Repudiation of guarantee by Government on the plea of changed situation.

S. Mohan, O.C.J.

1. This case illustrates how the Government could also some times try to get over its legal obligations and go to the extent of even denying such obligations and thereby would like to outwit parties.

2. This State of Tamil Nadu represented by its Joint Secretary, Department of Industries, Fort St. George, Madras, the first appellant herein, executed a deed of guarantee on 21.6.1968. It covered a loan of Rs. 15 lakhs with interest at 11 percent per annum granted to Sri Sarada Mills Ltd., Podanur (hereinafter referred to as 'the Mills'). The respondent, namely the Bank of Madurai, had the loan secured by way of an equitable mortgage from the said Mills.

3. Initially the Mills was taken over under the Sick Textiles Undertakings (Taking Over of Management) Act, 1972(Act 72 of 1972). Later on, in accordance with the provisions of Sick Textiles Undertakings (Notification) Act 1974 Central Act 57 of 1974), the Mills came to vest in the Central Government. Thereafter, it was transferred to and came to be vested in the National Textile Corporation. Since the loans advanced in favour of the Mills by the respondent/Bank of Madurai had not been repaid at the relevant point of time, the Bank of Madurai/the respondent invoked the deed of guarantee dated 21.6.1968 executed by the first appellant. A suit in O.S. No. 255 of 1976 on the file of the Sub Court, Coimbatore, was filed against the first appellant. On 24.3.1977, the respondent wrote to the second appellant as follows:

A term loan of Rs. 15.00 lakhs had been sanctioned by us to the above mills against the security of its fixed and other unencumbered assets and also on the guarantee dated 21.6.1968 (copy enclosed for ready reference) issued by Government of Tamil Nadu. The said loan was repayable in 5 equal annual instalments together with interest accrued and the first instalment was due after the expiry of a year from availing the entire loan. Although the Mills started to avail this loan at our Coimbatore branch on 26.6.1968, the entire limits was fully availed on 26.2.1970.

The management of the captioned mills had been taken over by the Tamil Nadu National Textile Corporation on 20.11.1972 and later nationalised on 21.9.1974.

As the mills had defaulted to pay all the five annual instalments with interest which fell due from 26.2.1971 to 26.2.1975 inspite of our repeated demands, we now in voke the guarantee issued by Government of Tamil Nadu and request payment of the entire loan amount which comes to Rs. 33,29,991.01 plus interest from 1.1.1976. If the payment is made early, there will be no necessity for us to prefer our claim before Assistant Commissioner of Payment at Coimbatore. A suit was filed by us at Coimbatore for 3 instalments with interest in order mainly to save the limitation period as per guarantee Clause No. 6 (ii). We have also issued lawyer's notice on 8.2.1977 to the Collector of Coimbatore demanding payment of remaining two instalments with accrued interest. We therefore request you to take up the matter with the Government of Tamil Nadu and arrange to settle the issue early. We are willing to withdraw our suit is our claim is settled early.

4. On 25.5.1977, the second appellant wrote a letter to the respondent as follows:

The Government have since informed me that the Bank of Madurai may be advised not to file a suit having regard to the Government guarantee already given to the Bank. I, therefore, request you kindly not to file any suit against the Government having regard to the Government guarantee already given to the Bank.

5. The reply by the Bank of Madurai on 26.5.1977 is under the following terms:

We invite your kind attention to your letter 17593/77 B3 dated 25.5.1977 asking us not to file the suit against the Government having regard to the Government guarantee already given to the Bank.

It is presumed that the Government acknowledge the liabilities under the guarantee and the question of limitation for filing the suit does not arise.

Pl