In order to grant leave to defend under Order 37 of the Code of Civil Procedure, the court must be satisfied that the defendant has a substantial defence to raise, which means that the defence has good chances of success or has good potentiality to dislodge the plaintiff or which is bonafide and honest one and raises such question of law or of facts which require thorough judicial security.

( 1 ) 1. The most important question involved is as to under what circumstances leave to defend should be given under Order 37 of the Code of Civil Procedure (hereinafter referred to as code ) as it stands after the amendment by Act No. 104 of 1976. Then the question involved is as to whether in the present case leave to defend should be given or not.

( 2 ) THE plaintiff brought a suit for the recovery of Rs. 22,27,000 from Allahabad Bank, defendant No. I on the basis of a guarantee of defendant No. 1, which was initially valid upto 31st March 1979 and was subsequently extended to 31st October 1979 and finally to 31st December 1979.

( 3 ) THERE is no dispute in respect of some of the facts. The plaintiff, by an agreement dated July 13, 1977 contracted to supply various items of railway accessories to Iranian State Railways, Iran. Interalia, the plaintiff had to supply 6244 M. T. (15,12,000 pieces) of "base plates" under that agreement. Plaintiff was approached by M/s. Kumardhubi Engineering Works Ltd. , (hereinafter referred to as kumardhubi ), a company with its registered office at Chartered Bank Building Calcutta and the latter proposed to manufacture and export for and on behalf of the former aforesaid base plates to the Iranian State Railways, Iran. Plaintiff issued to the said Kumardhubi a letter of Indent dated 16th November 1977 agreeing to manufacture and shipment by the latter of the aforesaid base plates to Iranian State Railways, Iran on the condition, interalia that the latter shall, either make a cash deposit in the amount of Rs. 20 lacs with the former, or, in lieu thereof, furnish unconditional bank guarantee in the amount of Rs. 40 lacs to ensure the due performance of the said contract. Kumardhubi did not deposit the amount and instead furnished a bank guarantee of Allahabad Bank, defendant No. 1. As already mentioned the guarantee was originally valid upto 3st March 1979 but the same was thereafter extended upto 31st October 1979 and afterwards upto 31st December 1979.

( 4 ) IT is alleged by the plaintiff that there was breach of agreement on the part of Kumardhubi because the latter instead of supplying the entire quantity despatched only 151. 509 M. T. of base plates on account of which the former suffered a loss to the tune of Rs. 46 lacs.

( 5 ) DEFENDANT No. 2 has been impleaded because according to the plaintiff, although the bank guarantee was in favour of the plaintiff, yet it was addressed to defendant No. 2 and defendant No. 2 made a demand dated 22nd December 1979 by means of telegram as well as a letter to defendant No. I to pay the guarantee amount.

( 6 ) AS the defendant No. I refused to comply with the aforesaid demand, the plaintiff brought the suit as already mentioned. The plaintiff claimed Rs. 20 lacs on account of the principal and the remaining amount of Rs. 2,27,000 by way of interest at the rate of 18 per cent per annum from the date of the demand i. e. 22nd December 1979 till the date of the institution of the suit in terms of Section 3 of the Interest Act 1978.

( 7 ) PROCEDURE as required by Order 37 of the Code was followed and in response to an application for summons for judgment, defendant No. I brought the present application, which is registered as I. A. No. 95/81 Defendant No. I prays for leave to defend on a number of grounds, most important out of which will be mentioned hereinafter. That application is contested by the plaintiff. I have heard at great length the learned counsel for the parties.

( 8 ) FIRST, it is to be determined as to what should be the principle or principles following which leave to defened should be granted or refused. Reliance of learned counsel for defendant No. 1 is on a judgment of Supreme Court in M/s. Mechalec Engineers and Manufacturers Vs. M/s. Basic Equipment Corporation AIR 1977 Supreme Court 577 (1 ). Following was held by Supreme Court :

" (A) If the defendant satisfies the Court that he has a good defence to the claim on its mer