Case Note & Summary
The petition was filed by SICOM Ltd., a State Financial Corporation, under Sections 31(1)(aa) and 32 of the State Financial Corporations Act, 1951, seeking to enforce the liability of the respondents as guarantors under four deeds of guarantee executed in connection with bills discounting facilities granted to a company of which the respondents were directors. The principal borrower company had executed agreements for bills discounting facilities totaling Rs.20 Crores on various dates: 8th November 2004 (Rs.5 Crores), 15th March 2005 (Rs.5 Crores), 19th July 2005 (Rs.5 Crores), and 5th May 2008 (Rs.5 Crores). The respondents executed separate guarantee agreements on the same dates, guaranteeing repayment of the facilities with interest at 12.75% per annum. The bills were dishonored, and the petitioner issued a notice on 17th February 2009 demanding repayment of Rs.19.67 Crores. The respondents contested the petition, arguing that the guarantees were discharged because the principal borrower's liability was varied without their consent, and that the petitioner failed to realize the security (FDR of Rs.2 Crores) offered by the respondents. The court analyzed the terms of the guarantee agreements, which expressly stated that the guarantees were continuing and that the creditor could vary the contract with the principal debtor without discharging the surety. The court held that the guarantees were not discharged as there was no material alteration, and the creditor was not bound to first exhaust remedies against the principal debtor or security before proceeding against the guarantors. The court allowed the petition, directing the respondents to pay the outstanding amount of Rs.19.67 Crores with interest at the contractual rate from the date of the petition until realization, and also awarded costs.
Headnote
A) State Financial Corporations Act, 1951 - Enforcement of Guarantee - Sections 31(1)(aa) and 32 - Liability of Surety - Petition filed by SICOM Ltd. (a State Financial Corporation) to enforce guarantee agreements executed by respondents as directors of the principal borrower company - Court held that the guarantees were continuing guarantees and the respondents were jointly and severally liable for the outstanding amount of Rs.19.67 Crores with interest - The defense that the guarantees were discharged due to variation in contract was rejected as the guarantees expressly covered future advances and renewals (Paras 1-10). B) Indian Contract Act, 1872 - Discharge of Surety - Section 133 - Variation in Contract - Guarantors contended that the principal borrower's liability was varied without their consent, thereby discharging them - Court held that the guarantees were continuing and the terms of the guarantee agreements permitted the creditor to vary the contract with the principal debtor without discharging the surety - No material alteration was proved (Paras 11-15). C) Indian Contract Act, 1872 - Rights of Surety - Section 140 - Subrogation - Guarantors argued that the creditor failed to realize security (FDR of Rs.2 Crores) and thus the guarantors were discharged - Court held that the creditor is not bound to first exhaust remedies against the principal debtor or security before proceeding against the surety - The guarantors' right of subrogation arises only after payment (Paras 16-18).
Issue of Consideration
Whether the respondents, as guarantors, are liable under the deeds of guarantee executed in favor of SICOM Ltd. for the liabilities of the principal borrower, and whether the guarantees were discharged due to alleged variations in the contract between the creditor and principal debtor.
Final Decision
The petition is allowed. The respondents are directed to pay the petitioner the sum of Rs.19.67 Crores with interest at the contractual rate of 12.75% per annum from the date of the petition until realization, along with costs.
Law Points
- Liability of guarantors under Section 31(1)(aa) and Section 32 of State Financial Corporations Act
- 1951
- Continuing guarantee
- Discharge of surety by variance in contract
- Section 133 of Indian Contract Act
- 1872
- Section 140 of Indian Contract Act
