in favour of the plaintiff a guarantee (Ext. P-14 ). This was to be considered a continuing guarantee for the purpose of securing the ultimate balance due, or that may be due from time to time, and at any time from the manufacturers Ltd. , to the plaintiff. On Nov. 22, 1973, the jute Mills also deposited with the bank at New Delhi various documents relating to their industrial unit situate at Kalpi Road, Kanpur, and thereby created a first and continuing mortgage charge over the said properties in favour of the plaintiff to secure repayment of the aforesaid sum of Rupees 60 lacs.
( 4 ) THE manufacturers Ltd. paid the first instalment of Rs. 5 lacs. It defaulted to make payment of any other instalment and consequently in Oct. , 1976, the plaintiff served a legal notice calling upon them to repay Rs. 56,39,791. 66 being the amount outstanding under the aforesaid loan as on Oct. 21, 1976. A similar notice was issued to the jute Mills also which was duly served on it on Oct. 31, 1976.
( 5 ) NO payment having been made either by the manufacturers Ltd. or the jute Mills , the plaintiff on or about July 21, 1977. filed a suit (No. 315 of 1977) in the Court of the Second Civil Judge, Kanpur, for a mortgage decree against the manufacturers Ltd. only, for recovery of Rupees 55,27,570. 01 being the loan outstanding as on date plus interest. In those proceedings, the bank filed an application under O. 2, R. 2, Civil Procedure Code praying for leave to subsequently file a suit in respect of this loan amount against the jute Mills which is stated to have been allowed on Oct. 15, 1977 (admittedly without notice and without hearing the jute Mills ).
( 6 ) IN the Kanpur suit, the parties, i. e. the plaintiff here and the manufacturers Ltd. , filed an
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