LAKSHMAN PERERA

Vs.

UNION BANK OF COLOMBO LTD AND OTHERS

SUPREME COURT
PERERA, C.J.
ALUWIHARE, J.
MALALGODA, J.
SC/(CHC) APPEAU22/11
HC (CIVIL) 36/2007/MR
JUNE 27, 2017

Money recovery action-Personal guarantee-Rescheduling of existing loan or new loan-Rights of guarantors when creditor varies original loan-Approbate and reprobate

The 1st respondent bank filed action in the Commercial High Court to recover a sum of Rs. 5, 162,341.53 with interest alleged to be due to it from the 2nd respondent Company on certain credit facilities granted to the 2nd respondent at the request of the appellant and the 3rd respondent, who were the directors of the 2nd respondent. The appellant and the 3rd respondent were also made defendants to the action under a "Joint and Several Personal Guarantee" dated 16.03.1998, which they had signed at the time of granting the facility. In the year 2000, the 2nd respondent went into arrears in making its repayments and, at the request of another director, the 1st respondent bank restructured the outstanding amount subject to the terms and conditions of an offer letter, which was signed and accepted by the appellant on 16.07.2001. The 2nd respondent continued to default on its repayments, and in 2002 the bank sent several reminders followed by a letter of demand. On 06.02.2007 the bank instituted legal action for the recovery of the total amount outstanding with interest.

At the trial, the bank abandoned its claim against the 2nd respondent and pursued only the claim on the personal guarantee against the appellant and the 3rd respondent. The appellant's defence was that in 2001 the 2nd respondent Company did not reschedule the existing loan repayments, but obtained a new credit facility. The appellant argued that he only became a surety for the 1998 loan and not for the loan obtained in 2001, and the Guarantee Bond having been executed in 1998, the claim for recovery of money in respect of the same in 2007 was prescribed. It was also argued that the 1998 guarantee bond was executed for a specific

loan, and could not be extended to cover future uncertain monies. The Commercial High Court entered judgment in favour of the 1st respondent bank and the appellant appealed to the Supreme Court.

Held:

1. Courts must consider the factual background known to the parties at or before the date of the contract and ascertain the objective of the transaction when interpreting the guarantee bond. The communications from the 2nd respondent in 2000 did not indicate an intention to obtain a new loan, but rather, a series of "concessions" to settle their dues. The bank's 2001 offer letter specifically stated that its purpose was "to restructure the outstanding" pertaining to the 2nd respondent.

2. Even though the bank's ledger account contained an entry in 2001 which stated "full recovery of the loan granted", immediately followed by two further entries to the effect of "Term Loan 1" and "Term Loan 2", no money had been deposited by the 2nd respondent in settlement of the loan granted, and no cash had been released to the 2nd respondent under the "Term Loan 1" and ''Term Loan 2". All these clearly indicate that the 2001 arrangement was not a new loan, but a rescheduling of the 1998 loan.

3. The material point at which time begins to run for the purpose of prescription is not the date of the execution of the guarantee bond, but the date on which the payment became due, which was either 30.11.2001 or April 2002. On either view, the action was not prescribed.

4. Under equitable principles, a guarantor may be discharged from liability under the guarantee when there is evidence that his rights have been prejudiced by the creditor's conduct. However, the mere fact of granting further time by the creditor does not always amount to a situation warranting discharge. It is necessary to see whether such extension/variation of the contract