Case Note & Summary
The petitioner, Narinder Pal Agarwal, was a director and guarantor of Narendra Metal Converters Pvt. Ltd., which had taken loans from Saraswat Cooperative Bank Ltd. After disputes arose within the Agarwal family, a family settlement was reached whereby the petitioner resigned as director and the remaining directors agreed to take steps to get the petitioner's name removed as guarantor. However, the bank was not a party to this settlement. The bank initiated arbitration proceedings under Section 84 of the Multi-State Cooperative Societies Act, 2002, against the company and the guarantors. The sole arbitrator passed an award holding the petitioner liable as guarantor. The petitioner challenged the award before the Bombay High Court, arguing that the family settlement discharged him from liability. The court dismissed the petition, holding that a family settlement between the guarantor and the principal debtor, without the consent of the creditor, does not discharge the guarantor. The court emphasized that the guarantee is a contract between the guarantor and the creditor, and the creditor's rights cannot be affected by a private arrangement between the guarantor and the debtor. The court also noted that the petitioner continued to be liable until the debt was repaid, and the bank had not consented to any variation of the guarantee. The petition was dismissed with no order as to costs.
Headnote
A) Arbitration - Challenge to Arbitral Award - Section 84 Multi-State Cooperative Societies Act, 2002 - Guarantee - Discharge of Guarantor - The petitioner challenged an arbitral award holding him liable as guarantor. The court held that a family settlement between the guarantor and the principal debtor, without the consent of the creditor bank, does not discharge the guarantor. The guarantee remains enforceable until the debt is repaid. (Paras 1-16) B) Contract Law - Guarantee - Discharge of Guarantor - Section 134 Indian Contract Act, 1872 - Variation of Contract - The court considered whether the family settlement amounted to a variation of the contract of guarantee. It held that the settlement did not alter the terms of the guarantee or the underlying loan, and the bank was not a party to the settlement. Therefore, the guarantor's liability was not discharged. (Paras 10-15)
Issue of Consideration
Whether a family settlement between the guarantor and the principal debtor, without the consent of the creditor bank, discharges the guarantor from liability under the guarantee.
Final Decision
The court dismissed the arbitration petition, upholding the arbitral award and holding the petitioner liable as guarantor.
Law Points
- Guarantor's liability continues until debt is repaid
- family settlement without creditor's consent does not discharge guarantor
- Section 84 of Multi-State Cooperative Societies Act
- 2002
- Section 134 of Indian Contract Act
- 1872
